New Income Tax Rules Expected Soon, FY27 Budget to See Minimal Tax Law Changes
The Union Budget for the financial year 2027 is unlikely to introduce major changes to income tax law. Instead, significant shifts for taxpayers will come through a new set of income tax rules. These rules will determine how the revamped Income Tax Act, 2025, operates in practice, according to sources familiar with the matter.
Focus on Rules Over Legislative Changes
The Finance Bill, 2026, to be tabled in Parliament as part of the FY27 Budget, may carry only essential income-tax proposals. These include notifying tax rates for the year and outlining the transition to the new income tax regime from April 1. The contours of the new regime will be defined by rules issued shortly by the Central Board of Direct Taxes.
These rules assume great significance. They will shape taxpayer rights, fairness in the system, compliance burden, and the differentiation between procedural breaches and tax evasion. The regulatory framework will hinge on these rules.
They are expected to cover sensitive procedures under faceless assessment. They will provide safeguards against excessive official discretion. The rules will lay down processes for initiating prosecution. They will also offer guidance on the transition to the new regime.
Simplified Law, Critical Rules
The rules under the Income Tax Act, 2025, have taken on added importance. The new law has been pared down sharply. It nearly halves the number of chapters and words compared with the 1961 Act it replaces. This effort aims to make it simpler and more reader-friendly.
In the process, several operational and procedural aspects have been shifted from the law itself to subordinate rules. This includes those relating to faceless assessment. The parliamentary panel that cleared the Income Tax Bill approved several such provisions. They accepted the government's explanations on how safeguards would be addressed in the rules.
Experts say that while the Act has undergone structural simplification, many monetary limits and classifications embedded in the tax system have never been rationalized. Some date back to 1961. They have not been updated for inflation, economic growth, or changing urban realities.
Awaiting Clarity and Implementation
Experts expect the Union Budget to include announcements on the transition to the new regime. They also anticipate measures to support its implementation. However, they note that several rules and forms are yet to be notified. This raises concerns about uncertainty and the risk of inadvertent non-compliance for taxpayers.
"Industry and other stakeholders are keenly awaiting timely notification of the rules, filing mechanisms, and explanatory FAQs," said Gokul Chaudhri, president - Tax, Deloitte South Asia.
"Much will depend on how these rules are ultimately framed. They will play a decisive role in shaping taxpayer rights, ensuring fairness and proportionality in enforcement and reducing the compliance burden," he added.
Chaudhri emphasized that following global best practices and allowing meaningful stakeholder consultation before finalizing the rules will be key. This will ensure the new law delivers on its promise of a simpler, fairer, and more taxpayer-friendly tax system.
Frozen Thresholds and Outdated Limits
Experts also flagged that several thresholds in the tax framework have remained frozen for decades. For instance, the tax-free meal allowance continues to be capped at ₹50 per meal. This amount no longer reflects urban food costs and has effectively become obsolete.
Similarly, for calculating house rent allowance exemption, metro cities mean only four cities: Delhi, Mumbai, Kolkata, and Chennai. This definition was introduced in 1961 and never updated. Cities such as Bengaluru, Hyderabad, and Pune, despite comparable cost of living, continue to be treated as non-metros.
The tax-free gift limit of ₹50,000 has also remained unchanged since its introduction. This is despite shifts in income levels and social practices.
"While rules under the Income Tax Act, 2025 are yet to be notified, businesses and professionals are keenly awaiting if any recalibration is done to these existing monetary limits, as a part of a broader tax policy realignment," said Sandeepp Jhunjhunwala, Partner at Nangia Global.
Rules Shape Practical Application
Jhunjhunwala also cautioned that while income-tax rules cannot breach or override the Act, they can significantly shape how the law functions in practice.
"For instance, rules prescribing reporting formats or faceless assessment mechanism can either simplify compliance for taxpayers or increase procedural burden. Similarly, rules governing valuation methods, documentation, etc, can influence fairness and due process, and, if loosely drafted, may expand executive discretion beyond what Parliament intended," said Jhunjhunwala.
"Thus, while the Act sets the legal framework, the rules can decisively affect whether the system is taxpayer-friendly and balanced or compliance-heavy," he added.
Budget's Role in Fine-Tuning
Experts said the Union Budget can still play a meaningful role. It can fine-tune income tax slabs, rebates, standard deductions, and compliance-related provisions. These will operate alongside the new Act.
While major structural reforms are embedded in the law itself, the Budget remains a powerful instrument. It shapes taxpayers' actual tax burden. The Income Tax Act, 1961, is slated for repeal. The new Income Tax Act, 2025, is set to take effect from April 1.
