From 1 April 2026, India’s direct tax system undergoes a major transformation with the introduction of the Income-tax Act, 2025 and the Income-tax Rules, 2026, replacing the 1961 framework. The new regime simplifies tax law by reducing sections, rules, and forms, introducing a unified “Tax Year,” and streamlining compliance. PAN requirements are expanded with stricter documentation and wider applicability for financial transactions. Salary taxation is rationalised with revised allowances and expanded metro definitions, while filing timelines and revised return provisions are updated with additional fees. Capital market changes include taxation of buybacks in shareholders’ hands, revised STT rates, and withdrawal of certain deductions. TDS/TCS provisions are simplified, automated systems introduced, and some procedural defaults decriminalised. MAT is made a final tax without future credits, and digital assets are integrated into reporting. Overall, the framework focuses on simplification, transparency, and technology-driven compliance.
Key Structural Changes – Income-tax Rules, 2026
The Income Tax Act, 2025 contains 536 sections and 16 schedules compared to the 819 sections and 14 schedules of the 1961 Act. In the new Act, the overall complexity has been reduced because:
(i) Explanations and provisos have been incorporated into the main text of the sections;
(ii) Tables and formulas replace verbose narrative provisions;
(iii) Redundant and obsolete provisions have been removed; and
(iv) Cross -references are clearer and more direct. Similarly, the Income Tax Rules have been reduced from 511 rules with 399 forms to 333 rules with 190 forms.
The Income-tax Rules, 2026 mark a major step towards rationalisation and simplification of India’s tax compliance framework.
Reduction in Number of Rules
- Earlier (Income-tax Rules, 1962): 511 rules
- Now (Income-tax Rules, 2026): 333 rules
Net reduction: 178 rules (~35% simplification)
Reduction in Forms
- Earlier: 399 forms
- Now: 190 forms
Nearly 50% reduction in reporting forms
Here is a comprehensive breakdown of all the major structural, compliance, and capital market changes coming into effect.
1. The Structural Overhaul
The “Tax Year” Concept: The confusing terminology of “Previous Year” and “Assessment Year” has been scrapped. Moving forward, the system will use a single unified identity: the Tax Year (e.g., Tax Year 2026-27).
“Tax Year” can be a period of less than a full financial year in certain cases e.g. New business/profession started during the year
Important Note:
If a business is set up on 1 December 2026, the Tax Year for that business will commence from 1 December 2026 to 31 March 2027
- Continuity of Rights, benefits, obligations or liabilities: Rights, benefits, obligations or liabilities that arose under the old Act continue to exist. For instance, if a taxpayer was entitled to claim a refund under the old Act for any tax year prior to the commencement of the new Act, he still remains entitled to that refund even after the new Act comes into force
- Old circulars, instructions, and notifications issued by the tax department continue after the new Act comes into force: As per the provisions of section 536(2)(j) of the Income Tax Act, 2025, circulars, notifications, instructions, approvals, etc, issued under the old Act will remain valid as long as they do not conflict with the new Act.
- Form Restructuring: Documentation has been completely renumbered for simplification. Several forms have been consolidated or redesigned for the 2026-27. For example, the traditional salary certificate (Form 16) is now Form 130, A consolidated form 141 introduced to streamline multiple TDS reporting requirements including Section 194-IA (Form 26QB – property purchase), Section 194-IB (Form 26QC – rent by individuals/HUF), Section 194M (Form 26QD – specified payments) and Form 26AS is now Form 168
- Document Identification Number (DIN): Every official communication, including notices, orders, or summons, must now carry a mandatory DIN to be legally valid.
Income Tax Slabs: No change in tax slab structure
PAN Framework Overhaul
With effect from 1 April 2026, the PAN framework has undergone a major transformation under the new Act and Rules.
1. Mandatory Additional Documentation
- The Aadhaar-only PAN application route has been discontinued (effective March 31, 2026).
- Proof of Date of Birth (DOB) is now mandatory.
Accepted documents include:
- Birth certificate
- Class 10 certificate
- Passport
- Voter ID
- Magistrate-issued affidavit
Aadhaar continues as a primary identity document but must now be supplemented with additional proof.
Important Note:
Only the name matching with Aadhaar will appear on PAN. Applicants must ensure Aadhaar details are accurate.
Redesigned PAN Application Forms
- Form 93 → Replaces Form 49A
- Form 94 → New form for specific applicant categories
- Form 95 → Replaces Form 49AA (non-residents)
PAN-linked Transactions (Rule 159)
Rule 159 expands the scope of mandatory PAN quoting:
- Motor vehicle purchase: Above ~₹5 lakh
- Property transactions: Threshold increased from ₹10 lakh to ₹20 lakh
- Mandatory PAN application if transaction exceeds ₹45 lakh
- Cash deposits/withdrawals: Above ~₹10 lakh (aggregate per financial year)
- High-value goods/services: Above ~₹2 lakh
- Banking/financial relationships: Account opening, credit cards, insurance
Investment-related PAN Requirements:
- Mutual funds: Above ₹50,000
- RBI bonds: Above ₹50,000
- Debentures/bonds: Above ₹50,000
- Fixed deposits: Above ₹50,000 or aggregate > ₹5 lakh
- Securities (excluding shares): Above ₹1 lakh per transaction
- Unlisted shares: Above ₹1 lakh
Rule 159 establishes a comprehensive PAN-based financial tracking ecosystem.
This is a simplified overview of PAN-linked transaction provisions. Readers are advised to refer to Rule 159 of the Income-tax Rules, 2026 and official CBDT notifications for detailed provisions and legal interpretation.
Form 97 – PAN Declaration
A new declaration form (Form 97) is introduced for persons without PAN entering into specified transactions under Rule 159
2. Salaried Individuals: The “Metro” Expansion & Allowance/ Perquisites Revised
The Rules introduce structured rationalisation of salary taxation and exemptions.
Allowances & Perquisites
HRA Exemption Structure (Rule 279)
- HRA exemption continues under formula-based method
- Metro cities expanded to include:
- Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad, Bengaluru
Exemption limits:
- Metro cities: 50% of salary
- Other cities: 40% of salary
This change makes the Old Tax Regime significantly more attractive for residents of these eight cities who pay high rent.
Leave Travel Concession (LTC) – Conditions & Changes (Rule 278)
The tax exemption for Leave Travel Concession (LTC/LTA) continues to be restricted to the actual travel cost incurred by the employee for travel within India, along with eligible family members, subject to prescribed conditions and limits.
Key Conditions
- Exemption is allowed only for travel within India
- Limited to actual travel expenses (fare component only)
- Applicable for employee and eligible family members
- Subject to conditions prescribed under Rule 278
Key Changes in Valuation
1. Travel where No Public Transport Exists
Earlier:
Exemption based on notional AC first-class or deluxe class rail fare
Now:
Where no public transport system or state transport rate is available,
Exemption is restricted to ₹30 per km of the shortest route
2. Travel by Air
Earlier:
Exemption up to economy class airfare of the national carrier (shortest route)
Now:
Exemption limited to fare of the class of travel the employee is entitled to, calculated on the shortest route
Revised Allowances & Perquisites – Old vs New (2026)
| Item | Old Rule | New Rule (2026) | Impact |
| Children Education Allowance | ₹100/month per child (max 2) | ₹3,000/month per child (max 2) | Realistic coverage |
| Hostel Allowance | ₹300/month per child (max 2) | ₹9,000/month per child (max 2) | Updated for costs |
| Meal Allowance | ₹50 per meal | ₹200 per meal | Improved benefit |
| Gifts (Non-cash) | ₹5,000/year | ₹15,000/year | Higher tax-free limit |
| Car (Small) | ₹1,800 + ₹900 (driver) | ₹5,000 + ₹3,000 | Higher valuation |
| Car (Large) | ₹2,400 + ₹900 (driver) | ₹7,000 + ₹3,000 | Increased value |
| Overseas Medical Treatment | Income ≤ ₹2 lakh | Income ≤ ₹8 lakh | Wider relief |
| Transport Allowance (Disabled) | ₹3,200/month | Metro: ₹15,000 + DA Others: ₹8,000 + DA | Strong increase |
| Free/Concessional Education | ₹1,000/month | ₹3,000/month | Increased benefit |
| Transport Business Allowance | 70% up to ₹10,000 | 70% up to ₹25,000 | Higher exemption |
| Medical Loan | ₹20,000 | ₹2,00,000 | Enhanced coverage |
1. Location-Based Allowances
Armed forces high altitude duty allowance
| Condition | Exemption |
| 39000–15000 ft | ₹4,500/month |
| Above 15,000 ft | ₹7,000/month |
J&K, Ladakh, Sikkim, Uttarakhand (all locations) ₹30,000/month
2. Underground Mine Allowance
Employee working in uncongenial underground mines
Exemption: 15% of Basic Pay
3. Highly Active Field Area Allowance (Armed Forces)
Applicable to armed forces in active field areas ₹22,000/month
4. Island Duty / Special Duty Allowance
| Location type | Exemption |
| Capital towns (Port Blair, Kavaratti, Agatti) | 10% of Basic Pay |
| Difficult areas (North/Middle Andaman, Lakshadweep excluding capital areas) | 16% of Basic Pay |
| Very difficult areas (Little Andaman, Nicobar, Narcondam etc.) | 20% of Basic Pay |
5. Siachen Allowance
Armed forces posted in Siachen region ₹42,500 per month (fully exempt)
Perquisite – Accommodation Valuation (Reduced)
Perquisite value of company-provided accommodation has been reduced
| City Population | Previous Rate | New 2026 Rate |
| Over 40 Lakhs (Metros) | 15% of salary | 10% of salary |
| 15 – 40 Lakhs | 10% of salary | 7.5% of salary |
| Below 15 Lakhs | 7.5% of salary | 5% of salary |
This is a short summary; for detailed conditions, eligibility, and valuation, readers are advised to refer to the relevant rules and guidelines relating to perquisites and allowances under the Income-tax Rules, 2026.
3. Revised Filing Timelines & Late Fees
- Extended Deadlines: While salaried individuals (ITR-1/2) must still file by July 31, the deadline for non-audit business and professional filers (ITR-3/4) has been permanently extended to August 31.
- Revised Returns & Section 234-I: The window to file a revised return has been extended to March 31 (12 months from the end of the tax year). However, correcting genuine errors or omissions after December now attracts an additional late fee under the new Section 234-I provisions (₹1,000 for income below ₹5 Lakh, and ₹5,000 above).
- ITR-U due date: Taxpayers can file an updated return even after receiving a reassessment notice, within the time allowed in that notice. This is allowed on payment of tax, interest, and an additional 10%, and the disclosed income will get immunity from under-reporting/misreporting penalty.
- Loss in ITR-U: The Finance Bill 2026 proposes that an updated return will be allowed even if the original return was a loss return, provided the updated return reduces the loss amount. This change enables voluntary correction, where reduced losses result in higher taxable income.
4. Capital Markets & Investment Taxation
- F&O Transaction Costs: Technical traders will see a direct hit to transaction costs. The Securities Transaction Tax (STT) on futures has increased from 0.02% to 0.05%, while STT on options premiums has jumped from 0.10% to 0.15%.
- Share Buybacks: The buyback distribution tax previously paid by companies is gone. Buyback proceeds are now taxed directly in the hands of the investor as capital gains. Retail/Non-Promoter Investors: You pay normal capital gains tax (12.5% LTCG or 20% STCG). No special extra surcharge.
Promoters (Founders/Directors): Under the new Section 69 of the 2025 Act, promoters must pay an additional 12% surcharge on the tax liability. This effectively pushes their tax rate higher (often 22%–30%), making buybacks less attractive for them.
- Sovereign Gold Bonds (SGBs): The tax-free status upon redemption is now strictly preserved only for investors who hold bonds from the original primary issue. Secondary market purchases (via stock exchanges) will attract capital gains tax upon redemption.
- Dividend & Mutual Fund Income: The provision allowing taxpayers to claim up to a 20% interest expense deduction against dividend or mutual fund income has been completely withdrawn.
5. TDS & TCS Rationalization
Manpower Services Covered Under Section 194C
Effective 1st April 2026, under the new Income-tax Act, 2025, the definition of “work” (formerly under Section 194C, now categorized under Section 393 of the new code) has been explicitly expanded to include manpower services.
The law now specifically inserts a new sub-clause into the definition of “work”:
“(f) supply of manpower to a person to work under his supervision, control or direction.”
This change means that the “skill level” of the personnel (e.g., whether you are hiring a security guard or a junior data entry operator) no longer matters as much as the supervision and control test. If they work under your direction, it is a work contract.
Since manpower supply is now officially “work,” the standard contractor rates apply:
| Status of Payee (Vendor) | TDS Rate |
| Resident Individual or HUF | 1% |
| Others (Companies, Partnership Firms, LLPs) | 2% |
| No PAN Provided | 20% |
MACT Interest: Total Exemption for Individuals
This is a landmark “compassionate” reform. Previously, while the principal compensation was tax-free, the interest was taxable as “Income from Other Sources,” with TDS kicking in above ₹50,000.
- The New Rule: Interest awarded by the Motor Accident Claims Tribunal (MACT) to a natural person (individual or legal heir) is now 100% exempt from income tax.
- TDS Removal: There is zero TDS on such payments, regardless of the amount
Life Insurance Payouts (Section 194DA)
The reduction in the TDS rate for life insurance is a significant relief for policyholders.
- The New Rate: The TDS rate on the income component of life insurance payouts (the maturity amount minus the premiums paid) has been reduced to 2%.
- Timeline: This change was initiated in late 2024 but is now fully integrated into the 2026 tax tables under the new Section codes.
- Threshold: The threshold for this deduction remains at ₹1 lakh. If the taxable portion of the maturity amount is less than ₹1 lakh, no TDS is deducted.
- Comparison: Old Rate: 5%
- New Rate (Current): 2%
Automated Nil/Lower TDS Certificates
The days of manual applications and follow-ups with an Assessing Officer (AO) are being phased out for many taxpayers.
- The Mechanism: A new rule-based automated system evaluates eligibility by pulling data from your past three years of filings and current AIS (Form 168) data.
- Instant Issuance: If you meet the predefined criteria (e.g., your projected total income is below the taxable threshold), the system can generate a Nil or Lower Deduction Certificate near-instantly without human intervention.
- Enterprise Impact: This significantly speeds up the procurement cycle for businesses that deal with hundreds of small vendors who operate on thin margins and cannot afford 10% TDS.
Simplified Property TDS: Buyers purchasing property from non-resident Indians (NRIs) no longer need to obtain a TAN. TDS can now be deposited directly using a PAN-linked challan.
CBDT Circulars Now Binding
Section 400(2) of the Income Tax Act, 2025 restores the binding nature of CBDT guidelines on both tax authorities and deductors. From 1 April 2026, CBDT circulars on TDS and TCS changes— including those on perquisites and virtual digital assets — carry mandatory compliance weight. “The argument that CBDT circulars are only advisory no longer holds under Section 400(2).”
| Section | Nature of Transaction | Before 1 April 2026 | From 1 April 2026 |
| 206C(1) | Alcoholic liquor | 1% | 2% |
| 206C(1) | Tendu leaves | 5% | 2% |
| 206C(1) | Scrap | 1% | 2% |
| 206C(1) | Minerals (coal, lignite, iron ore) | 1% | 2% |
| 206C(1G) | LRS (Education/Medical) | 5% | 2% |
| 206C(1G) | Overseas tour package | 5% up to ₹10L / 20% above | 2% (flat) |
Summary of Changes
- Increased to 2%:
- Alcohol
- Scrap
- Minerals
- Reduced to 2%:
- Tendu leaves
- LRS (education & medical)
- Simplified to flat 2%:
- Overseas tour packages (removed dual rate structure)
Liberalised Remittance Scheme (LRS) transfers for education and medical purposes (above ₹10 Lakh) has been slashed from 5% to 2%. Foreign tour packages also move to a flat 2% rate, removing the previous threshold-based tiering.
Decriminalization: Procedural Defaults
Non-production of books of account and documents, and requirement of TDS payment, where payment is made in kind, are being decriminalised. Further, minor offences will attract fine only. The remaining prosecutions will be graded commensurate with the quantum of offence. They will entail only simple imprisonment, with maximum imprisonment reduced to two years, and power to courts to convert even those into fine
6. Corporate & Corporate Governance Updates
MAT Finality: The Minimum Alternate Tax (MAT) is transitioning to a final tax at 14%. Companies will no longer be able to accumulate forward MAT credits, though existing credits earned up to March 31, 2026, remain usable. No new MAT credit allowed after 1 April 2026
No New Credits: Any MAT paid for Tax Year 2026-27 onwards will not generate a “MAT Credit.” You cannot carry this amount forward to offset future regular tax liabilities. It is now a final tax liability for that year.
This set-off of MAT credit brought forward as on 1/4/2026 is proposed to be allowed in the new tax regime to domestic companies to the extent of 25% of their tax liability.
Further, Non-residents who opt for Presumptive Taxation are now officially exempt from the provisions of MAT
7. The Digital Asset Framework
In alignment with global regulatory standards, the Income-tax Rules, 2026 introduce a structured framework for integrating digital assets into the core tax reporting system.
Inclusion of Digital Assets
The definition of “financial assets” has been expanded to explicitly include:
- Crypto-assets
- Central Bank Digital Currencies (CBDCs)
This ensures that digital holdings are formally recognised within the tax reporting ecosystem.
Enhanced Reporting Obligations
Financial institutions are now required to report holdings of Specified Electronic Money Products (SEMPs) as part of compliance obligations.
However, a relaxation has been provided for:
Small depository accounts, where the rolling average balance does not exceed USD 10,000, which remain outside the reporting requirement.
8. Carry Forward of Losses Allowed Under New Tax Law
Losses brought forward for tax years beginning before 1 April 2026 shall continue to be carried forward and set off under the new Act in the manner provided under the corresponding provisions of the repealed Act. Carry forward and set-off will be allowed only if all conditions under the old law are satisfied. As per Section 536(2)(b) of the Income-tax Act, 2025, rights acquired under the old Act are protected. The carry forward of losses is one such right, provided the specified conditions are fulfilled. Transition to the new Act does not affect the taxpayer’s right to carry forward losses, ensuring continuity and fairness in tax treatment.
9. Foreign Assets Disclosure Scheme, 2026 (FAST-DS)
This is a real and significant one-time initiative officially titled the “Foreign Assets of Small Taxpayers (FAST) Disclosure Scheme, 2026”. It is designed specifically to help residents who inadvertently failed to report foreign assets like ESOPs, RSUs, or dormant bank accounts.
- The Window: It is a time-bound, 6-month voluntary disclosure window (the specific start date is to be notified by the Central Government).
- Target Audience: Specifically aimed at “small taxpayers”—including students with old foreign accounts, tech employees with foreign equity (RSUs/ESOPs), and returning NRIs.
- The Two Categories of Disclosure:
- Category A (Up to ₹1 Crore) (Tax Evasion): If the aggregate value of undisclosed assets and income is ₹1 Crore, the taxpayer pays 30% tax plus a 100% additional levy (totalling 60% of the value).
- Category B (Up to ₹5 Crore) (Reporting Omission): If assets were acquired while the person was a Non-Resident (NR) but not declared upon becoming a Resident, they can regularize it by paying a nominal flat fee of ₹1 Lakh (provided the value is ₹5 Crore).
- The Benefit: Full immunity from penalties and prosecution under the Black Money Act, 2015.
10. Compliance: From Discretionary Penalties to Automated Fees
Under the Income-tax Act, 2025 and the Finance Act, 2026, the penalty for failing to comply with tax audit requirements has undergone a major shift from a “discretionary penalty” to a “fixed fee” structure. This change aims to provide certainty and reduce the long-standing litigation over what constitutes a “reasonable cause” for delay.
Starting 1 April 2026, here is the breakdown of the new penalty/fee regime for tax audits:
i. The “Two-Tier” Fee Structure (Section 63)
If you fail to get your accounts audited or fail to furnish the audit report by the due date (generally 30 September 2026 for the FY 2025-26), the following graded fees apply:
- Delay up to 30 Days: A fixed fee of ₹75,000. (This applies even if the delay is only one day).
- Delay beyond 30 Days: The fee doubles to ₹1,50,000.
Important Note: This new fixed fee replaces the old calculation of “0.5% of turnover or ₹1.5 lakh, whichever is lower.” The government has removed the turnover-linkage to simplify the automated levy of the fee.
The Core Difference: Penalty vs. Fee
- Old Way (Penalty): Under the 1961 Act, these were “penalties.” You could argue “reasonable cause” (e.g., medical emergency, death in the family, or portal glitches) before an officer to get the penalty waived. It often led to years of litigation.
- New Way (Fee): Under the 2026 framework, these are mandatory, automated fees. There is no “reasonable cause” defense. If the system detects a one-day delay, the fee is levied automatically, similar to the late fee for filing an ITR (Section 234F). It is non-appealable in most cases.
ii. Failure to Get Accounts Audited (Section 446)
The old penalty was turnover-linked (0.5% of turnover). The new fee is a fixed, graded amount regardless of your business size.
| Delay Period | New Fee Amount (2026) |
| Up to 30 Days | ₹75,000 |
| Beyond 30 Days / Non-filing | ₹1,50,000 |
iii. Transfer Pricing & Accountant Reports (Section 447)
For specialized reports (like the Section 172 Transfer Pricing report), the “discretionary” ₹1 Lakh penalty has been replaced by a recurring fee to encourage faster compliance.
- Initial Month of Delay: ₹50,000
- Each Subsequent Month: ₹1,00,000
iv. Comparison of Old vs. New
| Feature | Pre-April 2026 (1961 Act) | Post-April 2026 (2025 Act) |
| Calculation | 0.5% of Turnover (Max ₹1.5L) | Fixed Amount (₹75k or ₹1.5L) |
| Nature | Penalty (Discretionary) | Fee (Automatic) |
| One-Day Delay | Often waived by AO | Immediate ₹75,000 Fee |
| Turnover Link | Yes (Favored small businesses) | No (Flat hit for all) |
Statement of Financial Transactions – SFT (Section 454)
The SFT is how the government tracks high-value transactions (e.g., credit card bills > ₹10 Lakhs, property deals). Defaults here are now strictly fee-based.
- Non-Filing (Section 454(1)): The old ₹500/day penalty is now a mandatory fee.
- Inaccurate Information (Section 454(2)): Previously, inaccuracies could lead to open-ended penalties. The 2026 Rule introduces an upper limit of ₹1,00,000 for reporting errors, providing certainty to banks and financial institutions.
11. 5-Year Exemption for Capital Goods
Any non-resident (foreign entity) that provides capital goods, specialized machinery, or tooling to an Indian manufacturer in a Bonded Zone is exempt from income tax for 5 years.
FAQ
What is the primary objective of replacing the Income Tax Act, 1961 with the Income Tax Act, 2025?
The Income Tax Act, 2025 has been enacted to provide a streamlined, simplified, and modern tax code with reduced compliance burden, consolidated provisions, and clear definitions. Over six decades, the Income Tax Act, 1961 had accumulated numerous amendments, provisos, and explanations making it complex and difficult to navigate. The new Act aims to present the same tax policy in a more logical, accessible, and reader -friendly format. The Act further advances taxpayer centric approach by making compliance simpler, promoting ease of doing business, and aligning the Indian tax system with contemporary global standards.
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For any queries or professional assistance, the author can be reached at: CAMohitkumar25@gmail.com
Disclaimer: This content is intended solely for informational and educational purposes and should not be construed as professional tax or legal advice. Readers are advised to consult a qualified tax or legal professional for advice specific to their individual circumstances.
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