Understanding the New Income Tax Act 2025

1.What the New Income Tax Act Actually Is

The New Income Tax Act is the Income-tax Act, 2025 — formally Act No. 30 of 2025, described in its opening words as "An Act to consolidate and amend the law relating to income-tax". It is the first full rewrite of India's income-tax statute in over six decades: the Income-tax Act, 1961 had been in force since 1 April 1962, and by 2025 it had been amended so many times that it ran to 819 effective sections spread over 47 chapters.

The Act was passed by Parliament in August 2025, received the assent of the President on 21 August 2025, and — by the express command of its section 1(3) — came into force on 1 April 2026. From that date it repealed and replaced the 1961 Act for all income earned from tax year 2026-27 onwards. It has since been amended once already, by the Finance Act, 2026, the usual annual amending channel through which the Union Budget's direct-tax proposals are implemented.

Two points of orientation matter before anything else. First, this is the third post-Independence consolidation of Indian income-tax law, after the Indian Income-tax Act, 1922 and the 1961 Act; an earlier attempted replacement, the Direct Taxes Code, 2010, lapsed without enactment. Second, and more importantly for taxpayers, the 2025 Act is deliberately revenue-neutral: it rewrites the statute's language, structure and procedures, but it does not change the tax rates or the policy behind them. If your tax mathematics did not change because of the Budget, it does not change because of the new Act either.

Presenting Union Budget 2026-27 on 1 February 2026, Finance Minister Nirmala Sitharaman placed the reform in its proper context:

"In July 2024, I announced a comprehensive review of the Income Tax Act, 1961. This was completed in a record time and the Income Tax Act, 2025 will come into effect from 1st April, 2026. The simplified Income Tax Rules and Forms will be notified shortly, giving adequate time to taxpayers to acquaint themselves with its requirements. The forms have been redesigned such that ordinary citizens can comply without difficulty." Finance Minister Nirmala Sitharaman, Union Budget 2026-27 speech, 1 February 2026

In other words, the correct way to read the New Income Tax Act is as a re-codification: the same tax law, re-founded on a cleaner base, expressed in plainer language, and organised around how tax is actually administered in a digital, faceless system.

2.From 819 Sections to 536: The Scale of the Rewrite

The simplification is not cosmetic, and it is measurable. The Select Committee of the Lok Sabha, which scrutinised the Bill clause by clause, recorded the quantitative outcome of the drafting exercise in its report. The numbers are worth seeing together, because they explain why practitioners describe the 2025 Act as roughly half the statute it replaced.

2.1The numbers behind the rewrite

Source: Report of the Select Committee on the Income-tax Bill, 2025 (tabled 21 July 2025); FAQs of the Income Tax Department on the Bill.

The 1961 Act began life in 1962 with 298 sections. Six decades of Finance Acts — adding, amending, carving out and overriding — swelled it to 819 effective sections. The 2025 Act discards the deadwood: obsolete and repeated provisions, provisos stacked on provisos, and explanations to explanations are gone, replaced by direct sentences, tabular statements and formulae. Where the old Act expressed exemption conditions across pages of running text, the new Act frequently states them in a table the eye can scan in seconds.

2.2Plain language by design

The drafting philosophy is visible at the level of individual words. "Notwithstanding" gives way to "irrespective of"; "in accordance with" becomes "as per"; the tangled previous year and assessment year architecture becomes a single tax year. Sentences are shorter. Provisions that belong together now sit together — the chapter on income from salaries, for instance, is a compact run of sections rather than a scattering of overrides and carve-outs.

This is not a stylistic indulgence. Ambiguity in a tax statute is the raw material of litigation: every unclear proviso becomes an appeal, a rectification application or a stay request. The stated objective of the rewrite was tax certainty — reducing the scope for fresh interpretation — and the government has been explicit that readability of the law is a compliance instrument in itself. A taxpayer who can read the provision governing them is more likely to comply with it voluntarily and correctly.

2.3Where familiar provisions now live

Section numbers have changed wholesale, so anyone citing the law needs a map. The core correspondences are set out below, based on the comparative tables published with the new Act.

Source: comparative mapping tables published with the Income-tax Act, 2025 (including ICAI background material).

3.How the New Income Tax Act Became Law

The Act's legislative journey was unusually thorough for a money bill, involving a dedicated parliamentary committee and a mid-course redraft. The full sequence:

The withdrawal-and-reintroduction step in August 2025 is worth noting, because it is not routine. Rather than move a list of official amendments, the Government withdrew the original Bill and introduced a revised text incorporating the Select Committee's accepted recommendations — giving Parliament a clean, consolidated Bill to enact rather than a patchwork.

4.Tax Year Replaces Previous Year and Assessment Year

Of all the changes in the new Act, the one every taxpayer will meet first is terminological. The 1961 Act split every taxable cycle into two labels: income was earned in the previous year (say 2023-24) and assessed in the assessment year (2024-25). Two financial years, two names, and a standing source of confusion in notices, return forms and client correspondence.

The 2025 Act abolishes both terms. Section 3 defines a single tax year: the twelve months of the financial year beginning 1 April. Income earned between 1 April 2026 and 31 March 2027 is earned, assessed and taxed as tax year 2026-27. Where the old Act needed "assessment year", the new Act speaks of the "succeeding tax year", and returns, notices, computation sheets and demand orders all carry one label instead of two.

The Income Tax Department's own FAQs on the Bill put the rationale plainly: the previous year and assessment year represented two different financial years, creating confusion whose justification no longer exists once the previous year has been aligned with the financial year. The term "tax year" is also the one used in comparable tax jurisdictions.

For practitioners, this is the single most pervasive change to daily work: every template, deed reference, opinion, notice reply and appeal paper that used the PY/AY pairing must now use tax year language for post-April 2026 matters — while continuing to use AY language for everything that came before.

5.Slabs, Rebates and the Default New Regime

The slab story of the new Act is, in one sentence: nothing changed, and that is the point. The new tax regime announced in Union Budget 2025 — wider slabs, a bigger rebate, a higher standard deduction — was already law for financial year 2025-26 under the Finance Act, 2025. The Income-tax Act, 2025 carries that regime forward as its statutory default (in section 202, replacing section 115BAC of the 1961 Act), and Union Budget 2026 left the rates untouched for tax year 2026-27.

5.1New tax regime slabs (FY 2025-26 and tax year 2026-27)

These slabs apply to individuals, HUFs, AOPs, BOIs and artificial juridical persons under the default new regime, for financial year 2025-26 (assessment year 2026-27) under the 1961 Act and for tax year 2026-27 under section 202 of the 2025 Act. Rates are identical in both years.

There are no separate slab rates for senior or super senior citizens under the new regime, and the surcharge on income above the threshold is capped at 25% (against up to 37% under the old regime for the highest incomes).

5.2The rebate and the standard deduction

Two reliefs do the heavy lifting for middle India. First, the rebate against tax (the successor to the section 87A rebate) is ₹60,000, which reduces the tax of a resident individual with total income up to ₹12 lakh to zero. The rebate does not apply to income taxed at special rates, such as capital gains taxed under the special capital-gains sections. Second, salaried taxpayers under the new regime claim a standard deduction of ₹75,000. Put together, salary income up to ₹12.75 lakh attracts no income tax for a resident salaried employee.

The new Act also clears up a deduction that the case law of the 1961 Act had made uncertain: a flat 30% standard deduction from the annual value of house property, now stated directly in the statute.

5.3How the old regime compares

The old regime survives as an opt-in, not a default — a taxpayer who wants it must elect it at the time of filing. Its arithmetic is unchanged:

Old regime for individuals below 60 years; basic exemption is higher for resident senior citizens (60+) and super senior citizens (80+). The standard deduction is ₹50,000, and the rebate makes income up to ₹5 lakh effectively tax-free.

Which regime suits a given taxpayer depends, as before, on the volume of deductions available: Chapter VIII of the new Act (sections 122 to 154) preserves the deduction scheme, and the familiar 80C, 80D and similar deductions continue to be claimable under the old regime only. The new regime strips almost all of them out in exchange for the wider slabs — a trade that has favoured most taxpayers without large deduction baskets since Budget 2025.

6.Capital Gains Under the New Act

The capital-gains architecture of the July 2024 Budget — carried into the 2025 Act — is retained intact but reorganised, with the computation provisions in sections 67 to 91 and the rate provisions in sections 196 to 198. The operative numbers a taxpayer needs:

Position as consolidated in the Income-tax Act, 2025; rate and holding-period changes originate from Finance (No. 2) Act, 2024.

Budget 2026 added two changes around the edges of this regime. Share buybacks are now taxed as capital gains in the hands of all shareholders, replacing the earlier deemed-dividend treatment — with effective rates of roughly 22% for corporate promoters and 30% for non-corporate holders. And Sovereign Gold Bonds: exemption on redemption at maturity continues only for bonds subscribed at the original government issue; investors who bought in the secondary market will pay capital gains tax on the difference between their acquisition price and redemption value.

7.TDS and TCS, Rationalised

7.1One section instead of dozens

Under the 1961 Act, tax deduction at source was scattered across more than 40 operative sections — each specifying a payment type, a threshold, a payer and a rate. The 2025 Act consolidates the whole subject into three sections. Section 392 governs TDS on salaries. Section 393 governs TDS on everything else, organised into three tables — payments to residents, payments to non-residents, and payments to any person — with the nature of payment, monetary threshold, deductor and rate in one readable grid. Section 394 does the same for tax collected at source. The whole TDS/TCS chapter contracts from 69 sections to 13, and from roughly 27,500 words to under 15,000.

Consolidation is also codification of a habit: a separate table sets out the cases where no deduction is required, and the certificate, statement-filing and default provisions that were smeared across the old chapter are now gathered into individual, self-contained sections.

7.2Thresholds and rates that changed from 1 April 2026

The rewrite is not purely structural — several deduction thresholds and rates actually moved, with effect from 1 April 2026:

The TCS changes in the last two rows were announced in Union Budget 2026 and take effect under the new Act's framework.

For small taxpayers, two further Budget 2026 measures reduce friction: lower or nil deduction certificates can now be obtained through a rule-based automated process instead of an application to the Assessing Officer, and a resident buying immovable property from a non-resident can deduct and deposit TDS against the buyer's own PAN, without obtaining a TAN. Interest awarded by Motor Accident Claims Tribunals is fully exempt, with the TDS on it withdrawn.

8.Faceless by Statute: Digital-First Administration

Successive governments have moved income-tax administration online through schemes — faceless assessment, faceless appeals, e-verification, the DIN discipline. The 2025 Act gives this machinery statutory permanence. Faceless assessment is no longer an executive scheme layered on the statute: section 273 writes the faceless procedure into the Act itself, and section 532 consolidates the power to frame schemes for eliminating the interface between taxpayers and the department. A Taxpayer's Charter finds a home in section 240.

Procedure has been recalibrated in the taxpayer's favour in specific ways:

• Time-bound assessment. Regular assessment must be completed within 12 months from the end of the tax year in which the return is filed.
• Reassessment windows. Escaped income can be reassessed within 3 years generally, and up to 10 years only where the escaped income, supported by evidence, exceeds ₹50 lakh.
• A wider updated-return window. An updated return can be filed up to 48 months from the end of the relevant tax year, with additional tax rising from 25% to 70% depending on how late the update is. Budget 2026 went further still: revised or belated returns may now be filed up to 31 March with a nominal fee, and updated returns may be used to reduce a declared loss or even filed after a reassessment notice, with additional tax.
• Refunds despite delay. A taxpayer who files late can still claim a TDS refund without penal consequences for the delay.
• Modern income sources recognised. Virtual digital assets — including non-fungible tokens — are defined in the Act and expressly included in "undisclosed income" for search assessments.

Two adjacent cleanups complete the picture. The angel tax on share premia above fair market value, abolished in 2024, stays abolished. And the Finance Act, 2026 retrospectively clarified — from 1 October 2019 — that an assessment is not invalid merely because of a mistake or omission in quoting the Document Identification Number, provided the assessment is referenced to that DIN in some manner, settling a line of litigation that had grown around the DIN discipline.

9.Old Act vs New Act: The Full Comparison

Set side by side, the two statutes differ on almost every structural axis while remaining continuous on substance:

Sources: Select Committee report on the Income-tax Bill, 2025; Income Tax Department FAQs; text of the Income-tax Act, 2025.

10.Transition Rules: Section 536 and Pending Proceedings

Repealing a 64-year-old statute mid-flight raises an obvious question: what happens to everything already in the pipeline? Section 536 of the new Act — the Repeal and Savings clause — answers it, and the CBDT has issued clarificatory FAQs to settle the practical details. The rule is period-based, and it is clean:

All returns, assessments and other proceedings up to 31 March 2026 are governed by the 1961 Act, however late they are completed.

The savings clause goes further than dates. Under section 536(2), the repealed 1961 Act continues to apply to any proceeding pending on 1 April 2026, and to any proceeding initiated on or after that date — notices, assessment, reassessment, recomputation, rectification, penalty, reference, revision and appeals — in respect of any tax year beginning before 1 April 2026, which are then carried out under the old Act's procedure. Searches initiated, and requisitions made, before commencement also remain governed by the 1961 Act for all connected proceedings. Pending applications for registration or approval under sections 12AB and 80G of the old Act, filed on or before 31 March 2026, continue under the old framework too.

For TDS, the cut is by credit or payment: sums credited or paid up to 31 March 2026 attract deduction under the old Act's provisions; sums credited or paid on or after 1 April 2026 fall under the new tables. Deductors accordingly deal with two form-sets in the transition year — the familiar Form 16 and 16A for the old year, and the new Forms 130 and 131 for tax year 2026-27. Form 26 replaces the tax-audit reports 3CA, 3CB and 3CD; Form 121 replaces the 15G and 15H declarations; the quarterly TDS returns move from 24Q and 26Q to Forms 138 and 140; and the foreign remittance certificates 15CA and 15CB become Forms 145 and 146.

11.What Union Budget 2026 Changed Around the New Act

Union Budget 2026-27, presented on 1 February 2026, was the first Budget of the new era — and its central personal-tax message was continuity: no change to slab rates under either regime, and the ₹75,000 standard deduction preserved. Its energy went instead into the Act's machinery and into targeted compliance relief:

Beyond the items above, the Budget legislated a shift in accounting discipline: separate books maintained under the Income Computation and Disclosure Standards will be done away with from tax year 2027-28, with the changes embedded into the Indian Accounting Standards themselves. And in a measure of simplification working back through the system, employee contributions to welfare funds need only be deposited by the return-filing due date.

12.What the New Act Means for Different Taxpayers

Because the Act changes process more than economics, its impact differs sharply by taxpayer profile:

• Salaried employees see no change in outgo — the slabs, rebate and ₹75,000 standard deduction continue — but their form numbers, tax-year references and TDS certificates change, and the redesigned ITR forms are meant to be completed without professional help in straightforward cases.
• Senior citizens benefit from the doubled ₹1 lakh TDS threshold on bank interest and, where they rely on fixed deposits, from the clarified 30% standard deduction on house-property income. Under the new regime there are no age-based slabs; senior citizens who prefer the old regime's higher basic exemption must opt for it affirmatively.
• Small businesses and MSMEs gain most from the TDS rationalisation: lower rates on commission, brokerage, rent and technical services, higher thresholds before deduction begins, and automated lower-deduction certificates reduce both cash-flow drag and paperwork.
• Firms and LLPs face one genuinely new obligation: TDS at 10% on remuneration, interest, salary or commission paid to partners, under the provision modelled on the old section 194T.
• Companies and promoters must rework MAT planning — the tax becomes final at 14%, and credit accumulation stops from 1 April 2026 — and promoters must price in the buyback-as-capital-gains change. The IT and global-business safe-harbour changes reward the sectors they touch.
• Non-residents deal with a consolidated non-resident TDS table, the five-year foreign-income exemption for experts under notified schemes, and simpler PAN-based compliance when selling property in India to residents.

13.Myths vs Facts

14.Taxpayer Checklist for Tax Year 2026-27

15.A Practitioner's Perspective

Bismay Dash & Associates advises clients on tax and corporate matters, and the questions we field on the new Act cluster around one anxiety: "what do I have to relearn?" The honest answer is that the substance of Indian income-tax law has moved far less than the wrapper suggests. Charge, heads of income, computation, deductions, the regime choice — all are recognisably the same law. What has moved is the address of everything: the section you cite, the form you file, the year you label it with, and the threshold at which TDS begins.

Four practical observations from the transition so far:

• The citation map is non-negotiable. Every template, opinion and pleading needs a one-time remap from the 1961 Act's numbering to the 2025 Act's. The department's FAQs and the ICAI's bare-law edition with its comparative mapping tables are the working tools for this.
• Dual-track matters are the norm for two more years. A single client file may now straddle both Acts — a pending appeal under the 1961 Act and a fresh filing for tax year 2026-27. Keeping the two regimes clearly labelled on the file cover prevents citation errors that are embarrassing at best and time-barred at worst.
• TDS clients need proactive communication. Higher thresholds and lower rates change deductors' cash flows and payees' advance-tax calculations. The clients who adjust advance tax for the new 2% rates early avoid interest surprises at the end of the year.
• Litigators should read section 536 twice. Most of the transitional disputes of the next few years — which Act governs a notice, a limitation period or a penalty — will be resolved by that section and the CBDT's clarificatory FAQs on it.

16.Frequently Asked Questions