Draft Income Tax Rules 2026: Key Changes in HRA and Property PAN Norms

From April 1, 2026, the government’s draft income tax structure proposes a list of changes that'll affect property buyers, salaried tenants, and employers. The Draft Income Tax Rules, 2026, which will operate alongside the new Income Tax Act, 2025, aim to expand certain benefits while raising compliance in key areas such as House Rent Allowance claims and reporting standards.

Higher PAN Threshold for Property Deals

The draft rules suggest increasing the threshold for mandatory PAN mention in property deals from ₹10 lakh to ₹20 lakh. This higher limit may also apply to certain transactions like gifts of immovable property and joint development agreements. The revised PAN limit property transaction 2026 may also extend to gifts of immovable property and certain joint development agreements.

For many first-time homebuyers in tier-2 and tier-3 cities, this could reduce paperwork at the time of registration. In smaller towns, property values often decline within the ₹10 lakh to ₹25 lakh range. Under the existing rule, even minor transactions required PAN disclosure. Raising the limit to ₹20 lakh might offer some relief and simplify compliance for smaller buyers.

However, tax advisers suggest that voluntary PAN declaration remains safe. Property transactions carry tax implications, especially for sellers who may be accountable for capital gains tax. Even where quoting PAN is not compulsory, maintaining clear documentation protects both parties in case of future inquiry.

HRA Rules Get a Structural Update

At the same time, the draft rules introduce significant changes to House Rent Allowance, commonly known as HRA. Under the old tax regime, HRA exemption under Section 10(13A) continues to be available only if specific conditions are met. The exemption amount is calculated as the lowest of three figures: the actual HRA received, the rent paid minus 10 percent of salary, or 50 percent or 40 percent of salary depending on the city of residence.

Currently, employees living in Mumbai, Delhi, Kolkata, and Chennai can claim up to 50 percent of their salary as the maximum ceiling. For all other cities, the limit is 40 percent.

The draft rules propose expanding the 50 percent category to include Bengaluru, Hyderabad, Pune, and Ahmedabad. The move recognizes the sharp rise in rental costs and the increasing status of these cities as employment hubs in technology, manufacturing, and services.

If implemented, employees residing in these four cities under the old tax regime could observe a higher exemption limit. For salaried professionals paying high rents in these markets, this change may result in direct tax savings. 

Employees will need to declare whether the landlord is a parent, spouse, sibling, or any other relative. If there is no relationship, that too must be clearly stated. The intention is to address cases where rent is shown as paid to close family members without proper documentation or genuine tenancy arrangements.

Tax authorities have observed instances where employees claim inflated rent payments to relatives, sometimes without actual money changing hands. Under the proposed rules, genuine arrangements will still be allowed. For example, rent paid to parents can qualify for HRA exemption provided there is a valid rental agreement, payment is made through traceable banking platforms, and the parent declares the rental income in their tax return.

The compliance burden will increase at the employer stage. Employers deduct tax at the source based on employee declarations. With the introduction of Form 124, employers may need to verify more detailed information, including landlord PAN and Aadhaar details where rent exceeds ₹1 lakh per year. Employees will also be expected to maintain clear evidence of payment, like bank transfers or other digital records.

For employees in these locations under the old policies, the higher limit could equate to a larger exempt component of HRA, depending on rent paid and salary structure.

Also Read: Meaning of House Rent Allowance and How Does it Cater to Tax Exemption

The Formula Remains, But Documentation Tightens

As per Section 279 of the draft income tax rules, the exemption will continue to be calculated as the lowest of three figures:

• Actual HRA received
• Rent paid minus 10 percent of salary 
• 50 percent of salary for the eight specified cities, or 40 percent for others

For this purpose, salary includes basic pay and dearness allowance, where applicable. Other allowances and perquisites are excluded from the calculation base.

The fundamental computation has not changed. What has changed is the reporting structure.

End of Paper-Only Claims

A central feature of the draft is the introduction of Form 124, which will replace the current declaration mechanism for HRA and related claims. Under this format, employees must disclose their relationship with the landlord when claiming exemption.

If rent is paid to a parent, sibling, spouse, or other relative, that relationship must be explicitly declared. If there is no relationship, that must also be stated. This requirement is aimed at curbing inflated or fictitious rental claims, particularly arrangements where rent is shown as paid to family members without adequate documentation.

Rental arrangements with relatives remain valid. Taxpayers will need:

• A proper rent agreement
• Bank transfer or other traceable payment evidence
• Rent receipts
• Landlord PAN details, especially where annual rent exceeds ₹1 lakh
• Confirmation that the landlord reports the rental income in their tax return

Employers will face a higher due diligence burden when processing HRA claims at the tax deduction at source stage. The reporting cycle becomes more structured and less discretionary

Also Read: Why Joint Taxation Is Back on the Union Budget 2026 Agenda.

Increased Scrutiny Beyond HRA

The draft framework indicates closer monitoring not only of HRA claims but also of foreign tax credits and corporate audit observations. While relief is offered through the revised PAN limit property transaction 2026 and expanded metro classification, enforcement mechanisms are being reinforced.

Mismatches between an employee’s HRA claim and a landlord’s declared rental income could trigger automated scrutiny. Inconsistent or incorrect disclosures may lead to rejection of exemption or follow-up notices from the tax department. 

What Taxpayers Should Do Now

The draft rules are expected to take effect from April 1, 2026, subject to final notification. Until formal approval, they remain proposals. Yet the direction of policy is clear.

Employees who claim HRA under the old tax regime should review their documentation practices in advance of the new financial year. Rent deposits should ideally move through banking channels. Agreements must be current and signed. Landlord PAN details should be accurate and verified.

Property buyers and sellers, particularly in smaller cities, should understand that while mandatory PAN quoting thresholds may rise, the tax implications of property transactions remain unchanged.

In total, the Draft Income Tax Rules, 2026, attempt a careful balance. Relief is extended where housing costs have climbed and smaller property deals are common. At the same time, verification standards are strengthened to reduce misuse. For taxpayers, preparation and documentation will be the key safeguards in the year ahead.