Updated in March - 2026 | Subscribe to watch greytHR how-to video
As part of the Union Budget 2026 updates, the Indian government has introduced key income-tax changes effective April 2026, impacting payroll, covering expanded HRA metro city eligibility, revised perquisite valuation limits, updated allowances, and new statutory forms. These updates apply to all employers and employees and must be incorporated into payroll processing for FY 2026–27.
The list of metro cities eligible for the higher 50% HRA exemption has been expanded from 4 cities to 8 cities.
| Category | Earlier | Revised(effective April 2026) |
|---|---|---|
| No. of Metro cities | 4 | 8 |
| Metro cities | Mumbai, Delhi, Kolkata, Chennai | Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Pune, Bengaluru, Ahmedabad |
| HRA Exemption - Metro | 50% of salary | 50% of salary |
| HRA Exemption - Non Metro | 40% of salary | 40% of salary |
Note: The standard HRA exemption formula (least of actual HRA received, 50%/40% of salary, or rent paid minus 10% of salary) remains unchanged. Only the metro city list has been expanded.
The following perquisite limits have been revised and are applicable under both the old and new tax regimes, unless otherwise specified.
| Perquisite | Revised Value (Effective April 2026) | Previous Value |
|---|---|---|
| Meal coupons/Food coupons | Tax-free up to ₹200 per meal | ₹50 per meal |
| Gifts (Non-cash) | Tax-free up to ₹15,000 per year | ₹5,000 per year |
| Children Education Allowance | ₹3,000 per month per child | ₹100 per month per child |
| Hostel Allowance | ₹9,000 per month per child | ₹300 per month per child |
| Company Car Lease (≤ 1.6L) | ₹5,000/month + ₹3,000 for driver | ₹1,800/month + ₹900 for driver |
| Company Car Lease (> 1.6L) | ₹7,000/month + ₹3,000 for driver | ₹2,400/month + ₹900 for driver |
Note: This is applicable under both tax regimes(Old and New).
| Parameter | Details |
|---|---|
| Taxability Basis | Difference between SBI lending rate and the actual interest rate charged. |
| Exemption - small loans | Loans up to ₹2 lakh |
| Exemption - Medical emergency | Loans taken for medical emergencies |
| Parameter | Earlier | Revised |
|---|---|---|
| Income Threshold for Tax - free eligibility | <Rs.2 lakh | <Rs.8 lakh |
Income tax slabs for FY 2026–27 remain unchanged. Payroll admins should continue applying the existing slab rates under the employee's chosen tax regime.
| Purpose | Old Form | New Form |
|---|---|---|
| TDS Certificate (Salary) | Form No. 16 | Form No. 130 (TDS Certificate for Salary) |
| Investment Declaration | Form No. 12BB | Form No. 124 (Investment Declaration) |
| TDS Returns(Rent/Contractor/Profesional/other) | Forms 26QB, 26QC, 26QD, and 26QE | Form No. 141(consolidated into a single form) |
Payroll and HR teams should ensure the following actions are completed before processing the April 2026 payroll:
Update the metro city list in your payroll system to include all 8 cities for HRA exemption calculations.
Revise perquisite valuation rules for meal coupons/food coupons (₹200/meal), gifts (₹15,000/year), education and hostel allowances
Update company car lease perquisite values in the payroll engine for both engine categories.
Review employee loan perquisite workings to ensure SBI lending rate differential is applied correctly.
Validate the overseas treatment threshold update (₹8 lakh income limit) for eligible employees.
Migrate TDS certificate generation from Form 16 to Form 130 in the payroll/tax system.
Replace Form 12BB with Form 124 for employee investment declarations.
Consolidate TDS return filings under the new Form 141 (replacing 26QB/26QC/26QD/26QE).
The 8 metro cities are Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Pune, Bengaluru, and Ahmedabad.
Employees in metro cities are eligible for 50% of salary as HRA exemption. For all other cities, it remains 40% of salary.
No. Only the metro city list has expanded. The formula, least of actual HRA received, 50%/40% of salary, or rent paid minus 10% of salary remains unchanged.
The value has increased from ₹50 per meal to ₹200.
Non-cash gifts up to ₹15,000 per year are tax-free, revised from the earlier limit of ₹5,000.
Children Education Allowance is now ₹3,000/month per child (earlier ₹100) and Hostel Allowance is ₹9,000/month per child (earlier ₹300).
For engines up to 1.6L: ₹5,000/month + ₹3,000/month for driver (earlier ₹1,800 + ₹900).
For engines above 1.6L: ₹7,000/month + ₹3,000/month for driver (earlier ₹2,400 + ₹900).
Note: These apply under both tax regimes.
The taxable perquisite is the difference between the SBI lending rate and the actual interest rate charged. Loans up to ₹2 lakh and loans taken for medical emergencies are exempt.
The income threshold has been raised from less than ₹2 lakh to less than ₹8 lakh.
No. The income tax slabs remain unchanged for FY 2026–27.
Form No. 130 replaces Form No. 16 as the TDS certificate for salary income.
Form No. 124 replaces Form No. 12BB.
All four forms have been consolidated into a single new Form No. 141.
Yes. Payroll and compliance teams should ensure their systems are updated to use the new forms before processing the April 2026 payroll.
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