Taxpayers must be able to distinguish between matters where the old tax law still applies and those where the new one does
India’s direct tax system is set for a major overhaul, with the Income-tax Act, 2025, coming into force from April 1, 2026, replacing the six-decade-old 1961 law. The reform focuses on simplification – introducing a unified tax year, removing the assessment year, and streamlining provisions into a more structured, tech-friendly format.
While tax rates and core principles remain unchanged, the transition will require taxpayers to adapt to a new framework even as they continue dealing with legacy cases under the old law.
What changes for taxpayers from April 1
A key change is the shift to a single ‘tax year’, replacing the ‘previous year’ and ‘assessment year’, aligning income with its assessment, and reducing interpretational complexities in return filing and tax administration.
While the concept of shorter tax periods existed earlier under the law, the new Act formalises this within a unified ‘tax year’ framework, improving clarity without changing the underlying principle.
“Alongside structural changes, the draft Income Tax Rules, 2026, propose key updates. Thresholds for allowances and perquisites — such as children’s education, hostel expenses, employer gifts, and valuation of benefits like cars and concessional loans — have been raised to reflect current realities. At the same time, disclosure norms have been tightened, with added transparency requirements, including specifying the relationship with the landlord for house rent allowance (HRA) claims,” says Sandeepp Jhunjhunwala, partner, Nangia Global.
The tax audit framework has been streamlined, with Forms 3CA, 3CB and 3CD merged into a single, more detailed Form 26.
“Compliance timelines have also been revised: the window for TDS/TCS corrections is reduced to two years (with a one-time transition window available till March 31, 2026), and 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,” adds Jhunjhunwala.
However, the simultaneous rollout of new forms — covering areas like foreign remittances and withholding tax—poses execution challenges. Technical delays could potentially disrupt taxpayer compliance.
What stays unchanged
Despite a major structural overhaul, the core framework of taxation under the Income-tax Act, 2025, remains largely unchanged. The reform focuses on simplification and administration rather than policy.
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 under the new Act may be more beneficial.
“Key principles such as residential status, income classification, deductions, transfer pricing, and anti-avoidance rules continue in substance, ensuring continuity and reliance on existing jurisprudence. The repeal of the Income-tax Act, 1961, is supported by savings provisions, which protect past assessments, ongoing litigation, and accrued rights, ensuring a smooth transition without legal disruption,” says Jhunjhunwala.
However, the shift to a renumbered and reorganised law will require taxpayers and professionals to adjust to new references and formats, making the initial phase a learning curve despite improved clarity over time.
Key positives
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 prolonged litigation. The new law moves towards clearer, more direct language, which should reduce such differences and lower the volume of notices and appeals over time.
“It also introduces a leaner, more streamlined structure, making the law easier to navigate — particularly for individual taxpayers and small businesses. At the same time, it retains continuity in core areas, with tax rates, deductions and exemptions largely unchanged, providing stability and predictability for financial planning,” says Shubham Jain, director, SVAS Business Advisors.
Transitional pains
While the new Act is a step forward, the transition brings costs that are often underestimated. Even if core principles remain unchanged, moving to a new framework requires updates to accounting systems, payroll software and compliance tools. For large organisations, this means added effort across IT, vendors and tax teams, while for smaller businesses and individuals, the challenge is more practical, since guidance may still refer to the old law, creating confusion, and increasing the risk of errors.
“There is also a learning curve as tax professionals reorient themselves to the new structure. Importantly, the shift is not a clean break. The earlier law will continue to apply to past years and ongoing matters, meaning taxpayers and advisors will have to deal with two parallel regimes, adding to the overall complexity. For instance, the same chartered accountant handling your FY 2026–27 return under the new Act may simultaneously be dealing with a notice for AY 2022–23 under the old one, which underlines the practical complexity of this overlap,” says Jain.
How to optimise benefits
India will transition to the Income Tax Act 2025 from April 1, with a more streamlined and modern framework. A key change is the new tax regime becoming the default, with a higher basic exemption limit of ₹4 lakh, a standard deduction of ₹75,000, and a rebate of ₹60,000 — effectively reducing tax liability to nil for many. Progressive slab rates up to ₹24 lakh make it particularly attractive for middle-income salaried individuals with simpler pay structures.
“The revised perquisite rules also offer relief, with higher limits for meal coupons, gift vouchers, and child education allowance, along with updated valuation norms for company cars and expanded HRA benefits to more cities. These changes better reflect current cost structures and improve overall tax efficiency,” says Niranjan Govindekar, partner – corporate tax, tax & regulatory advisory at BDO India.
However, taxpayers claiming HRA, leave travel allowance (LTA) and deductions under Chapter VI-A may still find the old regime more beneficial, making it important to reassess their choice each year. “To maximise benefits, salaried individuals should undertake a holistic review of their salary structure and tax position annually,” Govindekar adds.
Sudhakar Sethuraman, partner, Deloitte India, points out that taxpayers can benefit from the new Act by using available navigation tools, comparison utilities offered by professionals, and government publications to better understand changes vis-à-vis the Income-tax Act, 1961. “They should undertake a comprehensive impact assessment of provisions affecting their business or personal tax position, review existing tax positions, documentation and reporting frameworks in light of the draft rules,” he adds.
Mistakes to avoid during transition
- Assuming automatic or uniform transition across all tax matters
- Using the 1961 Act where the new law applies
- Applying the new law to past years, ongoing disputes, and legacy matters
- Failing to clearly distinguish between matters governed by the old and new frameworks
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