Draft Income Tax Rules, 2026: Know These ITR Changes

The Income Tax Department had earlier released the draft Income Tax Rules, 2026. These draft rules, effective from April 1, 2026, propose to bring clarity and simplicity to the Income Tax Return (ITR) forms.

These drafts are open for shareholder consultation. The last date to submit the feedback or suggestion is February 22, 2026.

The draft proposes significant changes, like a method for calculating the holding period of capital assets in certain cases, revised guidelines for the notification of zero-coupon bonds, etc. Let us understand the new changes for the income tax return (ITR) filers.

Fewer Rules and ITR Forms

The Income Tax Rules, 2026, reduce the number of rules from 511 to 333. It also proposes to cut the number of ITR forms from 399 to 190.

Evolving ITR Forms

Under the new draft rule, the ITR-1 (Sahaj) and ITR-4 (Sugam) allow the assessee to own 2 properties, which was earlier 1.

The new draft also expands the list of income not eligible to be reported in ITR-1 and ITR-4. Under the 1961 rule, ITR-1 and ITR-4 were not allowed if the assessee earned income under section 115BBE (unexplained investments or money/cash credits). This list now covers other incomes like transfer of carbon credits, virtual digital assets (VDA), online games, etc.

ITR Form Ineligibility

ITR-1 has 12 disqualifications, including foreign assets or signing authority in foreign accounts, director status in any company, foreign-source income, income exceeding Rs 50 lakh, holding unlisted equity shares, agricultural income more than Rs 5,000, etc.

ITR-4, which is meant for presumptive taxpayers, has 15 disqualifications.

Experts say that taxpayers must be extra careful about their eligibility for the ITR forms, as the draft rule changes can affect their filing status.

Capital Gains Challenges

The draft rules also bring some challenges for the long-term capital gains reporting. Taxpayers can report long-term capital gains from listed equity shares in the ITR-1 and ITR-4 only if these gains are not more than Rs 1.25 lakh and there are no carry-forward losses. This brings more challenges for the retail investors who actively trade.

Experts suggest that taxpayers carefully classify their gains as short-term or long-term. Even small trades or SIP redemptions can affect your eligibility if they exceed limits.

Risk of Defective Returns

As per the new conditions, your return will be treated as “defective” if

• A return of income can be treated as defective if:
• All required fields, parts, schedules, statements, or columns are not properly filled.
• The details of the tax payment are not correctly mentioned.
• The audit report is not submitted before filing the ITR (if an audit is applicable).
• The MAT or AMT credit claimed does not match the last filed ITR.

Under the law, if a return is not filed in the prescribed form, it can be marked as defective. For Assessment Year 2025-26, it shows that many notices were issued due to the wrong ITR form selection. The tax department actively checks returns using TDS details, AIS data, and other reporting systems. So if you select the wrong form, it can lead to a defect notice from the department.

E-Filing of ITR

Draft Rule 164(12) explains how income tax returns must be filed. Companies are required to file their returns electronically using a digital signature.

Taxpayers whose accounts are required to be audited under section 63 can file their returns either with a digital signature or through an electronic verification code. Other taxpayers have more options. They can file their return electronically and verify it online, or they can send the data electronically and later submit physical verification through Form ITR-V.

Individuals who are 80 years or older and filing ITR-1 or ITR-4 are allowed to file their returns in paper form.