Income Tax Act 2025 vs Income Tax Act 1961 – Changes from April 1, 2026

Introduction

India’s income tax framework has undergone its most significant structural transformation in over six decades. The Income Tax Act, 2025 (ITA 2025), which comes into effect on April 1, 2026, replaces the Income Tax Act, 1961 (ITA 1961), a legislation that had governed direct taxation in India for 65 years. While the new law is largely a consolidation and re-codification of existing provisions, it introduces important structural changes, renumbers virtually every section, and in certain areas, makes substantive amendments that practitioners must understand with urgency.

This article provides a comprehensive comparison of ITA 2025 vis-a-vis ITA 1961, covering structural changes, renumbered sections, substantive amendments, and practical implications for taxpayers, tax professionals, and litigators alike.

Why Was a New Income Tax Act Needed?

The ITA 1961 had, over its 65 years life, accumulated over 800 sections, hundreds of amendments, thousands of provisos, explanations and clauses, and had become notoriously difficult to navigate. The Direct Tax Code (DTC) proposal of 2009 had earlier attempted a complete overhaul but was never enacted.

The ITA 2025 was drafted with the following stated objectives:

• Simplification and consolidation of the existing law without changing tax incidence
• Removal of redundant, obsolete, and repetitive provisions
• Use of plain language and tabular presentation wherever possible
• Logical re-ordering of sections for ease of reference
• Reduction in litigation through greater clarity

Structural Changes: How the Act is Organised

One of the most visible changes in ITA 2025 is the reorganisation of the Act’s structure. The 1961 Act had a somewhat haphazard arrangement that had grown organically over decades. The 2025 Act has been reorganised into logical chapters.

Chapter Structure Comparison

Section Renumbering: Key Provisions – Old vs New

The most practically disruptive change in ITA 2025 is the renumbering of almost every section. What was Section 4 (Charge of Income Tax) may now carry a different number; what was Section 80C is now a different provision. Below is a ready-reckoner for the most commonly cited sections:

Critical Section Cross-Reference Table

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Substantive Changes: What Has Actually Changed?

While ITA 2025 is largely a re-codification, certain substantive changes have been incorporated that alter the legal position. These must be carefully studied:

1. Capital Gains Taxation – Rationalized Rates

Following the Union Budget 2024, the capital gains regime was restructured. ITA 2025 consolidates these changes:

• Short-term capital gains (STCG) on listed equity and equity-oriented mutual funds: 20% (increased from 15% via Finance Act 2024)
• Long-term capital gains (LTCG) on listed equity: 12.5% without indexation (increased from 10%), threshold exemption of Rs. 1.25 lakh per year
• LTCG on other assets: 12.5% without indexation or 20% with indexation (taxpayer’s option removed for properties purchased after July 23, 2024)
• Holding period rationalisation: All assets (other than listed securities) – holding period for LTCG now uniformly 24 months

2. Deduction Framework – Chapter VI-A Overhauled

The Chapter VI-A deduction framework under ITA 1961 has been substantially restructured in ITA 2025. The popular Section 80C (investment deductions) has been re-modelled:

• The Rs. 1,50,000 aggregate deduction ceiling under old Section 80C is now codified under Section 150 of ITA 2025
• New regime (Section 115BAC equivalent) deductions continue to be restricted – most Chapter VI-A deductions not available under new tax regime
• Section 80D (health insurance), 80E (education loan), 80G (donations) continue with renumbering
• Section 80C investments such as ELSS, PPF, NSC, insurance premiums – all retained under new section numbers

3. New Tax Regime – Default Regime Codified

ITA 2025 formally codifies the new tax regime (introduced via Finance Act 2020, made default via Finance Act 2023) as the primary framework. The old regime requires explicit opt-in. The slab rates under ITA 2025 (new regime, FY 2025-26) are:

4. Faceless Assessment – Statutory Recognition

The Faceless Assessment Scheme, previously operating under executive orders and Finance Act amendments, now has explicit statutory recognition in ITA 2025 under Chapter VIII. Key features:

• National Faceless Assessment Centre (NFAC) established by statute
• Prescribed procedure for assessment, reassessment, and penalty under faceless mechanism
• Right of personal hearing codified – assessee can request hearing before designated NFAC officer
• Time limits for completion of faceless assessment explicitly prescribed

5. Reassessment Provisions – Tightened

Post the landmark Supreme Court decision in Union of India v. Ashish Agarwal (2022), the reassessment regime was overhauled via Finance Act 2022. ITA 2025 consolidates these changes:

• Reassessment only on basis of ‘information’ – concept of ‘reason to believe’ substantially modified
• Four-year time limit for reassessment in normal cases (10 years for cases involving assets above Rs. 50 lakh)
• Show cause notice mandatory before reopening – no suo motu reopening
• Approval of specified authority required for all reassessments

6. Penalties – Reorganised and Partially Enhanced

The penalty provisions have been consolidated and in some areas enhanced under ITA 2025:

• Under-reporting of income: 50% of tax on under-reported income (Section 295 of ITA 2025, corresponding to Section 270A)
• Misreporting of income: 200% penalty – continues
• Penalty for concealment equivalent (Section 300) – now explicitly defined with bright-line tests
• New penalty for failure to comply with notice under faceless assessment: Rs. 10,000 to Rs. 1,00,000

What Has NOT Changed?

It is equally important to understand what ITA 2025 has not changed, to avoid confusion in day-to-day practice:

• Tax incidence – the Act expressly states that it does not intend to change the overall tax burden
• All precedents under ITA 1961 continue to apply to corresponding provisions in ITA 2025 (subject to specific changes noted above)
• Assessment years, financial years, and tax calendar – no change
• PAN, TAN, and registration systems – no change
• GST remains a separate law – ITA 2025 has no impact on GST compliance
• Existing tax treaties (DTAAs) – continue to override domestic law as before

Implications for Litigators and Tax Professionals

The transition from ITA 1961 to ITA 2025 creates both challenges and opportunities for practicing advocates and CAs. Key action points:

For Pending Litigation (AY 2024-25 and earlier)

• All pending appeals before CIT(A), ITAT, High Court, and Supreme Court relating to AY 2024-25 and earlier will continue to be governed by ITA 1961
• Do not cite ITA 2025 section numbers in briefs relating to past assessment years – it will cause confusion and may be factually incorrect
• Orders passed by AOs for AY 2024-25 will continue under ITA 1961 even if the order is passed after April 1, 2025

For New Assessments (AY 2025-26 onwards)

• All citations must use ITA 2025 section numbers
• Grounds of appeal, written submissions, and legal opinions must refer to the correct Act
• The ITAT itself will need to adjust its working – significant transition burden on the ITAT registry
• High Court writ petitions filed after April 1, 2025 for new AYs must cite ITA 2025

For Tax Return Filing

• ITR forms for AY 2026-27 will be updated to reflect ITA 2025 references
• New forms expected from CBDT shortly – watch for notifications
• Tax audit reports (Form 3CA/3CB/3CD equivalent) will also be revised

Income Tax Rules, 2026 – Now Notified

Alongside ITA 2025, the government has notified the Income Tax Rules, 2026, which replace the Income Tax Rules, 1962 with effect from April 1, 2026. Unlike the earlier draft stage, the Rules are now formally enacted and binding. Practitioners must immediately transition from the 1962 Rules to the 2026 Rules for all compliance, filing, and procedural matters pertaining to AY 2025-26 onwards. Key features of the notified Rules:

• Income Tax Rules, 1962 stand superseded, all references in pending compliance matters for AY 2025-26 onwards must now cite IT Rules 2026
• ITR forms for AY 2025-26 will be prescribed under IT Rules 2026, updated forms expected from CBDT imminently
• TDS certificate formats, audit report formats (Form 3CD equivalent), and return filing procedures have been revised to align with ITA 2025 section numbers
• Rule numbers under the 2026 Rules largely correspond to updated provisions under ITA 2025, a cross-reference exercise similar to the section mapping above is essential
• For AY 2024-25 and earlier, Income Tax Rules 1962 continue to govern, no retrospective application

Conclusion

The Income Tax Act, 2025 marks a significant milestone in India’s direct tax history – not because it dramatically alters the tax burden, but because it reshapes the entire framework through which income tax law is understood, practiced, and litigated. For a taxation lawyer or CA, the transition demands careful study of the new section numbering, understanding of substantive changes (particularly in capital gains, reassessment, and penalty provisions), and a clear appreciation of the boundary between what has changed and what has merely been renumbered.

The first few months post April 1, 2025 will inevitably see confusion in practice – particularly before tribunals and courts where sections will be cited from both Acts in the same proceedings. Professionals who prepare early, build a cross-reference competency, and communicate clearly to clients will be best positioned in this transition.

The fundamental principle, however, remains unchanged: sound understanding of income tax law – whether under ITA 1961 or ITA 2025 – is built not on section numbers alone, but on the underlying legal principles, judicial precedents, and legislative intent that give those sections their meaning.

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Disclaimer

This article is intended for informational purposes only and does not constitute legal or tax advice. The section numbers cited in this article are based on the Income Tax Act, 2025 as published and the Draft Income Tax Rules, 2026 as available at the time of writing. Readers are advised to verify the final enacted text and consult a qualified tax professional before acting on any information contained herein. The author and MJ Lex Legal Chambers LLP disclaim all liability for any reliance placed on this article.