Draft Income Tax Rules 2026: Redesigned income tax return (ITR) forms, broader criterion for applicability of ITR forms, and more pre-filled details are some of the changes that income taxpayers can look forward to for the upcoming tax year 2026-2027 for which returns will be filed in 2027-28.The Income Tax Department has released the Draft Income Tax Rules 2026 which list out some of the changes in the tax filing process which also impact salaried and middle class taxpayers. It is important to note that the Draft Income Tax Rules 2026, once finalised, will be applicable for the next financial year 2026-27 and do not change your tax filing requirements and ITR forms for the upcoming tax filing season. While the draft income tax rules 2026 indicate the possible changes in ITR forms for tax year 2026-27, greater clarity will emerge only once the final forms are released next year.
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Draft Income Tax Rules 2026: How are ITR forms evolving?
According to Richa Sawhney, Partner Tax, Grant Thornton Bharat LLP, the eligibility parameters for selection of ITR 1 and 4 have been tweaked. “Though the forms are currently not available, it is anticipated that they will further carry forward the theme of simplification and ease of compliance. Also, as the New ITR forms would be applicable for tax year 2026 -27 they are expected to be notified later,” Richa Sawhney told TOI.The new rule 164 lays down the criteria for applicability of different ITR forms. The new forms are not yet available. The key changes are:
- The 1962 rule regime mandated filing return in ITR 1 and 4 provided the assessee does not own more than 1 property. The new rule provides for the ownership of 2 properties to exercise return filing under ITR 1 and 4.
- Similarly, ITR 1 and 4 were not allowed in a case where the assessee earned income u/s. 115BBE (unexplained investments or money/cash credits). Now, the negative list has been expanded to include certain other income streams e.g. transfer of carbon credits, VDA, online game etc.
Talking about the Draft Income Tax Rules 2026, she said, “In line with the New Income -Tax Act, the new rules have also been drafted to ensure they are simple to comprehend and easy to comply with, for all categories of taxpayers. The number of rules and forms has been significantly reduced, as redundant ones have been removed. The use of tables will help in better navigation. The focus on technology in ensuring the forms are pre -filled and reconciled will reduce the time spent in compliances and reduce inadvertent errors. It is important that all stakeholders evaluate these rules and forms in detail and share their inputs with the government in a timely manner, so that any teething issues in implementation are mitigated and there is a smooth transition.”Kuldip Kumar, partner at Mainstay Tax Advisors, highlighted technological progress in the ITR forms. “The redesign of forms, increased use of pre-filled information, and automated linkages will significantly simplify compliance and improve ease for taxpayers. This simplification has already been progressing gradually over the years and is further strengthened by the proposed changes and approach adopted by the government,” Kuldip Kumar told TOI.“Although the draft ITR return forms under the proposed Income-tax Rules, 2026 have not yet been issued, it is reasonable to expect that the existing structure of return forms, namely ITR-1 to ITR-7, will broadly continue. However, stricter monitoring of taxpayer eligibility for the respective forms may be introduced, supported by increased digitisation and improved data integration within the tax administration system,” he says.“Greater integration with AIS/TIS data, audit reports, and other third-party information sources is also anticipated. Additionally, there may be a rearrangement of sections and renumbering of rules and forms, as required, to align the return forms with the provisions of the Income-tax Act, 2025. Certain alignment challenges are already visible under the current framework. For example, where a taxpayer is liable to offer notional rental income in respect of more than two self-occupied house properties, such taxpayer cannot use ITR-1 or ITR-4, even if the other eligibility conditions of those forms are satisfied,” Kuldip Kumar explains.“At present, reporting of foreign assets continues to pose practical challenges. For instance, ambiguity often arises regarding whether vested but unexercised stock options are required to be disclosed in the foreign asset schedule. Clarificatory guidance on such issues would significantly assist taxpayers in ensuring accurate compliance,” he adds.
The ITR form ineligibility risk
Five main return forms: ITR-1 (Sahaj) for salaried individuals with simple income, ITR-2 for those without business income, ITR-3 for business or professional income, ITR-4 (Sugam) for presumptive taxpayers, and specialized forms for other entities.ITR-1 eligibility appears straightforward—salary, family pension, house property income (maximum two properties), income from other sources (excluding lottery and race horses), and long-term capital gains under section 198 up to Rs 1.25 lakh.
But twelve specific disqualifications exist: foreign assets or signing authority in overseas accounts, foreign-source income, director status in any company, holding unlisted equity shares, income above Rs 50 lakh, agricultural income exceeding Rs 5,000, plus six other technical triggers.ITR-4 for presumptive taxpayers has fifteen disqualifications.OP Yadav, former principal commissioner of income tax and now tax evangelist at Prosperr.io explained the continuity. The forms are prescribed each year within the broader framework—earlier under Rule 12 of the 1962 rules, from 2026-27 onwards under Draft Rule 164. “There is no fundamental shift in policy—the structure largely continues the existing approach.”
Asked by TOI whether ordinary taxpayers may unknowingly slip into ineligibility, CA Chintan Ghelani, partner for direct tax at N.A. Shah Associates LLP, said the risk is real.An otherwise ordinary taxpayer may unknowingly become ineligible if any exclusion triggers—foreign assets, unlisted shares, directorship, or crossing the Rs 50 lakh threshold. But the rules are largely consistent with the existing framework, he emphasised. The key point: careful evaluation before selecting the return form.The annual review question becomes critical.According to Ghelani, taxpayers should review eligibility every year rather than assume continuity. “Even a single change such as acquiring foreign assets, holding unlisted shares, becoming a director, or crossing the income threshold can immediately alter the applicable return form,” he said.Yadav reinforced the point. Eligibility is not static—a taxpayer eligible in the previous year may become ineligible in the current year due to changes in income composition or asset holdings, and vice versa. Therefore, annual review isn’t driven by rule changes but by evolving income profiles.He noted the compliance risk: assuming continuity merely on the basis of last year’s filing, without evaluating the changed income profile, can lead to incorrect form selection.
Capital gains complexity
The draft rules allow ITR-1 and ITR-4 where long-term capital gains under section 198 don’t exceed Rs 1.25 lakh and there are no carry-forward losses. Section 198 of the new Act corresponds to section 112A of the existing Act—the provision taxing long-term capital gains on listed equity shares.From Assessment Year 2025-26, Yadav explained, ITR-1 and ITR-4 permitted reporting of long-term capital gains from listed equity shares up to Rs 1.25 lakh under section 112A, which is otherwise exempt. The new Act continues this through section 198.For retail investors trading actively through SIPs, direct equities, and digital platforms, tracking gets challenging.Asked how difficult this becomes, Ghelani told TOI the challenge is moderate but real. Even routine SIP redemptions or equity trades can generate capital gains or losses affecting whether simplified forms remain available.While trading platforms typically provide consolidated gain/loss statements, taxpayers still need to correctly classify gains as short-term versus long-term, identify any carry-forward losses, and check prescribed thresholds. Crossing those limits automatically disqualifies the simplified return. “In practice, the difficulty is manageable with proper record-keeping and annual review, but investors who trade frequently or across multiple platforms face a higher risk of overlooking a disqualifying trigger.“Can small changes like booking profits suddenly shift taxpayers into complex forms?Yes. According to Ghelani, even relatively small transactions—booking capital gains or claiming a carry-forward loss—can immediately make a taxpayer ineligible for simplified forms. Eligibility depends on the nature and classification of income rather than its size. Therefore, a seemingly routine investment activity can shift the taxpayer into a more detailed return form.Yadav clarified the mechanics. If capital gains exceed the prescribed limit but there’s no business income, ITR-2 would generally apply. If there’s business or professional income along with capital gains, ITR-3 becomes necessary.
Defective returns risk
Wrong form selection carries consequences. But what is treated as a defective return? Let’s understand that:According to Grant Thornton Bharat’s Richa Sawhney, the newly inserted conditions state that a return of income shall be treated as defective if any of following conditions fulfilled-
- All fields, parts, schedules, statements, and columns in the return of income, have not been duly filled in
- Audit report not furnished prior to furnishing ITR
- Detail of payment of tax not filled in
- MAT/ AMT credit not in accordance with last ITR
Just as under section 139(9) of the Old Act, OP Yadav explained, under Draft Rule 166 read with section 263(7) of the New Act, a return may be treated as defective if not furnished in the prescribed form applicable for the relevant year.Recent data shows active enforcement. For Assessment Year 2025-26, a considerable number of notices under section 139(9) were issued due to incorrect selection of ITR forms. This demonstrates that the tax administration actively verifies form eligibility based on disclosures available through TDS statements, AIS and other reporting mechanisms.Incorrect form selection is not merely a procedural lapse- it can trigger formal defect notices requiring timely rectification. If such a defect is not rectified within the prescribed time by filing the return in the applicable form, the return may ultimately be treated as invalid – effectively as if no return was filed – attracting all consequences of non-filing.
Electronic Filing of ITR
Draft Rule 164(12) prescribes filing methods. Companies must file electronically under digital signature. Persons whose accounts require audit under section 63 can file under digital signature or electronic verification code. Others have additional options including transmitting data electronically and submitting physical verification in Form ITR-V.Individuals aged 80 years or more filing ITR-1 or ITR-4 can file in paper form—the only remaining option for physical filing.Draft Rule 165 governs updated returns under section 263(6), requiring Form ITR-U. Draft Rule 177 addresses modified returns for business reorganizations under section 314, requiring Form ITR-A.
| Person |
Manner of furnishing return of income |
| Company |
Electronically under digital signature |
| Any person whose accounts are required to be audited under section 63 of the Act |
(A) Electronically under digital signature; (B) Transmitting the data electronically in the return under electronic verification code. |
| Any person other than the person referred in Sl. No. 1 and 2 |
(A) Electronically under digital signature; (B) Transmitting the data electronically in the return under electronic verification code; (C) Transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V. |
| An individual of the age of 80 years or more at any time during the tax year, who furnishes return in Form No. SAHAJ (ITR-1) or
Form No. SUGAM (ITR-4)
|
(A) Electronically under digital signature; (B) Transmitting the data electronically
in the return under electronic verification
code;
(C) Transmitting the data in the return
electronically and thereafter submitting the
verification of the return in Form ITR-V;
(D) Paper form.
|
