The Income Tax Act, 2025 came into effect on April 1, 2026, replacing the 64-year-old Income Tax Act, 1961 as the governing statute for direct taxation in India. The new legislation, which was introduced in Parliament during the Budget Session of 2025 and received Presidential assent in March 2025, represents the most comprehensive overhaul of India's direct tax architecture in over six decades.
Background
The Income Tax Act, 1961 had been amended more than 4,000 times over its lifetime, resulting in a statute that had grown unwieldy, with over 800 sections, complex cross-references, and multiple layers of explanation and proviso. Several committees — including the Kelkar Committee (2002), the Easwar Committee (2016), and the Akhilesh Ranjan Committee (2019) — had recommended a complete rewrite. The Government introduced the Income Tax Bill, 2025 in the Lok Sabha in February 2025 as a revenue-neutral replacement designed to simplify language, reduce litigation, and modernise the compliance framework.
Key changes effective April 1, 2026
1. Unified "Tax Year" replaces Assessment Year and Financial Year
The most significant structural change is the elimination of the dual Assessment Year/Financial Year system. Income earned from April 1, 2026 to March 31, 2027 will be governed by a single "Tax Year" 2026-27. Returns will be filed within the same tax year framework, eliminating the longstanding confusion of earning in one year and assessing in the next.
2. Reduced sections: 536 from over 800
The new Act consolidates the statute from 47 chapters and over 800 sections to 23 chapters and 536 sections. Notably, all TDS provisions have been consolidated under a single Section 393, replacing the scattered TDS sections (192 through 206C) of the 1961 Act.
3. Form 130 replaces Form 16
For salaried employees, the familiar Form 16 has been replaced by Form 130, which requires more granular reporting of salary components, deductions, and tax computation. Employers will need to update their payroll systems to generate the new form.
4. Stricter HRA compliance
House Rent Allowance claims will now require mandatory PAN disclosure of landlords in specified cases. The Income Tax Department has implemented data analytics to flag mismatches between claimed rent payments and landlord declarations.
5. Expanded HRA metro city list
Bengaluru, Hyderabad, Pune, and Ahmedabad have been added to the list of metro cities eligible for higher HRA exemption (50% of salary instead of 40%), joining Delhi, Mumbai, Kolkata, and Chennai.
6. Enhanced STT on derivatives
The Securities Transaction Tax on futures and options has been increased, raising the cost of derivative trading. This aligns with the Government's stated objective of discouraging excessive speculative activity.
7. Stock buyback taxation reformed
Stock buybacks will now be taxed as capital gains in the hands of shareholders rather than as deemed dividends at the company level, a change that affects both promoters and retail investors.
Revenue neutrality
The Government has emphasised that the new Act is revenue-neutral. Tax slabs, rates, and key deductions remain unchanged. The reform is structural rather than fiscal — aimed at simplifying compliance and reducing litigation rather than altering tax burdens.
Transitional provisions
Assessments, proceedings, and orders under the 1961 Act for tax years prior to April 1, 2026 will continue to be governed by the old Act. Pending appeals, reassessments, and refund claims will not be disturbed by the transition.
Implications for practitioners
This is the most significant direct tax event in decades. Practitioners need to immediately familiarise themselves with the new section numbering, as every citation in tax practice — from assessment orders to tribunal filings — will now reference the 2025 Act. The Income Tax Department has published a detailed section-mapping document and FAQ on the transition.
For taxpayers, the immediate practical impact is limited given revenue neutrality. The real change is in compliance architecture: new forms, tighter verification, and digital tracking systems. The transition to a single Tax Year concept should reduce confusion for salaried individuals filing returns for the first time.
Source attribution
This article is based on official Government notifications and the PIB press release on the Income Tax Act, 2025. Veritect provides this content for informational purposes and does not constitute legal advice.