(INDIA) — The Central Board of Direct Taxes released the Draft Income Tax Rules, 2026 on February 8, 2026, setting out Draft Income Tax Rule 26 to spell out when payments exceeding ₹10,000 per day may be made otherwise than by specified banking or electronic modes under Rule 48.
Draft Income Tax Rule 26 establishes exemptions to the requirement that payments exceeding ₹10,000 per day must be made through specified banking or electronic modes under Rule 48. It also clarifies the circumstances in which “no disallowance under section 36(4) of the Income Tax Act shall be made” when such payments exceed the daily threshold.
The approach matters for taxpayers whose transactions do not always move through the specified banking or electronic channels contemplated by Rule 48, particularly when operational needs or the nature of the counterparty leads to payments being made in other forms even when the amount crosses ₹10,000 per day.
Rule 26 sits within the Draft Income Tax Rules, 2026 and is scheduled to come into force on April 1, 2026. The draft rules coincide with the commencement of the Income Tax Act, 2025.
At the centre of the draft is the interaction between the daily payment limit and the consequences tied to section 36(4). Rule 26 provides the cases where the tax outcome set out in section 36(4) does not apply even though the payment exceeds ₹10,000 per day and is not made through the specified banking or electronic modes under Rule 48.
One set of exemptions covers payments to a defined list of financial institutions. The rule includes “The Reserve Bank of India or any banking company as defined under the Banking Regulation Act, 1949,” and also covers “The State Bank of India or any subsidiary bank as defined under the State Bank of India (Subsidiary Banks) Act, 1959.”
Rule 26 also lists categories of co-operative and rural financial bodies that often play a role in credit and payments outside major commercial bank networks. It names “Co-operative banks, land mortgage banks, and primary agricultural credit societies” among the entities covered by the exemption.
Life Insurance Corporation of India is explicitly listed in the draft as well. By naming the Life Insurance Corporation of India, the rule makes clear that payments to the insurer fall within the financial-institution category for which the exemption applies when payments exceed ₹10,000 per day.
Another set of exemptions deals with payments made to the Government in circumstances where legal tender is mandated. Rule 26 states that payments made to the Government “where legal tender is mandated” are covered under the exemption, linking the relief to the way the payment must be made rather than to the amount alone.
The draft also outlines relief for transactions routed through certain banking instruments. These include “Letters of credit,” “Mail or telegraphic transfers,” “Book adjustments between bank accounts,” and “Bills of exchange payable to banks.”
By listing these instruments, the draft rule draws a distinction between the specified banking or electronic modes under Rule 48 and other channels that still operate within a banking framework. The inclusion of book adjustments between bank accounts also captures transactions that settle by accounting entries rather than by a conventional outward payment.
Rule 26 further provides an exemption for liability adjustments that arise from business dealings between the payer and payee. It covers “Adjustments against liabilities for goods supplied or services rendered by the assessee to the payee,” excluding those adjustments from disallowance even when the daily amount involved exceeds ₹10,000.
That provision addresses situations where the parties net off mutual obligations rather than making a stand-alone payment in the manner Rule 48 would otherwise require. In practice, it frames certain set-offs as falling within the protected categories for section 36(4) purposes.
The draft rule also carves out an exemption for payments connected to purchases in primary sectors. It exempts “Payments for the purchase of agricultural or forest produce,” linking the relief to the nature of what is being purchased rather than to the identity of the payer.
Taken together, the exempted categories concentrate on counterparties such as financial institutions, circumstances such as legal tender mandates for Government payments, channels such as specific banking instruments, settlement methods such as liability adjustments, and purchases such as agricultural or forest produce.
For taxpayers reading the draft, the list signals where the rule draws firm lines. The exemptions are framed as “the following circumstances,” meaning the relief from disallowance under section 36(4) applies when payments exceeding ₹10,000 per day fall into the covered cases.
The presence of Life Insurance Corporation of India among the specified financial institutions makes the treatment particularly direct for payments to that entity. Rather than relying on a broad principle, the draft includes the institution by name, placing it alongside the Reserve Bank of India, banking companies, and the State Bank of India and subsidiary banks.
The examples of banking instruments also provide concrete reference points for how transactions can qualify for relief. Letters of credit, mail or telegraphic transfers, book adjustments between bank accounts, and bills of exchange payable to banks are each named, indicating the kinds of banking channels that the draft treats as eligible for the exemption in the context of section 36(4) and Rule 48.
Although Rule 26 is presented as an exemption to the ₹10,000 per day payment mode requirement under Rule 48, it is structured as a safeguard against disallowance under section 36(4). In that sense, the draft ties the practical question of how a payment is made to a defined tax consequence, and then specifies when that consequence does not follow.
The framing also underscores that the exemptions operate at the daily threshold. The draft repeatedly anchors the relief to “payments exceeding ₹10,000 per day,” which makes the day-by-day measurement a core feature of the rule rather than an incidental detail.
The timing laid out in the draft provides a clear runway for taxpayers and advisers to review and respond. The Central Board of Direct Taxes released the draft rules on February 8, 2026, for public consultation, and scheduled them to come into force on April 1, 2026.
The April 1, 2026 start date aligns with the commencement of the Income Tax Act, 2025. That linkage places Rule 26 within the broader shift to the new Act’s framework, with the Draft Income Tax Rules, 2026 intended to support its operation from the first day.
From a practical standpoint, the exemptions may shape how businesses and individuals handle routine payments that can exceed ₹10,000 per day. Where a payment falls under the listed categories, Rule 26 indicates that making the payment otherwise than by specified banking or electronic modes under Rule 48 does not trigger disallowance under section 36(4).
For businesses, that can matter most in cases where the counterparty is a financial institution covered by the rule, including the Life Insurance Corporation of India, or where transactions are conducted through instruments such as letters of credit or bills of exchange payable to banks. For some taxpayers, the relevant case may be a set-off against liabilities for goods supplied or services rendered by the assessee to the payee, particularly when accounts are settled through adjustments rather than standalone transfers.
The Government payment category, limited to cases “where legal tender is mandated,” points to circumstances where the form of payment is dictated by the requirement itself. Rule 26 treats those payments as falling within the protected set for the purpose of section 36(4) where the daily amount exceeds ₹10,000.
The agricultural and forest produce exemption points to another transactional setting where payment practices can differ, with Rule 26 explicitly excluding such payments from disallowance when they exceed the daily threshold. By locating the exemption in the nature of the purchase, the draft sets out a bright-line category for that segment.
Compliance considerations follow naturally from how the draft is written. Because Rule 26 defines the cases in which “no disallowance under section 36(4) of the Income Tax Act shall be made,” taxpayers who rely on the exemptions would typically need to be able to show that a payment exceeding ₹10,000 per day fits within one of the covered circumstances and relates to the category described.
That could mean being able to demonstrate that the payee is among the financial institutions listed, such as the Reserve Bank of India, a banking company as defined under the Banking Regulation Act, 1949, the State Bank of India or a subsidiary bank as defined under the State Bank of India (Subsidiary Banks) Act, 1959, a co-operative bank, a land mortgage bank, a primary agricultural credit society, or the Life Insurance Corporation of India. In other cases, the relevant support may relate to the nature of the transaction, such as whether it was carried out through letters of credit, mail or telegraphic transfers, book adjustments between bank accounts, or bills of exchange payable to banks.
For liability adjustments, the exemption is framed around adjustments “against liabilities for goods supplied or services rendered by the assessee to the payee,” placing the relationship between the parties and the underlying supply of goods or services at the core of the category. For agricultural or forest produce, the key characteristic is that the payment is “for the purchase of agricultural or forest produce.”
The draft’s structure also draws attention back to Rule 48, because Rule 26 is defined as an exemption to the ₹10,000 per day payment mode requirement under Rule 48 rather than as a separate payment rule. That makes Rule 48 the baseline for how qualifying payments exceeding ₹10,000 per day must be made, with Rule 26 identifying specific cases where payments may be made otherwise than by the specified banking or electronic modes without triggering disallowance under section 36(4).
By releasing the Draft Income Tax Rules, 2026 for public consultation on February 8, 2026 and setting April 1, 2026 as the date the rules come into force alongside the Income Tax Act, 2025, the Central Board of Direct Taxes set a short consultation-to-implementation window for taxpayers to assess how Draft Income Tax Rule 26, Rule 48 and section 36(4) will apply to payments that cross the ₹10,000 per day threshold.
Draft Income Tax Rule 26 Targets Payments Over ₹10,000 Outside Banking Modes
The CBDT has introduced Draft Income Tax Rule 26, establishing exemptions for payments over ₹10,000 per day made through non-electronic modes. The rule protects taxpayers from disallowance under section 36(4) when dealing with financial institutions, government mandates, or specific agricultural purchases. Set to launch in April 2026, it clarifies the interaction between daily payment limits and various banking instruments like letters of credit and book adjustments.
