The Central Board of Direct Taxes (CBDT) has released the Draft Income-tax Rules, 2026, paving the way for the implementation of the historic Income-tax Act, 2025 (Act 30 of 2025). The new rules, which are set to replace the six-decade-old Income-tax Rules, 1962, mark a significant overhaul in India’s direct tax administration, aiming for simplification and reduced litigation.
According to Rule 1 of the draft notification, these rules will be officially called the Income-tax Rules, 2026 and will come into force on the 1st day of April, 2026, coinciding with the commencement of the new Act.
Operationalising the Income-tax Act, 2025
The draft rules are designed to provide the procedural framework for the substantive provisions laid down in the Income-tax Act, 2025. Rule 2 of the draft defines the “Act” as the Income-tax Act, 2025 (30 of 2025). It further standardises definitions, stating that “authorised bank” refers to banks appointed as agents by the Reserve Bank of India under Section 45(1) of the RBI Act, 1934.
The release of these draft rules signals the government’s readiness to transition to the new tax regime, which promises a simplified tax structure with fewer sections and a focus on digital compliance.
Key Provision: Arrangements for Dividend Declaration (Rule 3)
A critical compliance aspect highlighted in the draft is Rule 3, which prescribes the arrangements a company must make to be considered as having declared and paid dividends within India for the purposes of Section 2(42) of the new Act.
To qualify, a company must satisfy the following strict conditions:
- Share Register Maintenance: The company must regularly maintain its share register for all shareholders at its principal place of business within India. This must be done in respect of any tax year from a date not later than April 1st of that year.
- General Meeting in India: The General Meeting for passing the accounts of the tax year and for declaring any dividends (including those on preference shares) must be held strictly within India.
- Dividend Register: The registers of members and dividend registers should be open for inspection at the company’s registered office in India.
This rule ensures that companies claiming benefits or status as domestic entities regarding dividend distribution maintain their primary corporate governance functions within Indian jurisdiction.
Detailed Depreciation Rates for Power and Infrastructure Assets
The draft rules also introduce a granular classification for depreciation rates, particularly for the power and infrastructure sectors, reflecting the government’s push towards modernising energy assets.
As per the schedule annexed to the draft (referenced in the text as Page 410), specific depreciation rates have been proposed for assets used in electricity distribution and generation:
- Batteries: A high depreciation rate of 33.40% is proposed for batteries, likely to incentivise energy storage solutions and electric vehicle infrastructure.
- Transformers: Transformers with a rating of 100 kilovolt amperes and above will attract a depreciation rate of 7.81%, while others are set at 7.84%.
- Switchgear & Lightning Arrestors: Rates are proposed at 7.84% generally, with specific types like Pole type arrestors at 12.77%.
- Air-conditioning Plants: Static plants are rated at 12.77%, while portable units are eligible for a higher rate of 33.40%.
These specific rates indicate a move towards a more scientific approach to asset life and depreciation, moving away from broader block rates to item-specific allowances in capital-intensive industries.
Reduction in Compliance Burden
The new framework reportedly aims to drastically reduce the compliance burden. Public reports indicate that the number of rules has been rationalised from 511 in the old regime to approximately 333 in the 2026 Rules. Similarly, the number of forms is expected to be cut down significantly, from nearly 400 to around 190, simplifying the filing process for taxpayers.
Public Consultation and Way Forward
The CBDT has placed these draft rules in the public domain to invite comments and suggestions from stakeholders, tax professionals, and the general public. The consultation period is open until February 22, 2026. Following the review of public feedback, the final rules will be notified for implementation starting April 1, 2026.
Stakeholders are advised to review the specific “Manner of determination of Fair Market Value” and other procedural aspects which are expected to be covered in subsequent rules (Rule 4 onwards) to ensure readiness for the new fiscal landscape.
