A key mistake would be continuing to rely on provisions of the Income-Tax Act, 1961, where the new law now applies, and vice versa.
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Key Points
- Income-Tax Act, 2025 replaces the 1961 law from April 1, 2026, introducing structural changes without altering tax rates.
- Single ‘tax year’ concept replaces previous and assessment years, aiming to simplify interpretation and reduce disputes.
- Compliance timelines revised, with extended revised return deadline and shorter TDS and TCS correction windows.
India’s direct tax system is set for an overhaul, with the Income-Tax Act, 2025, coming into force from April 1, 2026, replacing the 1961 law.
While tax rates and core principles remain unchanged, the transition will require taxpayers to adapt to a new framework even as legacy cases continue to be dealt with under the old law.
What changes
A key change is the shift to a single ‘tax year’, replacing concepts like ‘previous year’ and ‘assessment year’.
This is meant to reduce interpretational complexities. While the concept of a ‘shorter tax period’ existed earlier, the new Act formalises it.
“Alongside structural changes, the draft Income Tax Rules, 2026, propose key updates. Thresholds for allowances and perquisites have been raised to reflect current realities. Disclosure norms have been tightened, with added transparency requirements, including specifying the relationship with the landlord for house rent allowance claims,” says Sandeep Jhunjhunwala, partner, Nangia Global.
TDS TCS compliance timeline
Compliance timelines have been revised. The window for tax deducted at source (TDS) and tax collected at source (TCS) corrections has been reduced to two years (with a one-time transition window available till March 31, 2026).
“The deadline for revised returns has been extended to March 31 of the following tax year as against the earlier cut-off of December 31. This extension offers greater flexibility to correct errors and align reported income with evolving information,” says Jhunjhunwala.
What stays unchanged
The core framework of taxation remains largely unchanged. There is no immediate change in tax rates, slab structure, surcharge, or cess.
So, taxpayers should not expect any direct impact on their tax liability except in a few cases where the old regime may be more beneficial under the new Act.
Key principles such as residential status, income classification, and anti-avoidance rules continue in substance, ensuring continuity.
“The repeal of the Income-Tax Act, 1961, is supported by savings provisions, which protect past assessments, ongoing litigation, and accrued rights,” says Jhunjhunwala.
Complexity reduced
One of the key positives of the new Income-Tax Act is its attempt to tackle long-standing complexity in drafting.
Earlier, taxpayers and authorities often interpreted the same provisions differently, leading to disputes and litigation.
The new law moves towards clearer, more direct language, which should reduce such differences and lower the volume of notices and appeals.
“The new Income-Tax Act introduces a leaner, more streamlined structure, making the law easier to navigate, particularly for individual taxpayers and small businesses. It keeps tax rates, deductions and exemptions largely unchanged, providing predictability in financial planning,” says Shubham Jain, director, SVAS Business Advisors.
The revised perquisite rules offer relief, with higher limits for meal coupons, gift vouchers, and child education allowances, along with updated valuation norms for company cars and HRA benefits to more cities (Hyderabad, Pune, Ahmedabad and Bengaluru).
“These changes better reflect current cost structures,” says Niranjan Govindekar, partner – corporate tax, tax & regulatory advisory at BDO India.
Transitional pains
The shift to a renumbered and reorganised law will require taxpayers and professionals to adjust to new references and formats.
“There is a learning curve as taxpayers and professionals reorient themselves to the new structure,” says Jain.
The shift is not a clean break. “The earlier law will continue to apply to past years and ongoing matters, meaning taxpayers and advisers will have to deal with two parallel regimes, adding to the overall complexity. For instance, the same chartered accountant handling your FY 2026-2027 return under the new Act may simultaneously have to deal with a notice for AY 2022-2023 under the old one,” says Jain.
How to optimise benefits
Taxpayers can benefit from the new Act by using the navigation tools and comparison utilities offered by professionals and the government.
“They should undertake a comprehensive assessment of the impact of provisions affecting their business or personal tax position, review existing tax positions, documentation and reporting frameworks in light of the new rules,” says Sudhakar Sethuraman, partner, Deloitte India.
Taxpayers eligible for HRA, leave travel allowance and other special allowances, and those claiming Chapter VI-A deductions such as Sections 80C and 80D, may find the old tax regime more advantageous.
“Taxpayers should review their choice because of the renewed relevance of the old tax regime,” says Govindekar.
Mistakes to avoid
A key mistake would be continuing to rely on provisions of the Income-tax Act, 1961, where the new law now applies, and vice versa.
“Taxpayers should ensure they apply the provisions of the new law from April 1, 2026, and avoid continuing to rely on the Income-tax Act, 1961, beyond its relevant scope. At the same time, they should not assume that ongoing disputes or legacy matters will automatically shift to the new regime,” says Sethuraman.
Feature Presentation: Aslam Hunani/Rediff
