The draft income-tax rules have several new or reworked sections, laying out new procedures, thresholds, and forms that either replace provisions in the Income Tax Act, 1961 while laying out the blueprint for implementation of the 2025 I-T act.
From crypto reporting standards to PAN-exempt NRI investments, the Draft Income-Tax Rules, 2026, introduce procedural shifts while bringing back tax relief for voluntary retirement.
The Draft Income Tax Act, 2026, marks a shift by replacing the dual “previous year” and “assessment year” framework with a single “tax year” structure.”
“These rules align India with global standards, eliminating the perennial confusion regarding temporal applicability for foreign investors and domestic taxpayers,” an tax expert said.
Key changes for individual taxpayers under the New Income Tax Act, 2025 and the proposed draft rules are as follows:
Draft rules define defective returns under ITA 2025
Under Section 263(7) of the I-Tax Act, 2025, and Rule 166 of draft rules, the tax authority can treat a return as defective if it is incomplete or missing prescribed information. Rule 166 sets out the conditions under which a return will be treated as defective.
The new rule proposes to replace Section 139(9) framework with a revised defective-return regime, while still allowing taxpayers an opportunity to correct errors before the return is treated as invalid.
“The new rule clarifies exactly what mistakes or missing information will cause a return to be considered invalid under this technology-driven system,” another tax expert said.
According to Rule 166, a return may be treated as defective if required fields and income computations are incomplete, the mandatory audit report is not filed before the return, tax payment details are missing where applicable, or Minimum Alternate Tax (MAT) or Alternate Minimum Tax (AMT) credit claims do not match allowed carry-forwards.
PAN exemption for NRIs for Investments in India
Under Section 262 of Rule 157 of the draft I-T rules, select non-resident individuals (NRIs) can invest in India without the need to obtain a PAN, provided that they do not earn any income in India other than income from investments that are taxed at source, and proper details and documents are furnished.
According to him, this rule replaces the PAN framework previously spread across sections 139A and 139AA of the 1961 Act and the corresponding 1962 rules.
“The new framework reduces procedural burden for lower value dealings but subjects substantial financial property and high value consumption transactions to stricter identity-based traceability, making maintenance of a valid Aadhaar-linked PAN a critical compliance requirement,” he said.
Draft rules extend common reporting standards to VDAs
Under Section 509 of the I-T Act, 2025 and rules 241 to 244 of the draft, a new information-reporting regime for cryptocurrency and virtual digital assets (VDAs) has been introduced.
According to him, this framework establishes a first-time Common Reporting Standard (CRS)-style system specifically designed for crypto-asset transactions, bringing Virtual Asset Service Providers (VASPs) and other intermediaries within a bank-like reporting perimeter comparable to traditional financial institutions.
“The regime requires platforms and intermediaries to conduct customer due diligence, track transactions and report specified information to tax authorities in prescribed formats. This marks a major shift for crypto, tightening compliance and bringing digital assets under monitoring standards similar to traditional finance,” he said.
Voluntary retirement moves from exemption to deduction under new rules
Under Section 19 (Table: Sl. No. 12) of Rule 20 of the Income-tax Rules, 2026 (Draft), payouts under Voluntary Retirement Scheme (VRS) or Voluntary Separation Scheme (VSS) qualify for a tax deduction instead of being fully taxed as salary.
Earlier, relief for voluntary retirement was provided under the old framework of the Income-tax Act, 1961, under Section 10(10C). Rule 20 lays out eligibility, conditions, and payout limits for employees, such as the requirement of completing more than 10 years of service.
According to tax analysts, the overall tax impact is expected to remain broadly unchanged. The key shift is in form and process, with relief now taken as a deduction under Section 19 rather than an exemption under Section 10(10C).
