New Income Tax Rules from April 2026 — Every Change That Affects Your Salary

From April 1, 2026, India's six-decade-old Income Tax Act of 1961 has been replaced by the new Income Tax Act, 2025. While the core tax rates remain the same, the way you file returns, claim deductions, and understand your salary structure has changed significantly.

This guide covers every change that matters for salaried employees — what is different, what stays the same, and what you need to do about it.

The Big Picture: What Changed and What Did Not

New Tax Slabs Under the New Regime (FY 2026–27)

The tax slabs remain unchanged from the previous year. Here is the current structure under the new regime (which is now the default):

Key Point: With the ₹75,000 standard deduction and Section 87A rebate of up to ₹60,000, salaried individuals earning up to ₹12.75 lakh have zero tax liability under the new regime.

Major Changes That Affect Salaried Employees

1. "Tax Year" Replaces Financial Year and Assessment Year

The new law introduces a single term — "Tax Year" — replacing the confusing dual system of Financial Year (FY) and Assessment Year (AY). Income earned from April 1, 2026 to March 31, 2027 is now simply "Tax Year 2026–27." No more remembering that FY 2026–27 corresponds to AY 2027–28.

2. HRA Exemption Expanded to 8 Cities

Previously, the 50% HRA exemption (instead of 40%) applied only to Delhi, Mumbai, Kolkata, and Chennai. From April 2026, four more cities qualify:

• Bengaluru
• Hyderabad
• Pune
• Ahmedabad

If you live in any of these 8 cities and claim HRA under the old tax regime, your exemption calculation now uses 50% of basic salary instead of 40%. This can save ₹10,000–₹30,000 per year depending on your rent and salary.

New requirement: You must now disclose your relationship with the landlord when claiming HRA. This is to prevent false claims where people pay rent to family members without actual rental arrangements.

3. Salary Structure: Basic Pay Must Be ≥50% of CTC

Under the Code on Wages, companies must now ensure that basic salary plus dearness allowance (DA) accounts for at least 50% of total CTC. Many companies previously kept basic pay low (30–40%) to reduce PF and gratuity contributions.

What this means for you:

Your monthly in-hand salary may decrease slightly, but your retirement savings (PF and gratuity) will be significantly higher. Over a 20–30 year career, this change benefits you.

4. Increased Allowance Limits

These are small but useful increases, especially the children's education allowance which went from a token ₹100 to a more meaningful ₹3,000 per month.

5. Form 16 Is Now Form 130

The familiar Form 16 that your employer gives you for tax filing has been renumbered as Form 130 under the new Income Tax Act. The content and purpose remain the same — it is your salary and TDS certificate. Only the form number has changed.

Similarly, other tax forms have been renumbered. Your employer and tax filing software will handle this automatically, but do not be confused if you see unfamiliar form numbers this year.

6. Filing Deadline Changes

If you are a salaried employee filing ITR-1 or ITR-2, your deadline remains July 31. Freelancers and those with business income filing ITR-3 or ITR-4 now get an extra month until August 31.

7. Faster Final Settlement

Companies must now settle all salary dues within two working days of an employee's last working day. Previously, many companies took 30–60 days to process full and final settlement. This is a significant improvement for employees switching jobs.

8. TDS on Higher Income Simplified

The new act simplifies TDS provisions. Key changes:

• TDS on salary continues as before — your employer calculates and deducts
• TDS threshold for senior citizens on interest income increased to ₹1,00,000 (from ₹50,000)
• Simplified TDS return forms for employers

New Regime vs Old Regime — Which Should You Choose?

The new tax regime remains the default. You can still opt for the old regime if it benefits you. Here is a quick comparison:

Simple Rule: If your total deductions under the old regime (80C + 80D + HRA + home loan interest) exceed ₹3.75 lakh, the old regime may save you more tax. Below that threshold, the new regime is almost always better. Use your company's tax declaration portal to compare both options with your actual numbers.

What You Should Do Right Now

1. Check your April payslip — Compare it with March. Look for changes in basic pay, PF deduction, and take-home amount. If your company has restructured salary under the Code on Wages, your numbers will look different.
2. Decide your tax regime — Inform your employer early whether you want the new regime (default) or old regime. Late decisions mean excess TDS or refund hassles later.
3. Update your investment proofs — If choosing the old regime, gather proofs for 80C (PPF, ELSS, insurance), 80D (health insurance), and HRA (rent receipts with landlord PAN for rent above ₹1 lakh/year).
4. Note the new form numbers — Form 16 is now Form 130. Do not be confused when your employer issues it.
5. Set a filing reminder — July 31, 2027 for ITR-1/2, August 31, 2027 for ITR-3/4. Yes, the filing for Tax Year 2026–27 happens in 2027.

Frequently Asked Questions

Is my March 2026 salary taxed under the old act or the new act?

March 2026 salary falls under FY 2025–26 (the old system). The new Income Tax Act applies from April 1, 2026 — so your April salary onwards is under the new law. Your March payslip and Form 16 for FY 2025–26 follow the old format.

Do I need to do anything differently when filing my return this year?

For income earned until March 2026 (FY 2025–26), you file using the existing system — nothing changes for this filing. The new act applies to income from April 2026 onwards, which you will file in 2027.

Will my take-home salary decrease because of the basic pay change?

It depends on your current salary structure. If your company was already paying 50%+ as basic, there is no change. If basic was 30–40%, your take-home may decrease by 5–10% while your PF contribution increases by the same amount. The total compensation stays the same — the split between take-home and retirement savings changes.

I live in Bengaluru. How does the HRA change help me?

If you choose the old tax regime, your HRA exemption is now calculated at 50% of basic salary instead of 40%. For example, if your basic is ₹50,000/month and you pay ₹20,000 rent, your annual HRA exemption increases by about ₹12,000–₹18,000. This only applies if you opt for the old regime — the new regime does not allow HRA exemption.

What is the "Tax Year" concept?

Previously, income earned in Financial Year 2025–26 was assessed in Assessment Year 2026–27. The new law simplifies this into a single "Tax Year 2026–27" — the year you earn the income is the same year for tax purposes. It is a naming change that reduces confusion but does not change how tax is calculated.

Should salaried employees switch to the old regime for the HRA benefit?

Only if your total deductions (80C + 80D + HRA + others) exceed ₹3.75 lakh. The new regime's lower rates and higher standard deduction (₹75,000) often outweigh the old regime's deductions. Run the numbers with your actual salary and expenses before deciding.

The new Income Tax Act 2025 is more of a modernisation than a revolution — tax rates are unchanged, but the structure, forms, and terminology are simpler. The most impactful changes for salaried employees are the salary restructuring under the Code on Wages (higher PF, slightly lower take-home) and the expanded HRA exemption for four additional cities. Review your April payslip, choose the right tax regime early, and keep your investment proofs ready. That is all you need to do to stay on top of the changes.