Govt Releases Draft Income Tax Rules 2026: How ITR-1 to ITR-7 May Change for Taxpayers

India’s taxation framework is heading toward one of its biggest reforms in decades. Beginning April 1, 2026, the newly introduced Income-tax Act, 2025 will replace the existing Income-tax Act, 1961, bringing a modern and more structured tax compliance system.

To support the implementation of the new legislation, the government has issued the Draft Income-tax Rules, 2026, along with updated Income Tax Return (ITR) forms. These draft rules aim to streamline compliance, strengthen disclosure requirements, and promote digital filing across all taxpayer categories.

Currently, the government has invited suggestions and public feedback on these draft rules until February 22, 2026, after which the final rules are expected to be officially notified.

This transformation is expected to significantly impact how individuals, professionals, businesses, companies, and institutions file their income tax returns in the coming years.

Major Objective of Draft Income Tax Rules 2026

The newly proposed rules focus on improving transparency, simplifying compliance procedures, and enhancing data accuracy in return filing. The government intends to create a tax filing ecosystem that is largely digital, data-driven, and standardized across taxpayer segments.

Key objectives include:

1. Simplifying tax return filing formats
2. Introducing stricter eligibility norms for simplified tax forms
3. Increasing disclosure and reporting standards
4. Encouraging digital-first compliance
5. Strengthening integration between tax data and reporting systems

Although the existing structure of ITR forms (ITR-1 to ITR-7) will remain in place, eligibility criteria and disclosure obligations are being clearly redefined.

Changes in ITR Forms Under Draft Rules 2026

ITR-1: Simplified Return with Strong Digital Compliance

ITR-1 will continue to serve as the simplest return form designed primarily for resident individuals with basic income sources such as:

1. Salary or pension income
2. Income from one house property
3. Income from other sources such as interest

However, the draft rules emphasise that this form will strictly apply only to straightforward income cases. The government has reinforced digital filing requirements under this form.

Key Proposed Changes in ITR-1:

1. Electronic filing will become compulsory for most taxpayers
2. Paper filing will only be allowed for super senior citizens aged 80 years or above
3. Verification of return must be done through Electronic Verification Code (EVC) or Digital Signature
4. Eligibility conditions are expected to be more strictly monitored

This indicates that taxpayers with slightly complex financial situations may no longer qualify for ITR-1.

ITR-2: Primary Return for Complex Non-Business Income

ITR-2 will remain applicable for individuals and Hindu Undivided Families (HUFs) who do not earn income from business or profession but have multiple or complex income streams.

This form generally covers taxpayers with:

1. Capital gains income
2. Multiple house properties
3. Foreign income or foreign assets
4. High-value investments

Under the new framework, ITR-2 is expected to act as the default option when taxpayers do not meet the eligibility conditions of ITR-1.

Expected Enhancements in ITR-2:

1. More detailed disclosure of capital gains transactions
2. Expanded reporting of foreign income and assets
3. Greater transparency in investment reporting
4. Improved cross-verification with global tax data

These additions indicate the government’s intention to monitor high-value and international transactions more closely.

ITR-3: Increased Disclosure for Business and Professional Income

ITR-3 will continue to apply to taxpayers earning income from business or professional activities. The draft rules suggest that taxpayers who do not fall under presumptive taxation schemes will mandatorily be required to file ITR-3.

Key Expected Changes:

1. Expanded reporting of business income and professional receipts
2. Additional disclosures related to perquisites and special income categories
3. Detailed capital gain reporting for traders and professionals
4. Enhanced reconciliation with financial records and audit data

The updated rules indicate that ITR-3 may become more detailed and compliance-focused, especially for high-income professionals, consultants, traders, and freelancers.

ITR-4: Most Significant Restrictions Introduced

Among all forms, ITR-4 is expected to witness the most significant changes. Traditionally, ITR-4 was widely used by small businesses and professionals opting for presumptive taxation schemes.

Under the new draft rules, strict eligibility conditions have been introduced to prevent misuse of this simplified return.

Taxpayers Will NOT Be Eligible for ITR-4 If They:

1. Possess foreign income or foreign assets
2. Serve as a company director
3. Hold unlisted equity shares
4. Earn total income exceeding ₹50 lakh
5. Own more than two house properties
6. Carry forward business or capital losses
7. Earn agricultural income exceeding ₹5,000

These restrictions mean that many taxpayers who previously relied on ITR-4 may now be required to shift to ITR-3, leading to more detailed reporting and compliance responsibilities.

ITR-5 and ITR-6: Enhanced Digital Reporting for Firms and Companies

The structural format of ITR-5 and ITR-6 will largely remain unchanged. However, the draft rules emphasize stronger integration with digital compliance systems.

ITR-5 (Applicable To):

1. Partnership firms
2. LLPs
3. Associations of Persons (AOPs)
4. Bodies of Individuals (BOIs)

ITR-6 (Applicable To):

• Companies (excluding those claiming exemption under Section 11)

Expected Compliance Enhancements:

1. Mandatory digital signature filing for companies
2. Stronger linkages with audit reports
3. Integration with newly introduced forms such as:

• ITR-A – For business reorganisation cases
• ITR-BL – For block assessment proceedings

These measures aim to improve financial reporting transparency and ensure consistency between audit findings and tax filings.

ITR-7: Increased Transparency for Trusts and Exempt Entities

ITR-7 applies to charitable trusts, political parties, research institutions, and other entities claiming tax exemptions.

Under the new draft rules, compliance requirements are being tightened to ensure proper monitoring of tax-exempt funds.

Key Changes Expected:

1. Detailed reporting of donations received
2. Mandatory linking of audit reports with return filing
3. Transparent disclosure of fund utilisation
4. Strict penalties for defective or delayed filings

The government is clearly focusing on preventing misuse of tax exemptions by introducing stricter verification processes.

Shift Toward Digital-First Tax Compliance

One of the most significant aspects of the Draft Income Tax Rules 2026 is the strong push toward electronic compliance. The government is focusing on building a tax ecosystem that relies heavily on structured data and automated verification.

Core Digital Compliance Changes:

1. Online filing will become compulsory for most taxpayers
2. Digital verification methods will replace manual authentication
3. Integration with AIS, financial institutions, and GST data will increase
4. Real-time data monitoring may become more common

This transition is expected to reduce tax evasion while improving filing efficiency.z

Impact on Taxpayers and Businesses

The implementation of the new Income-tax Act, 2025 along with the Draft Rules, 2026 is likely to bring significant changes for both taxpayers and businesses, creating a mix of benefits and compliance responsibilities. On the positive side, the revised framework is designed to simplify the overall tax structure, improve transparency in tax administration, enable quicker processing of returns, and ensure better coordination between financial reporting systems and tax databases. However, these changes also introduce certain challenges, as taxpayers may be required to provide more detailed disclosures, and the eligibility for simplified return forms is expected to become more restricted. Additionally, businesses and individuals will need to maintain more accurate financial records and rely heavily on digital compliance systems. As a result, taxpayers must adopt proper documentation practices and regularly reconcile their financial and tax data with official records to ensure smooth compliance under the new regime.

Public Feedback Opportunity

Before final implementation, the government has invited feedback from taxpayers, professionals, and industry stakeholders. The draft rules remain open for suggestions until February 22, 2026.

This step reflects the government’s intention to make the tax framework more practical and user-friendly before finalising the rules

Conclusion

The upcoming Income-tax Act, 2025, along with the Draft Income Tax Rules, 2026, represents a major transformation in India’s tax compliance environment. While taxpayers will continue to use familiar return forms such as ITR-1 to ITR-7, eligibility conditions, disclosure standards, and filing procedures will become more structured and transparent.

The shift toward digital compliance, stricter reporting norms, and limited availability of simplified returns indicates that taxpayers must adopt better financial record management and professional tax planning strategies.

As April 1, 2026 approaches, individuals, businesses, and tax professionals should begin preparing for these changes to ensure smooth compliance under the new taxation regime.

Frequently Asked Questions (FAQs)

Q1. When will the new Income-tax Act, 2025 come into effect?

The new Income-tax Act, 2025 will be implemented from April 1, 2026. It will replace the existing Income-tax Act, 1961 and introduce updated compliance rules and return filing procedures.

Q2. Why has the government introduced Draft Income Tax Rules 2026?

The government introduced these draft rules to support the implementation of the new tax law. The main goal is to simplify tax filing, increase transparency, improve reporting accuracy, and promote digital compliance.

Q3. Will ITR forms change completely under the new rules?

No, the ITR structure will remain the same. Taxpayers will still file returns using ITR-1 to ITR-7, but eligibility criteria, disclosure requirements, and compliance procedures will become more detailed and stricter.

Q4. What is the biggest change proposed in ITR-1 (Sahaj)?

The major change is that electronic filing will become mandatory for most taxpayers. Paper filing will only be allowed for individuals aged 80 years or above. Also, eligibility for ITR-1 will be more strictly monitored.

Q5. Who will need to file ITR-2 under the new rules?

ITR-2 will apply to individuals and HUFs who do not have business income but have complex income sources such as:

1. Capital gains
2. Multiple house properties
3. Foreign income or assets
4. High-value investments

Q6. What changes are expected in ITR-3?

ITR-3 will require more detailed reporting for taxpayers having business or professional income. The form may include expanded disclosures related to:

• Business income
• Perquisites and special income categories
• Capital gains transactions
• Financial and audit reconciliations

Q7. Why is ITR-4 (Sugam) becoming more restrictive?

The government aims to prevent misuse of simplified returns. Under the new rules, taxpayers cannot use ITR-4 if they:

1. Have foreign income or assets
2. Are company directors
3. Hold unlisted shares
4. Earn income above ₹50 lakh
5. Own more than two house properties
6. Have carried forward losses
7. Earn agricultural income above ₹5,000

Q8. Will companies and firms see major changes in ITR-5 and ITR-6?

The overall structure of these forms will remain similar, but compliance will become more digital and data-driven. Companies will also have mandatory digital signature filing and stronger integration with audit and assessment forms.

Q9. How will the new rules impact trusts and exempt institutions filing ITR-7?

Trusts and exempt entities will need to provide more transparency in reporting donations, audit reports, and fund utilisation. Failure to comply may result in loss of tax exemption benefits.

Q10. What is meant by digital-first tax compliance?

Digital-first compliance means that most tax filing and verification processes will be done online. The government plans to increase integration between tax returns, AIS, GST records, and financial institutions to improve data accuracy and monitoring.

Q11. How will these changes affect taxpayers and businesses?

The new rules will simplify tax structures and improve transparency but will also increase disclosure requirements. Taxpayers and businesses will need better financial documentation and stronger digital compliance systems.

Q12. Can taxpayers give feedback on the Draft Income Tax Rules 2026?

Yes, the government has invited suggestions and feedback from taxpayers and professionals. The feedback window is open until February 22, 2026, after which the final rules will be notified.

Q13. Will simplified ITR forms still be available?

Yes, simplified forms will remain available but with stricter eligibility conditions. Many taxpayers who previously used simplified forms may need to shift to detailed return forms.

Q14. What should taxpayers do to prepare for the new tax rules?

Taxpayers should:

1. Maintain accurate financial records
2. Reconcile tax data regularly
3. Understand eligibility conditions for ITR forms
4. Strengthen digital compliance practices
5. Seek professional tax planning support if required