Published 9 May 2026
A Complete Guide to the New Law
After six decades of patchwork amendments, the Income-tax Act, 1961 is being replaced. The Income-tax Act, 2025 (Act No. 30 of 2025) was passed by Parliament and notified as effective from 1 April 2026. This comprehensive guide explains what changes -- and just as importantly, what does not change -- for taxpayers, practitioners, and the Government.
By the end of this guide you will have a clear roadmap for transitioning your practice to the new framework, an understanding of the saving-clause mechanism that preserves the old Act for pending matters, and a checklist of the actions to take in the next two filing cycles.
The Structural Reform at a Glance
Item | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
Number of Chapters | 23 primary plus sub-chapters | 23 streamlined chapters |
Numbered Sections | Approximately 298 plus sub-numbered | 536 unified sections |
Key Frameworks Codified | Faceless / DRP / DRC scattered | Codified into the statute |
Time-Period Terminology | Previous Year / Assessment Year duality | 'Tax year' unified |
Effective Date | 1 April 1962 (commenced) | 1 April 2026 |
Repeal of Predecessor | Replaced 1922 Act | Replaces 1961 Act under section 536 |
Why a New Act, and Why Now
The 1961 Act was itself a consolidation. It replaced the Indian Income-tax Act, 1922. In 1961, the Act was a model of clarity. But over six decades it has been amended by more than 65 Finance Acts and Taxation Laws (Amendment) Acts. The result is profound: 23 chapters, 298 numbered sections plus countless sub-numbered sections, eight Schedules, the Income-tax Rules 1962 with more than 100 rules, and a body of case-law spanning approximately 50,000 reported decisions. Reading the Act became increasingly difficult; cross-referencing across amendments, virtually impossible without paid databases.
The Direct Tax Code drafts of 2009 and 2013 attempted reform but did not progress beyond consultation. The 2025 Act is the culminated reform initiative -- drafted by a Central Board of Direct Taxes Committee during 2023-24, vetted through stakeholder consultation, and enacted as Parliament's Act No. 30 of 2025.
What Stays the Same: Substantive Law and the Saving Clause
Substantive law for assessment year 2025-26 and earlier remains under the Income-tax Act, 1961 by virtue of the saving clause in section 536 of the new Act. Specifically preserved:
- All proceedings pending under the 1961 Act on 31 March 2026 -- assessments, reassessments, appeals, revisions, prosecutions, refunds, recovery.
- All approvals, registrations, certificates, notifications -- 12AB / 80G / 10(23C) registrations, Permanent Account Numbers, Tax Deduction Account Numbers, Aadhaar links, Tax-deducted-at-Source certificates (Form 16 / 16A), Dispute Resolution Panel orders, Advance Pricing Agreements.
- Tax rates and rates as per applicable Finance Acts.
- Judicial precedents -- six decades of Supreme Court / High Court / Income-tax Appellate Tribunal case-law continues to be persuasive for interpretation of equivalent provisions in the 2025 Act where statutory language is preserved.
Practical Implication Your client's pending Commissioner of Income-tax (Appeals) appeal on assessment year 2020-21 does not become void on 1 April 2026. It continues under the 1961 framework, with appeal rights, time-limits, and remedies all preserved. Pending search assessments under section 132 of the 1961 Act continue under the 1961 procedure. |
Substantive Amendments Already Integrated
Finance Act, 2024 (No. 2) brought several substantive amendments. The 2025 Act has these built in. The most important integrations are summarised in the table below.
Amendment | Effect |
|---|---|
Capital gains restructure (effective 23 July 2024) | Long-term gains unified at 12.5% without indexation; INR 1.25 lakh exemption for section 112A; short-term gains on listed equity raised from 15% to 20%; real estate election preserved for pre-23 July 2024 acquisitions |
Buy-back tax (section 115QA) abolished from 1 October 2024 | Buy-back proceeds now taxed in the shareholder's hands as deemed dividend plus capital gains |
Online gaming separated (section 115BBJ) | 30% flat rate; companion section 194BA tax deducted at source on year-end aggregation |
Section 43B(h) MSME 45-day rule | Payments to micro and small enterprises beyond agreed terms or 45 days are deductible only on actual payment |
Standard deduction enhanced to INR 75,000 (new regime) | From INR 50,000; old regime continues at INR 50,000 |
Section 87A rebate INR 25,000 (new regime) | Threshold income of INR 7 lakh with marginal relief |
Section 80CCD(2) employer National Pension System (private) | Enhanced to 14% (parity with Government employees) |
Section 80CCH (Agniveer Corpus Fund) | Deduction for the contribution by Agniveer; preserved in default new regime |
Updated return window extended to 48 months | From 24 months; additional tax bands 25% / 50% / 60% / 70% |
Provisions Repealed, Replaced, or Sunsetted
Provision | Status |
|---|---|
Section 10(38) -- Securities-Transaction-Tax-paid Long-term Capital Gains exemption | Already abolished by Finance Act, 2018; replaced by section 112A |
Dividend Distribution Tax (Section 115-O / 115Q) | Abolished by Finance Act, 2020; dividend now in shareholder's hands |
Settlement Commission (Sections 245A to 245L) | Abolished by Finance Act, 2021; replaced by Dispute Resolution Committee for small / medium taxpayers (Section 245MA) |
Authority for Advance Ruling (Sections 245N to 245W) | Replaced by Board for Advance Ruling (post Finance Act, 2021) |
Section 115QA buy-back tax | Abolished by Finance Act, 2024 from 1 October 2024 |
Block-period assessment (Section 158B / 158BC) | Reinstated by Finance Act, 2024 for searches post 1 September 2024 |
Transition Mechanics: The Three-Year Roadmap
The transition runs over three filing cycles. Practitioners need to understand which Act governs which cycle.
Cycle | Period | Governing Act | Key Action |
|---|---|---|---|
Cycle 1 | Assessment year 2025-26 (financial year 2024-25) | Income-tax Act, 1961 | File regular returns by 31 July 2025 / 31 October 2025 |
Cycle 2 | Assessment year 2026-27 (financial year 2025-26) | Income-tax Act, 1961 (LAST cycle) | File by 31 July 2026 / 31 October 2026; LOCK IN carry-forward losses |
Cycle 3 | Tax year 2026-27 (financial year 2026-27) | Income-tax Act, 2025 (FIRST cycle) | File by 31 July 2027 onwards; new ITR forms apply |
What Practitioners Should Do Now
- Audit your library: maintain BOTH Acts in parallel for the four-to-five-year transition period. Bare Acts, commentaries, and case-law digests for both.
- Update engagement letters: reference both Acts as applicable per financial year.
- Map clients' carry-forward losses and unabsorbed depreciation. Assessment year 2025-26 and 2026-27 returns LOCK IN the carry-forward position into the 2025 Act regime.
- Re-evaluate corporate concessional regimes (sections 115BAA / 115BAB / 115BAC). The one-time election impact extends into the 2025 Act period.
- Review trust and non-profit organisation compliance. Section 12AB registration cycles align with the 2025 Act framework.
- Update internal documentation: tax-audit reports (Form 3CA / 3CB / 3CD), tax-deducted-at-source quarterly returns, advance tax instalment planners.
- Train articled clerks and audit staff on dual-Act practice.
- Subscribe to Central Board of Direct Taxes notifications for the equivalence Schedule and the new Income-tax Rules 2026.
Key Takeaways
- The Income-tax Act, 1961 stands repealed effective 1 April 2026 by section 536 of the 2025 Act.
- The saving clause preserves pending matters, registrations, certificates, and case-law.
- Assessment year 2025-26 plus assessment year 2026-27 returns are filed under the 1961 Act; tax year 2026-27 onwards under the 2025 Act.
- Substantive law is largely preserved; structural rationalisation is the dominant reform.
- 23 chapters / 536 sections, consolidated from over 50 chapters / 700 effective sections in the 1961 Act.
- Finance Act, 2024 (No. 2) amendments are fully integrated.
- Practitioners must maintain a dual-Act library for the next four to five years.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.