The Income-Tax (No. 2) Bill, 2025 received Presidential assent on 21 August 2025, becoming the Income-Tax Act, 2025 — India's first comprehensive replacement of direct tax legislation in over six decades. The new Act, comprising 536 sections organised across 23 chapters and 16 schedules, will replace the Income Tax Act, 1961, with effect from 1 April 2026.
Background
India's direct tax framework under the Income Tax Act, 1961 had grown unwieldy over its six-decade lifespan. Successive Finance Acts, judicial pronouncements, and administrative circulars had expanded the statute from its original framework into a labyrinthine code that even seasoned professionals found difficult to navigate. Multiple committees — including the Kelkar Committee (2002) and the Arbind Modi Direct Tax Code Task Force (2019) — had recommended comprehensive replacement.
The journey to the 2025 Act began with the introduction of the Income-Tax Bill, 2025 during the Budget Session in February 2025. That Bill was referred to a select committee, whose recommendations led to the withdrawal of the original Bill and the tabling of the Income-Tax (No. 2) Bill, 2025 in August. Both Houses of Parliament passed the revised Bill during the concluding days of the Monsoon Session.
Key Provisions
The Income-Tax Act, 2025 introduces a restructured direct tax framework:
Consolidated structure: The Act organises India's direct tax law into 536 sections across 23 chapters, replacing the 1961 Act's accumulated provisions. The reorganisation aims to group related provisions logically, reducing cross-referencing across distant sections.
16 schedules: Technical computation rules, tax rates, and procedural details are moved into 16 schedules, keeping the main body of the Act focused on substantive provisions and principles.
Simplified language and drafting: The Act adopts a modernised drafting style intended to reduce interpretive disputes. Provisos and explanations — a persistent source of complexity in the 1961 Act — are incorporated into the main text of relevant sections.
Effective date — 1 April 2026: The new Act applies from Assessment Year 2026-27, corresponding to the financial year beginning 1 April 2026. The Income Tax Act, 1961 continues to apply for all assessment years up to and including AY 2025-26.
Transitional framework: The Act includes detailed transitional provisions governing the treatment of proceedings initiated under the 1961 Act, carry-forward of losses, and continuation of exemptions and deductions for their originally notified periods.
Implications for Practitioners
The enactment of the Income-Tax Act, 2025 is the most significant event in Indian direct tax law since 1961. Every tax practitioner, corporate tax department, and revenue officer must undertake a systematic study of the new statute before its effective date.
The immediate priority is a section-mapping exercise — correlating each provision of the 1961 Act with its counterpart (or absence thereof) in the 2025 Act. This mapping is essential for pending advisory matters, ongoing assessments, and advance ruling applications.
Practitioners should pay particular attention to the transitional provisions governing pending appeals and assessments. The treatment of proceedings initiated under the old Act but concluding after 1 April 2026 will determine litigation strategy for thousands of pending matters before the Income Tax Appellate Tribunal and High Courts.
The seven-month window before the effective date should be used to update standard documentation, internal compliance processes, and client-facing materials. Training programmes for junior professionals and support staff are equally critical given the wholesale change in statutory architecture.