Income Tax rules are set for a drastic overhaul in April as the newly unveiled draft rules come into effect. It brings together several scattered provisions for employees — ensuring stability for salary components such as PF, NPS and retirement benefits. Key changes suggested by the Finance Ministry include an increase in PAN threshold for several items and suggested raising the value of perquisites provided by employers from April 2026.
A quick perusal of the lengthy documents indicates no direct change for employee provident fund or contributions to the National Pension System. It clarifies multiple procedural details and shares valuation methods for perquisites. Rule 20 under the draft rules outlines calculation details for voluntary retirement or separation from a company.
Employer contributions to PF, NPS, and superannuation funds will abide by the Income Tax Act of 2025 — with tax-exemption up to a combined annual cap of Rs 7.5 lakh. This is typically calculated by taking 12% of the basic salary and adding the dearness allowance. Any excess is treated as a taxable perquisite in the employee’s salary income. The draft Income Tax Rules will expand tax-free perquisites for salaried employees — including employer-provided meals up to Rs 200 each and car allowances up to Rs 8,000-10,000 monthly (with a driver). The decision was reportedly taken considering the current market realities.
The proposed Income Tax Rules will be notified by the first week of March after incorporating public comments. It will replace the Income Tax Rules of 1962 with effect from April 1.
What do the draft rules say about voluntary retirement/separation?
According to Rule 20 of the draft, the amount received during voluntary retirement or voluntary separation from a company can be claimed as deduction for the purposes of section 19 by an employee. The scheme must apply to employees with 10 years of service or age 40+, cover all staff except directors, aim to reduce overall workforce, avoid refilling vacancies, and prevent re-employment under the same management.
The process has been simplified under the draft rules. Payments are calculated by multiplying three months’ salary by the total number of service years or by multiplying the salary by the remaining months until superannuation — capped at the lower figure. It uses the last drawn salary (including dearness allowance but excluding other benefits) for this calculation.
What changes will the draft Labour Codes bring?
The Centre also notified draft rules for four new labour codes at the beginning of January — inviting public consultations for the next 45 days. The guidelines define workers, wages, types of employment, gratuity, bonus and social security of workers. According to the Ministry, it will ensure better wages, safety, social security and welfare for the workforce.
The new rules standardise wage calculations and make appointment letters mandatory — potentially increasing net pay for some. No direct changes are being made to income tax on employer contributions to PF or NPS under the draft rules. Monthly take-home pay is expected to decline slightly as companies adjust their salary structures. But employees are likely to build a higher retirement corpus as provident fund contributions and gratuity payouts see a corresponding hike.