The Income Tax Act, 2025 came into force on 1 April 2026, replacing the six-decade-old Income-tax Act, 1961 (PIB, 2026). For most SME owners, the first question is not about tax slabs. It is about what must change inside the payroll sheet before the April salary run. The new Act rewrites the perquisite table, renames every TDS form, and shifts the maths on eight common salary line items. Every number here is checked against an official or tier-1 Indian source.
Key Takeaways
- Form 16 is now Form 130 under Section 392. Quarterly salary TDS returns move from Form 24Q to Form 138 (ClearTax).
- HRA 50% exemption now covers 8 cities (the 4 metros plus Bengaluru, Hyderabad, Pune, Ahmedabad) under Rule 279 (TaxGuru).
- Meal vouchers jump from ₹50 to ₹200 per meal, tax-free under both regimes (Deccan Herald).
- Children’s education allowance goes from ₹100 to ₹3,000 per child/month. Hostel allowance goes from ₹300 to ₹9,000. Employer gift exemption triples from ₹5,000 to ₹15,000 a year (Business Today, TaxGuru).
- Company car taxable value nearly triples (₹1,800 to ₹5,000/month for small cars, driver perk ₹900 to ₹3,000). CTC restructuring is urgent for SMEs offering car benefits.
What actually changed on 1 April 2026?
The old Rule 3 perquisite values are now under Rule 15 of the Income-tax Rules, 2026, notified on 20 March 2026 (incometaxindia.gov.in). Tax slabs and the standard deduction are unchanged. Standard deduction stays at ₹75,000 (new regime) and ₹50,000 (old). What has changed is the perquisite table, the form family, and the HRA city list. Those three shifts drive every line item below.
The 8 payroll changes SMEs must action now
1. Form 16 is now Form 130, Form 24Q is now Form 138
The biggest shift for HR is the new form family under Section 392. The annual TDS certificate is no longer Form 16. It is now Form 130, built from the new quarterly salary return, Form 138 (which replaces Form 24Q). Non-salary TDS on vendor and contractor payments moves from Form 26Q to Form 140 (Business Today).
A Madhapur diagnostic lab with 74 staff came to us in April 2026 with old Section 192 references still in their vendor contracts. Those lines will fail at TRACES. Every template needs a search-and-replace.
2. Rule 15 replaces old Rule 3 as the perquisite framework
Rule 15 is the new master table for every non-cash benefit. If your CTC calculator or offer letter template was built between 2015 and early 2026, it quotes old Rule 3 figures. Those figures are now wrong. The table below shows the big movers.
| Perquisite | Old (Rule 3) | New (Rule 15) | Direction |
|---|---|---|---|
| Meal vouchers (per meal) | ₹50 | ₹200 | Employee-friendly |
| Education allowance (per child/month) | ₹100 | ₹3,000 | Employee-friendly |
| Hostel allowance (per child/month) | ₹300 | ₹9,000 | Employee-friendly |
| Gift exemption (per year) | ₹5,000 | ₹15,000 | Employee-friendly |
| Interest-free medical loan | ₹20,000 | ₹2,00,000 | Employee-friendly |
| Company car (≤1.6L) | ₹1,800/month | ₹5,000/month | Taxable rises |
| Company car (>1.6L) | ₹2,400/month | ₹7,000/month | Taxable rises |
| Driver perk | ₹900/month | ₹3,000/month | Taxable rises |
| Accommodation (metros) | 15% of salary | 10% of salary | Employer relief |
| Accommodation (cities 15-40L) | 10% of salary | 7.5% of salary | Employer relief |
Source: TaxGuru analysis of Income Tax Rules 2026 perquisite valuations, referenced in the Key Takeaways above.
3. HRA 50% exemption now covers 8 cities, not 4
Rule 279 expands the 50% HRA exemption. Mumbai, Delhi, Chennai, and Kolkata are now joined by Bengaluru, Hyderabad, Pune, and Ahmedabad. Every other city stays at 40%. An employee on a ₹60,000 basic drawing ₹24,000 HRA in Pimpri can now claim up to ₹30,000 as exempt. That is an extra ₹72,000 of tax-free salary per year, with zero cost to the employer.
One catch: HRA exemption applies only to the old regime. Staff on the default new regime cannot claim it. Many HR teams will need to re-run the regime comparison for FY 2026-27.
4. Meal vouchers jump from ₹50 to ₹200 per meal
The tax-exempt limit on employer-provided meal vouchers is now ₹200 per meal. Two meals a day across 22 working days adds up to about ₹1.05 lakh of tax-free benefit a year. This limit applies under both regimes, per the Deccan Herald report referenced in the Key Takeaways. Vouchers must still be non-transferable and usable only at food outlets during work hours.
A Pimpri-based auto-components unit with 42 shop-floor staff can now shift ₹1 lakh of each salary from taxable basic into meal vouchers. That saves each employee up to ₹31,200 in tax at the 30% slab plus cess. The company’s cash outflow is unchanged.
5. Education and hostel allowances jump 30x
Children’s Education Allowance moves from ₹100 to ₹3,000 per child per month. Hostel Expenditure Allowance moves from ₹300 to ₹9,000. A parent of two children can now claim up to ₹2.88 lakh of tax-free benefit per year, as per the Business Today analysis cited in the Key Takeaways. These allowances are old-regime only, so it is worth flagging them to parents in the April payslip note.
6. Gift exemption triples from ₹5,000 to ₹15,000
Under old Rule 3(7)(iv), employer gifts were tax-free up to ₹5,000 a year. Under Rule 15(5)(a) Table IV, the limit is now ₹15,000. This covers festive hampers, anniversary rewards, and Diwali bonuses given as gift cards. A Surat textile wholesaler running two outlets and one warehouse can now hand out a ₹12,000 Diwali hamper to all 38 of its staff without any of it hitting the taxable salary line.
7. Company car and driver perks nearly triple
Here is where the new Act bites the other way. The notional value of an employer-provided car rises sharply:
- Engine up to 1.6L: ₹1,800 → ₹5,000 per month
- Engine above 1.6L: ₹2,400 → ₹7,000 per month
- Driver perk: ₹900 → ₹3,000 per month
A senior manager with a car plus driver now shows a taxable perk of ₹8,000 a month, up from ₹2,700. That is ₹63,600 more in taxable income per year. A 30% slab employee pays about ₹19,800 extra in tax unless the CTC is reshaped.
Across 30,000+ Petpooja Payroll clients, most SMEs offering company cars have not yet re-run the maths for FY 2026-27. A Vastrapur retail chain with three directors on company cars came to us in late March 2026. Each director faced an extra tax hit of about ₹47,800 a year. The fix was to trim the car benefit and raise the meal voucher and gift components.
8. Accommodation perquisite is now cheaper, not dearer
Rule 15 lowers the taxable percentage for employer-provided housing:
- Metros (population above 40 lakh): 15% → 10% of salary
- Cities (15 to 40 lakh): 10% → 7.5% of salary
- Other places: 7.5% → 5% of salary
This helps SMEs running staff quarters: factory dormitories, resident doctor housing, construction site rooms, and quick-commerce dark-store rooms. A Hyderabad diagnostic lab running night-shift radiology quarters now values that housing at 7.5% instead of 10%. Less tax for the employee, no extra cost to the employer.
A quick note: the 50% wage rule is NOT from the Income Tax Act
Some blogs in April 2026 claim the Income Tax Act, 2025 enforces a rule requiring Basic + DA to be at least 50% of CTC. This is wrong. That rule comes from Section 2(y) of the Code on Wages, 2019, a separate labour law under the four Labour Codes (KSK Labour & Employment), effective 21 November 2025.
Indian SMEs are now dealing with two new laws at once. The Code on Wages changes the statutory basis of salary. The Income Tax Act changes how that salary is taxed. Any CTC redesign must satisfy both. For the labour side, see our labour law compliance checklist for HR and payroll teams in 2026.
What must Indian SMEs do before the April payroll run?
Here is the working checklist we hand to clients onboarding to Petpooja Payroll in April 2026.
- Step 1: Update payroll software to the Rules 2026 form library. Old Form 16 and 24Q templates will fail at TRACES.
- Step 2: Run a fresh regime comparison for every employee, especially those in Bengaluru, Hyderabad, Pune, and Ahmedabad.
- Step 3: Restructure CTC for anyone with a company car. The 2.8x jump hits tax outgo hard.
- Step 4: Raise meal voucher allocations to the ₹200 limit. Zero effort, up to ₹31,200 saved per employee.
- Step 5: Update offer letters and CTC templates to quote Form 130 and Rule 15.
- Step 6: Flag the change in the April payslip email. Most employees notice only in June.
For SMEs still on Excel, this is the year to switch. Our guide on switching from Excel to payroll software walks through the migration.
How does payroll software handle the new Income Tax Act?
A payroll system built for Indian SMEs carries the repetitive layer on its own. Petpooja Payroll handles the following out of the box for FY 2026-27:
- Form 130, 138, 140 generation from the monthly wage register, ready for TRACES upload
- Rule 15 perquisite valuation for cars, drivers, housing, meal vouchers, and gifts
- HRA 8-city detection from the employee’s work location, with the 50% or 40% rule picked on its own
- Old versus new regime comparison for every employee in the first April payslip
- Section 392 TDS computed on projected annual income with all new exemption limits
- WhatsApp alerts to HR on the 12th of every month flagging what is due by the 15th
The pattern we see most often in growing SME chains: the Act changes on 1 April, but the software is updated only in May or June because nobody was tracking the CBDT timeline. That gap produces one or two wrong payslips, and fixing them later takes more time than the update would have.
If the goal for FY 2026-27 is to stop firefighting on the 14th of every month, explore Petpooja Payroll, and see our guide to calculating payroll for small businesses.
Conclusion
The Income Tax Act, 2025 is a fresh rulebook with new form names, new section numbers, and a new perquisite table. Six of the eight changes help Indian SME employees: higher meal, education, hostel, gift, and loan limits, plus wider HRA coverage and cheaper staff housing valuation. The bad news is the company car perk nearly tripling, and every form and template built before April 2026 needing an update.
The first Form 138 return is due in mid-July 2026. Start with the software update, then the regime comparison, then the CTC restructuring. See our 9 payroll mistakes Indian SMEs should avoid and the salary management system walkthrough for the next steps.
Frequently Asked Questions
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the Income-tax Act, 1961. Presidential assent was given on 21 August 2025, per the PIB release cited earlier. All income earned in FY 2026-27 is taxed under the new Act.
Yes. Under Section 392, the annual TDS certificate is now Form 130. The quarterly salary TDS return moves from Form 24Q to Form 138. Non-salary TDS returns move from Form 26Q to Form 140. Every payroll software and HR template needs an update.
Eight cities now qualify under Rule 279: Mumbai, Delhi, Chennai, Kolkata, Bengaluru, Hyderabad, Pune, and Ahmedabad. Every other city stays at 40%. HRA exemption is available only to employees on the old tax regime.
Yes. The limit has moved from ₹50 per meal to ₹200 per meal. Two meals a day across 22 working days adds up to about ₹1.05 lakh of tax-free benefit a year. This limit applies under both the old and new regimes.
No. That rule comes from Section 2(y) of the Code on Wages, 2019, a separate labour law under the four Labour Codes, effective 21 November 2025. The Income Tax Act, 2025 does not contain any 50% CTC rule.
Update payroll software to generate Form 130, 138, and 140. Run a fresh regime comparison for every employee, especially those in Bengaluru, Hyderabad, Pune, and Ahmedabad. Restructure CTC for any employee with a company car. Raise meal voucher and gift components to the new limits and update every offer letter template.
