How India’s new Income Tax Act (2025) rewrites rules of assessment PART II

The Income Tax Act, 2025 introduces a restructured and modernized assessment framework while largely retaining the core mechanisms from the Income Tax Act, 1961. Key provisions such as summary processing, scrutiny assessment, best judgment assessment, and reassessment continue but are simplified, reorganized, and aligned with the concept of a single “Tax Year.” A major structural reform is the statutory recognition of faceless assessments under Section 532, replacing the earlier scheme-based approach and making electronic assessments the default. The new law embeds stronger taxpayer protections, including mandatory prior notice before enforcement actions, expanded timelines for filing updated returns up to 48 months, and faster refund processes. It also introduces the concept of “Virtual Digital Space,” enabling tax authorities to examine digital footprints such as cloud storage, emails, and online accounts during assessments. Despite the new law coming into effect on April 1, 2026, proceedings for income earned up to March 31, 2026 will continue under the 1961 Act, meaning taxpayers and practitioners will operate under both regimes during the transition.

Also Read: How India’s New Income Tax Act, 2025 Rewrites Rules of Assessment PART I

Part III: Side-by-Side — Key Assessment Provisions Compared

The table below maps the most important assessment provisions across both Acts:

Part IV: What the New Act Gets Right on Assessment

Faceless Assessment Gets Teeth

The most practically significant change in the assessment framework is not a new type of assessment; it is the elevation of faceless assessment from administrative scheme to statutory right. Under the old Act, the Faceless Assessment Scheme existed under Section 143(3A), which gave the Central Government power to notify a scheme for eliminating human interface. This was innovative, but it was scheme-based authority: subject to modification, withdrawal, or challenge on grounds of procedural inconsistency.

Section 532 of the new Act changes this. The Central Government is now empowered directly by statute to frame electronic and faceless schemes covering assessment, appeals, and verification. Every assessment going forward is presumed to be faceless unless an exception applies. This reduces discretion at the officer level, minimises the risk of geographic favoritism or bias, and gives taxpayers a more predictable experience regardless of which jurisdiction they fall under.

Taxpayer Protections — Built In, Not Bolted On

One critique of the 1961 Act that practitioners raised repeatedly was that taxpayer protections often felt like afterthoughts ; provisos added to restrict broad powers already granted to the revenue. The new Act takes a different approach, embedding safeguards more clearly within the body of assessment provisions.

The requirement for mandatory prior notice before enforcement actions is now a stated feature of the statute, not a departmental instruction. Updated returns can be filed up to 48 months from the end of the relevant Tax Year, compared to the more restricted windows under the old law. Faster refund processes are now part of the assessment framework, and the continuity provision in Section 536 protects taxpayers from being stuck in limbo during the transition.

The Digital Footprint Provision

A particularly forward-thinking element of the new Act is its formal definition of ‘Virtual Digital Space.’ This category encompasses email servers, cloud storage, social media accounts, online trading accounts, and websites that document asset ownership.

This is the legislative architecture that enables the department to access and analyze digital trails during surveys and assessments.

It is also the provision that signals where assessment is heading. Artificial intelligence-driven data matching, AI-flagged income discrepancies, and electronic audit trails are not future possibilities, they are already in operation. The new Act gives them a statutory home.

Part V: The Transition — Living with Two Acts

Here is the practical reality that every taxpayer and practitioner in India needs to understand: even though the new Act takes effect from April 1, 2026, the 1961 Act does not simply disappear.

For income earned up to March 31, 2026 (FY 2025-26), assessments, appeals, penalties, and proceedings will continue under the Income Tax Act, 1961 potentially for years after the new Act is in force. Cases already selected for scrutiny under the old law will be completed under old law provisions. Reassessments that started before the new rules came into effect will continue to follow the old guidelines.

Practitioners, therefore, will be navigating two different sets of regulations at the same time. They’ll be using the new Act for the 2026-27 tax year and beyond, while still dealing with the old Act for all prior periods.

Notices will need to be read carefully to determine which legislative regime governs. Limitation periods, procedural requirements, and available defenses can differ between the two. Finance teams should audit pending assessments, document positions carefully, and ensure their systems can distinguish between the two frameworks.

The transitional provisions are clearly governed by Section 536, which replicates the general savings principles of Section 6 of the General Clauses Act, 1897. Pending rights, liabilities, and proceedings survive the repeal of the 1961 Act intact. There is no gap; there is no ambiguity on that point.

Conclusion: Architecture Over Cosmetics

The temptation when evaluating the Income Tax Act, 2025 is to focus on what has not changed: tax rates are the same, the five heads of income remain, the fundamental obligation to file a return continues. And those critics who argue that this is ‘only a redraft’ are not entirely wrong.

But on assessment, the changes run deeper than redrafting. Making faceless assessment statutory is a structural shift, not a cosmetic one. Consolidating the search assessment framework, which generated a decade of litigation over 153A and 153C, is a genuine simplification. Embedding taxpayer protections into the body of assessment provisions rather than leaving them to administrative discretion is a meaningful change in legislative philosophy. And giving the department statutory authority to operate in the ‘Virtual Digital Space’ is a frank acknowledgment that assessment in 2026 looks nothing like assessment in 1961.

For taxpayers, the immediate takeaway is this: the process of being assessed changes significantly in approach but not in substance. You will still file returns, you will still receive notices (now electronically by default), and you will still have the right to contest assessments. What changes is the system behind those interactions , more automated, more traceable, and more firmly grounded in a legislative framework designed for the 21st century rather than the post-independence era.

Whether the new Act succeeds in reducing litigation; its most ambitious goal will only become clear over the next several years of judicial interpretation. But on the specific question of assessment, the 2025 Act has made a serious attempt to build something that is not just simpler to read, but structurally sounder to administer.

Note: The Income Tax Act, 2025 comes into effect from April 1, 2026. All references to the 1961 Act remain operative for income earned up to March 31, 2026.