New TDS Rules 2026: Impact on Salary, HRA, ITR and Standard Deduction

As of April 1, 2026, the Income Tax Act, 2025 has officially come into force by replacing the Income Tax Act 1961, bringing a digital-first approach to compliance. For salaried professionals, this means a shift in how Tax Deducted at Source (TDS) is calculated, how house rent benefits are claimed, and even how your annual tax certificate looks.

Major Changes in Tax Deducted at Source (TDS) Rules 2026

1. From Form 16 to Form 130: 

One of the most visible changes for employees is the retirement of Form 16 under the new rules, employer will now issue Form 130 instead of From 16:

• System-Generated: Form 130 must be downloaded directly from the TRACES portal by the employer to be legally valid.

• Granular Data: It includes more detailed reporting, such as the specific rate of tax deduction applied to each payment, not just the total amount.

• Deadline: Employers must issue Form 130 by June 15 following the end of the Tax Year.

2. HRA Revolution: 50% Benefit for 8 Cities

Previously, the coveted 50% of basic salary House Rent Allowance (HRA) deduction was restricted to the four metros cities under the Income Tax Rules, 2026, this list has doubled.

Note: This 50% HRA cap is only applicable under the Old Tax Regime. In the New Tax Regime, HRA remains fully taxable.

3. Standard Deduction and Enhanced Allowances:

The 2026 rules maintain the standard deduction while significantly bumping up smaller allowances that had remained stagnant for decades.

• Standard Deduction: Remains at ₹75,000 for the New Tax Regime and ₹50,000 for the Old Tax Regime.

• Children’s Education Allowance: Increased from a meager ₹100/month to ₹3,000 per month per child (up to two children).

• Hostel Allowance: Increased from ₹300/month to ₹9,000 per month per child.

• Meal Vouchers: The tax-exempt limit for meal cards/vouchers is now ₹200 per meal (up from ₹50).

4. The "Tax Year" and ITR Filing Changes:

The confusing overlap between "Financial Year" (FY) and "Assessment Year" (AY) has been eliminated. We now follow a single Tax Year.

• Unified Terminology: For income earned between April 1, 2026, and March 31, 2027, you are simply filing for Tax Year 2026-27.

• New ITR Deadlines: While the deadline for salaried individuals remains July 31, non-audit cases (like freelancers or small businesses using ITR-3/4) have seen an extension to August 31.

• Zero Tax Limit: Under the New Tax Regime, individuals with a total income up to ₹12 lakh (effectively ₹12.75 lakh after standard deduction) pay zero tax due to the Section 87A rebate.

New TDS Compliance for High-Rent Payers:

If you are a tenant paying significant rent, take note of the stricter compliance under the new Act.

• Rent Exceeding ₹50,000: For monthly rent above ₹50,000, tenants must deduct 2% TDS and deposit it by March 31.

• PAN of Landlord: Quoting the landlord's PAN is now mandatory for HRA claims above certain thresholds to ensure transparency in the "Virtual Digital Space" as defined by the 2025 Act.

The Old Tax Regime has gained a new lease on life for high-rent payers with the expansion of HRA benefits to cities like Bengaluru and Pune. However, for those with an income up to ₹12 lakh and minimal investments, the New Tax Regime remains the most frictionless and tax-efficient path.

Also Read: New Income Tax Rules 2026: ITR, Pan Card and Other Major Changes from 1st April