The Income Tax Act, 2025: A New Era In Direct Taxation Replacing the Income Tax Act, 1961 with effect from 1st April, 2026 By: S. Prasad, Auditor & Tax Consultants, Mysore

The Income Tax Act, 2025 — A New Era In Direct Taxation – Replacing the Income Tax Act, 1961 with effect from 1st April, 2026 

 1. INTRODUCTION

Starting 1st April 2026, India enters a new chapter in direct taxation. The Income Tax Act, 2025 officially replaces the six-decade-old Income Tax Act, 1961. The new Act received Presidential assent on 21st August 2025 after Parliamentary approval on 12th August 2025, following scrutiny by a Select Committee.

The 1961 Act was enacted when the Indian republic was young. Over 64 years, it was amended hundreds of times — sections were added, removed, patched, and cross-referenced until it became virtually impossible for the common man to comprehend. Provisos to provisos, explanations to explanations, and scattered cross-references made it a labyrinth even for seasoned practitioners.

The 2025 Act is a landmark effort to simplify, consolidate, and modernise India’s direct tax framework — without changing the fundamental tax liability structure.

2.  STRUCTURAL OVERVIEW — THE SCALE OF SIMPLIFICATION 

Note: The reduction in sections does not mean any reduction in tax rates, slabs, or deductions. The Act is revenue-neutral. What has changed is the structure, language, cross-references, and navigability.

3.CHAPTER STRUCTURE OF THE NEW ACT

The 23 chapters of the Income Tax Act, 2025 are logically reorganised so that related provisions sit together:

4.  KEY CHANGES — DETAILED NOTES

 4.1 “Tax Year” Replaces Previous Year and Assessment Year (Section 3)

One of the most significant conceptual changes. Section 3 of the new Act eliminates the dual concepts of “Previous Year” and “Assessment Year” and introduces a single unified concept: the “Tax Year”, running from 1st April to 31st March.

• Income earned during 2026-27 is referred to as Tax Year 2026-27 (not “PY 2026-27” or “AY 2027-28”).
• The term “Succeeding Tax Year” is used where the old Act used “Assessment “
• This removes an enduring source of confusion in client communications, notices, return forms, and assessment

Practitioner’s Note: All future communications, return filings, and legal references must use the new “Tax Year” terminology from FY 2026-27 onwards. For prior years, the old PY/AY terminology continues.

4.2  TDS/TCS Consolidation — The Most Impactful Change for Practice

Under the 1961 Act, TDS provisions ran from Section 192 to Section 194T — more than 60 separate sections, each with its own format, thresholds, and exceptions. Cross-referencing them was a routine source of deductor error and audit exposure.

The 2025 Act consolidates this into three sections:

Important: The number of TDS/TCS tables has actually increased — more granular tables, clearly structured, are easier to work with than fewer sections requiring multiple provisos.

Select Committee Correction: The Nil/Lower TDS certificate mechanism (old Section 197) was missing from the original Bill. The Select Committee restored it.

4.3  Rationalised TCS Rates (From 1st April 2026) 

Note for Scrap Dealers: The TCS rate on sale of scrap increases from 1% to 2%. This is relevant to clients dealing in scrap metals and recyclables.

4.4  Default Tax Regime — Section 202 (New) vs Section 115BAC (Old) 

Tax Slabs remain unchanged for FY 2026-27: 

Tax rebate of up to Rs. 60,000 under Section 87A continues, making income up to Rs. 12 lakh effectively tax-free.

4.5  Digital Assets and Virtual Digital Assets (VDA)

The 2025 Act formally recognises and integrates digital assets throughout its provisions:

• Broader definition of Virtual Digital Asset — includes any asset with digital representation of value relying on cryptographically secured ledger or similar
• Undisclosed income definition now expressly includes Virtual Digital Assets (not present in the 1961 Act).
• Virtual Digital Assets are formally recognised as taxable capital
• “Virtual Digital Space” is defined (email servers, cloud storage, social media accounts, online trading accounts, websites holding asset ownership records).

4.6  Charitable Trusts and Non-Profit Organisations (NPOs)

Everything previously scattered across Sections 11, 12A, 80G, and related sections is now consolidated into a single chapter.

Key Select Committee Corrections:

 Anonymous Donations (Clause 337): The original Bill incorrectly limited the exemption from the 30% anonymous donation tax to purely religious trusts only. The Select Committee restored the correct position — both purely religious and religious-cum-charitable trusts are

1. “Receipts” vs. “Income” (Clause 335): The original Bill used “receipts” where it should have said “income.” Left uncorrected, this would have exposed gross inflows (including pass-throughs and corpus donations) to tax. This critical error was

4.7  Capital Gains — Reorganised, Not Changed

The capital gains regime is preserved intact but reorganised:

Sovereign Gold Bonds: Exemption on redemption at maturity applies only to bonds bought during initial issue, not from secondary markets. Secondary market gains are taxed as capital gains.

Buyback of Shares: Amounts received on buyback now taxed as capital gains (effective rate: 30% for individual promoters, 22% for company promoters) instead of deemed dividends at slab rates.

4.8  House Property — Clarified

• Pre-construction interest explicitly deductible for both self-occupied and let-out or deemed let-out
• 30% standard deduction on Net Annual Value

4.9  Salary Provisions — Consolidated

All salary provisions (HRA, gratuity, leave encashment, perquisites) are now consolidated instead of being scattered:

• Standard deduction of 75,000 codified in the Act itself.
• Non-employee pensioners (not drawing salary) can claim full commuted pension deduction without

4.10  Extended HRA Exemption — 50% Cities

The 50% HRA exemption now covers 8 cities (previously 6):

Newly added: Bengaluru, Pune, Hyderabad, Ahmedabad

Already covered: Delhi, Mumbai, Chennai, Kolkata

Compliance Note: Taxpayers must now disclose the relationship with the landlord to prevent false claims.

4.11  Increased Allowances (Reducing Taxable Income) 

 4.12  Business and LLP Provisions

• LLPs get clearer inter-activity loss set-off provisions and a cleaner AMT
• Presumptive scheme (Section 63): Businesses with turnover under Rs. 10 crore and cash receipts below 5% are exempt from maintaining books and undergoing tax

4.13  Refund Provisions — Liberalised

• TDS refunds now available on belated returns as well as timely ones — a significant
• Interest on delayed refunds: 5% per month (or part thereof).
• No interest payable where refund is less than 10% of total tax
• Under Section 437, outstanding demands can be set off against refunds before the balance is paid

4.14  Faceless Administration — Statutory Footing

Section 532 authorises the Central Government to design administration schemes aimed at eliminating human interface and optimising resources. This now has a direct statutory basis rather than mere scheme-based authority.

4.15  Filing Deadlines — Key Changes 

Note: Additional fee applies for revised returns filed after 31st December.

4.16  STT Rate Increases (F&O Traders) 

This means significantly higher transaction costs for F&O traders.

4.17  Cash Transaction Rules — Stricter

Cash loans or deposits above Rs. 20,000 attract a penalty equal to 100% of the amount. For example, a Rs. 50,000 cash loan incurs a Rs. 50,000 fine.

4.18  No Deduction for Interest Against Dividend Income

Interest expenditure deduction against dividend income and income from units of mutual funds is no longer allowed under the new Act.

5.TRANSITIONAL PROVISIONS — SECTION 536

Section 536 is the repeal and savings clause, containing 22 sub-clauses to address every transitional situation. This is crucial for practitioners handling matters spanning both Acts.

5.1 Core Principle

The old Act continues to apply to all tax years before 1st April 2026. No taxpayer, authority, or proceeding falls into a regulatory vacuum.

5.2  Key Savings Clauses 

5.3  TDS Transition

• Earlier of credit or payment on or before 03.2026 → Old Act TDS provisions apply.
• Earlier of credit or payment on or after 04.2026 → New Act TDS provisions apply.
• Old Form 16/16A for FY 2025-26; new Form 130/131 for Tax Year 2026-27.
• Old Form 3CA/3CB/3CD for AY 2026-27; new Form 26 for Tax Year 2026-27.

5.4  Appeals and Litigation Transition

• All pending appeals, revisions, rectifications, and remand proceedings for pre-2026 years continue under the 1961
• Fresh appeals filed after 04.2026 for earlier years also governed by the 1961 Act.
• Appellate hierarchy, powers of authorities, and limitation periods remain unchanged.
• Dispute Resolution Committee (DRC) framework and Advance Ruling mechanism remain materially the same.

5.5  Important Form Changes 

 6. ADVANTAGES OF THE INCOME TAX ACT, 2025

 6.1 For Taxpayers

1. Simplified Language: Plain-language drafting replaces archaic legal constructions. Provisos to provisos and explanations to explanations are

2. Reduced Complexity: 40% reduction in legislative volume. Fewer sections to navigate, fewer cross-references to

3. Single Tax Year Concept: Eliminates the perennial confusion between “Previous Year” and “Assessment “

4. Higher Allowances: Increased exemptions for children’s education, hostel, office meals, and festival gifts directly increase take-home pay.

5. Extended Filing Deadlines: More time for revised returns (12 months instead of 9). ITR-3 and ITR-4 non-audit deadline extended to 31st

6. TDS Refund on Belated Returns: A major relief — taxpayers can now claim TDS refunds even when ITRs are filed after the deadline, without penal

7.  Extended HRA Cities: 50% HRA exemption now covers Bengaluru, Pune, Hyderabad, and Ahmedabad — benefiting lakhs of salaried

6.2 For Tax Practitioners, CAs, and Auditors

1. TDS Consolidation: The reduction from 60+ sections to 3 sections (392, 393, 394) with structured tables meaningfully reduces lookup time and error risk in day-to-day practice.

2. Logical Organisation: Related provisions sit together in dedicated chapters rather than being scattered across the

3. Sequential Numbering: No more alphabetical section numbers (80C, 80D, 80CCD, etc.). Clean sequential numbering

4. Section Comparison Utility: The Income Tax Department has released a utility tool to compare old and new section numbers — invaluable during the transition

5. Reduced Litigation: Simpler language and clearer provisions mean fewer interpretational disputes and less ambiguity for clients and authorities

6. Clearer Compliance Framework: Streamlined forms, structured tables, and consolidated provisions reduce the scope for inadvertent

6.3 For Businesses

1. Cleaner AMT Framework for

2. Clearer inter-activity loss set-off

3. Presumptive scheme benefits for businesses with turnover under Rs. 10 crore and cash receipts below 5%.

4. Faceless administration on statutory footing ensures consistency and reduces human

6.4  For the Tax System

1. Reduced Litigation Burden: The simplification is expected to significantly reduce the volume of disputed tax

2. Enhanced Digital Integration: PAN-linked data under 26AS/AIS and Taxpayer Information Summary (TIS) ensures

3. Modern Compliance Architecture: The Act is built to accommodate digital economy realities — virtual digital assets, virtual digital spaces, and faceless

4. Revenue Neutrality: The Act achieves all simplification without any change in tax rates — a remarkable legislative

7.WHAT REMAINS UNCHANGED

It is equally important to note what has not changed:

• Tax slab rates under both old and new regimes
• Capital gains rates and holding period requirements
• Scope of income and residential status criteria
• Appellate hierarchy and limitation periods
• Dispute Resolution Committee and Advance Ruling frameworks
• Monetary thresholds for DRC (variation below 10 lakh; returned income below Rs. 50 lakh)
• Fundamental rights of taxpayers in assessment and appellate proceedings

8. PRACTICAL GUIDANCE FOR PRACTITIONERS

 8.1  Immediate Steps

1. Update all section references in templates, letters, SCN replies, and opinion

2. Familiarise with the new Form numbers (Form 26 for Tax Audit, Form 130/131 for TDS certificates, Form 121 for 15G/15H, etc.).

3. Use the IT Department’s comparison utility to map old sections to new

4. Brief clients on the Tax Year terminology

5. Review TDS compliance processes to align with the consolidated Section 393

8.2 For Pending Cases

• All pending litigation, assessments, and appeals for pre-2026 years continue under the 1961
• No fresh appeals need to be
• Remand proceedings for earlier years also governed by the 1961
• The e-Filing portal will support both Acts

8.3 Dual Compliance in FY 2026-27

During FY 2026-27, practitioners will handle:

• AY 2026-27 returns (for income of FY 2025-26) under the old Act
• Tax Year 2026-27 compliances (advance tax, TDS from 04.2026) under the new Act

This dual-track will require careful attention to ensure the correct Act governs each proceeding.

9.CONCLUSION

The Income Tax Act, 2025 is not a revolution in substance but a revolution in form. The same charge to tax, the same rates, the same deductions — but everything around it has changed for the better. The structure, the language, the cross-references, and the navigability are dramatically improved.

For practitioners who have spent decades navigating the labyrinth of the 1961 Act, the transition will require effort — re-learning section numbers, adapting templates, and understanding the new form structure. But the reward is a statute that is genuinely easier to read, interpret, and apply.

As the CBDT’s own FAQ states: “The two Acts will coexist for a transitional period” — and Section 536 ensures that this coexistence is orderly, with no taxpayer or proceeding falling through the cracks.

The new era begins on 1st April 2026.

REFERENCES

1. Income Tax Act, 2025 — [Parliamentary approval 12.08.2025; Presidential assent 21.08.2025]

2. FAQ s on Interplay and Transition — Income Tax Department

3. Income Tax Changes From 1st April 2026 — ClearTax

4. Old Income Tax Act 1961 vs New Income Tax Act 2025 — ClearTax

5. New Income Tax Bill 2025: All You Need to Know — KDK Software

6. India’s New Income Tax Act 2025 — ETV Bharat

7. Simplified Income Tax Act, 2025 — Economic Times

8. Appeals, Revision & ADR during Transition — TaxGuru

Disclaimer: This article is for informational and educational purposes. For specific advice, please consult with a qualified tax professional with reference to the actual statutory provisions.