Income Tax 2026: Changes to Rental Deductions and Audit Procedures

New Income Tax Act 2025: Draft Forms Tighten HRA Claims, Foreign Tax Credit Rules and Audit Disclosures​

The government has released draft income tax forms under the new Income Tax Act, 2025, introducing stricter disclosure requirements for House Rent Allowance claims, foreign tax credits, PAN applications and tax audit reporting.

The new law, which replaces the six decade old Income Tax framework, will come into effect from April 1, 2026. Draft Rules and Forms have been circulated for stakeholder consultation, with final notifications expected next month.

Tenant-Landlord Relationship Disclosure Made Mandatory for HRA Claims​

A key change in the draft forms is the introduction of Form 124, which requires an assessee to disclose any relationship with the landlord while claiming House Rent Allowance deductions.

Under existing practice, an employee claiming HRA is required to submit a declaration to the employer regarding the estimated rent payable during the financial year. The proposed Form 124 adds another layer of transparency by mandating disclosure of the tenant-landlord relationship.

Tax experts say this move could act as a deterrent against fictitious or inflated rental claims by bringing transparency at the first stage of reporting. Genuine rental arrangements remain protected, while artificial claims lacking proper ownership or authentic payment trails may face greater scrutiny.

Foreign Tax Credit Claims Face Tighter Audit Scrutiny​

The draft forms also significantly increase the responsibility of auditors and companies in claiming tax credits on foreign income.

Proposed Form 44, titled Statement of income from a country or specified territory outside India and Foreign Tax Credit, requires accountants to independently examine:

• Foreign tax withholding certificates
• Proof of tax payments
• Exchange rate conversions
• Treaty eligibility conditions such as beneficial ownership and tax residency status

Accountants would also need to interpret treaty provisions including limitation of benefits clauses, credit caps and source rules. This increases documentation requirements and may pose challenges in cases where:

• Foreign jurisdictions issue consolidated tax statements without income-wise breakups
• Taxes are paid in a different financial year than when income is offered in India
• Foreign tax assessments are provisional

These changes are expected to tighten compliance around Foreign Tax Credit claims and reduce potential mismatches.

Mandatory Declaration to Prevent Duplicate PAN Applications​

The draft forms also introduce stricter safeguards for company PAN applications.

Applicants will be required to file a declaration confirming that the company does not already possess a PAN. Entities will need to conduct internal due diligence before applying, including verification of whether branches, project offices or predecessor entities already hold a PAN.

For foreign entities entering India for the first time, coordination with advisors becomes critical to ensure that no earlier withholding-tax-driven PAN exists.

The inclusion of a legal consequences clause is designed to deter multiple PAN holdings and identity manipulation, while strengthening the integrity of the tax database.

Tax Audit Form 26: Audit Qualifications Now Linked to Tax Consequences​

Another major change appears in the new Tax Audit Form No 26, which makes it mandatory to disclose whether any qualification, adverse remark, disclaimer or emphasis of matter in the statutory auditors’ report affects income, loss or book profit.

The draft provisions significantly raise the income tax implications of audit observations made under the Companies Act, 2013.

If a statutory auditor flags issues such as:

• Improper revenue recognition
• Doubtful recoverability of receivables
• Incorrect inventory valuation
• Inadequate provisioning

the tax auditor must assess whether these matters have resulted in under-statement of taxable income or book profits.

Companies will therefore need to evaluate the tax impact of audit remarks before finalising income tax returns, ensure alignment between statutory and tax positions, and maintain clear documentation to address potential future disputes.

Disclosure of Accounting Software and Data Storage Details​

The draft forms also require tax audit reports to disclose detailed information about the accounting systems used by entities. This includes:

• Name of accounting software
• Whether books are stored on cloud or other platforms
• IP address and country of data storage
• Address of the physical backup server located in India

This move adds a technology and data governance layer to tax compliance under the new Income Tax Act, 2025.

Consultation Underway Before April 2026 Rollout​

With the new Income Tax Act, 2025 set to take effect from April 1, 2026, the government has opened the draft Rules and Forms for stakeholder consultation. The final version is expected to be notified next month.

The proposed changes indicate a clear shift toward enhanced transparency, stricter audit accountability and tighter documentation standards in India’s evolving tax compliance framework.