Income Tax Act, 1961 vs Income Tax Act, 2025

1. Introduction

India’s direct tax framework has been governed for more than six decades by the Income Tax Act, 1961. Over the years, the Act has grown enormously—through amendments, explanations, provisos, circulars, judicial interpretations, and notifications.

To address the complexity, litigation, and compliance burden, the Government of India has proposed a new Income Tax Act, 2025, intended to replace the existing Act and introduce a simpler, clearer, and more predictable tax law.

This article explains:

• The structure and philosophy of the Income Tax Act, 1961
• Why a new tax Act is needed
• Key features of the proposed Income Tax Act, 2025
• A section-wise and concept-wise comparison
• Practical implications for taxpayers and professionals

2. Income-tax Act, 1961 – The Old Regime (Still in Force Until 31 March 2026)

2.1 Background & Status

• Enacted: Parliament passed it in 1961; effective from 1 April 1962.
• Purpose: To consolidate and amend laws relating to levy, administration, collection, and recovery of income tax in India.
• Current Status (until 31 March 2026): Fully in force and regularly amended through annual Finance Bills.

2.2 Structure

The Act underpins India’s tax regime with:

• 23 Chapters
• 298 Sections
• Schedules & Rules

covering all income, exemptions, deductions, residential status, assessments, penalties, TDS/TCS, appeals, and compliance procedures.

2.3 Key Features

a. Taxable Income & Heads:

Income is computed under five major heads — Salaries, House Property, Business or Profession, Capital Gains, and Other Sources.

b. Previous Year & Assessment Year:

• Previous Year: The year in which income is earned.
• Assessment Year: The year in which that income is taxed.

c. Residential Status:

Different rules apply based on whether a taxpayer is Resident & Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident.

d. Deductions & Exemptions:

Chapter VI-A (including sections like 80C, 80D, etc.) provides for permissible deductions, while several sections under “Exempt Income” (like Section 10) provide tax exclusion.

e. Compliance Mechanisms:

TDS/TCS, tax filing dates, assessment procedures, penalties, and appeal routes are governed under the Act and accompanying rules.

3. Why Reform Was Needed

Over decades, the 1961 Act accumulated:

• Complex language
• Numerous provisos and explanations
• Overlapping provisions
• High litigation
• Cumbersome compliance requirements

This made the law less transparent for taxpayers and more difficult for tax authorities to administer — leading to the decision to enact a new direct tax statute.

4. Income-tax Act, 2025 – The New Regime (Effective 1 April 2026)

4.1 Legislative Journey

• Draft Bill Introduced: 13 February 2025 in the Lok Sabha.
• Revised Bill (No. 2) Tabled: August 2025 after Select Committee recommendations.
• Passed by Parliament: Both Houses in August 2025.
• Presidential Assent: Received on 21 August 2025.
• Implementation: Scheduled for 1 April 2026.

4.2 Structure of Income-tax Act, 2025

The new statute is structured with:

• 23 Chapters
• 536 Sections
• 16 Schedules

It simplifies language, reorganizes provisions, reduces ambiguities, and focuses on digital compliance and litigation reduction.

4.3 Conceptual Reforms

a. Tax Year Concept:

Replaces the old Previous Year–Assessment Year format with a unified Tax Year (1 April-31 March) to align tax computation with accounting years.

b. Clearer Language:

Ambiguous terms and multiple provisos are pruned to improve clarity.

c. Structural Reorganisation:

Sections are re-grouped logically rather than historical sequencing, improving accessibility.

d. Reducing Litigation:

More precision in clause drafting and removal of overlapping provisions are aimed at minimizing taxpayer disputes.

5. Key Changes Under the New Act

5.1 What’s Retained

• Tax rates and slabs as announced in the Union Budget 2025 remain unchanged for the new regime.
• Core tax principles (taxability, residential concepts, etc.) continue with clearer drafting.

5.2 Major Shifts

5.3 Procedural Reforms

The new law is expected to align with modern digital infrastructure (e-filing, faceless assessments, automated compliance) — although transitional procedures will be detailed through Rule notifications after enactment.

6. Important Professional Implications

For Tax Practitioners & CAs:

√ Need to re-learn section numbering and structure

√ Advising clients on transition year implications (FY 2025-26)

√ Rewriting compliance checklists

For Businesses & Corporates:

√ Tax planning must consider the new Tax Year

√ Reassessment processes will align with new structuring

For Individual Taxpayers:

√ Familiarity with new filing references (Tax Year vs AY)

√ Compliance remains largely consistent but easier to understand

7. Current Application (Now – 31 March 2026)

Until 1 April 2026, Income-tax Act, 1961 governs:

• Tax computation
• Filing procedures
• TDS/TCS rules
• Assessments and penalties
• Slab rates (as amended by Union Budget 2025)

Taxpayers should continue compliance under 1961 Act until the new law becomes operable.

8. Conclusion

Income-tax Act, 1961 has been India’s foundational tax law for over six decades. Its replacement by the Income-tax Act, 2025 — effective 1 April 2026 — marks a major reform aimed at simplicity, clarity, and modern compliance.

The new law will maintain continuity where needed, introduce important conceptual improvements (like the Tax Year), and establish a more robust and technology-aligned tax framework.