Income Tax Act 2025: 10 Major Changes Every Taxpayer Must Know in 2026

TL;DR

The Income Tax Act, 2025 has replaced the Income Tax Act, 1961 from 1 April 2026 for tax years beginning on or after that date. The new law is designed to simplify the structure of Indian income-tax legislation rather than introduce a completely new tax system.

For taxpayers, some of the most important changes include the replacement of the Assessment Year concept with the Tax Year, consolidation of income-tax return provisions under Section 263, restructuring of TDS provisions under Sections 392 and 393, new reassessment provisions under Sections 279–286, and a reorganised appeals framework.

However, the transition is critical: income earned during FY 2025–26 continues to be governed by the Income Tax Act, 1961 and will be reported as AY 2026–27, while income earned from FY 2026–27 onward falls under the new Act and is referred to as Tax Year 2026–27.

Introduction

India’s income-tax framework has undergone one of its biggest structural changes in decades.

The Income Tax Act, 2025 came into force on 1 April 2026, replacing the Income Tax Act, 1961 for tax years beginning on or after that date. The objective is not simply to change section numbers. The new legislation restructures the law, removes several layers of accumulated provisions, consolidates related rules and introduces a more streamlined framework for taxpayers and tax authorities.

The Income Tax Department states that the new Act contains 536 sections and 16 schedules, compared with 819 sections and 14 schedules under the 1961 Act. The restructuring also incorporates many explanations and provisos into the main provisions and aims to reduce unnecessary cross-referencing.

For taxpayers, however, the biggest challenge in 2026 is understanding which Act applies to which income, return, TDS transaction, assessment or proceeding.

Here are the 10 most important changes every taxpayer should understand.

1. The Assessment Year Concept Has Been Replaced by the Tax Year

One of the most visible changes is the move away from the traditional Previous Year + Assessment Year terminology.

Under the Income Tax Act, 1961, taxpayers generally referred to the year in which income was earned as the Previous Year and the following year as the Assessment Year.

The Income Tax Act, 2025 introduces the concept of a Tax Year.

A Tax Year is a 12-month period beginning on 1 April.

For example:

The Income Tax Department specifically clarifies that there is no Assessment Year under the Income Tax Act, 2025. The Tax Year corresponds to the financial year beginning on 1 April.

Why this matters

This is not merely a terminology change.

Taxpayers, employers, businesses, accountants and tax professionals need to use the correct year when:

• Making tax payments
• Filing returns
• Recording TDS
• Responding to notices
• Maintaining tax records
• Preparing financial statements
• Communicating with the Income Tax Department

Using the wrong Act or tax-year reference can create confusion, particularly during the transition period.

2. The Income Tax Act, 1961 Still Matters in 2026

A common misconception is that the new Act automatically replaces the old Act for every tax matter from 1 April 2026.

That is incorrect.

The Income Tax Department has clarified that income relating to periods before 1 April 2026 continues to be governed by the Income Tax Act, 1961.

For example, income earned between 1 April 2025 and 31 March 2026 is reported through AY 2026–27 under the old Act, even though the return may be filed after 1 April 2026.

At the same time, income earned from 1 April 2026 onward falls under the new Act and is covered by the Tax Year framework.

This means 2026 is effectively a transition year in which taxpayers may need to interact with both frameworks.

Simple example

Suppose Rahul earned ₹12 lakh between April 2025 and March 2026.

His income is related to AY 2026–27 and the Income Tax Act, 1961 applies.

If Rahul earns another ₹12 lakh between April 2026 and March 2027, that income belongs to Tax Year 2026–27 and the Income Tax Act, 2025 applies.

Understanding this distinction is essential before filing or responding to any tax communication.

3. Income-Tax Return Provisions Are Consolidated Under Section 263

The new Act significantly reorganises income-tax return provisions.

Under the Income Tax Act, 2025, Section 263 brings several types of income-tax returns into one unified provision.

It covers:

• Original return under Section 263(1)
• Belated return under Section 263(4)
• Revised return under Section 263(5)
• Updated return under Section 263(6)

The fundamental obligation to file an income-tax return remains broadly similar to the earlier framework, but the provisions are presented in a more consolidated manner.

Updated Return under Section 263(6)

One particularly important provision is the new Act’s treatment of ITR-U.

An updated return can generally be filed within 48 months from the end of the financial year succeeding the relevant tax year, subject to the conditions and additional tax prescribed by law.

The updated return:

• Can be filed even if an original, belated or revised return was not previously filed
• Cannot increase a loss
• Cannot reduce the tax liability
• Cannot increase a refund
• Is generally limited to one updated return per tax year
• Requires additional income tax under the applicable provision

The Income Tax Department confirms that these provisions are substantially aligned with the earlier Section 139(8A) framework.

This makes ITR-U an important compliance mechanism for taxpayers who discover previously unreported income or errors.

4. TDS Provisions Have Been Consolidated

Another major change concerns Tax Deducted at Source (TDS).

Under the old Income Tax Act, TDS provisions were spread across numerous sections, including familiar provisions such as Sections 192, 194C, 194H and 194J.

Under the Income Tax Act, 2025, the TDS framework has been consolidated primarily into:

• Section 392 – TDS on salaries
• Section 393 – TDS on other specified payments

Section 393 uses tables to identify the nature of payment, applicable threshold, recipient category and TDS rate.

Importantly, this is largely a structural simplification rather than a wholesale change in TDS policy. The Income Tax Department states that TDS rates and monetary thresholds have largely been retained.

Important 2026 compliance point

For transactions falling under the new Act, deductors must use the applicable new section/table reference.

For example, for transactions after 1 April 2026, taxpayers should not automatically continue quoting old provisions such as 194C, 194H or 194J where the new Act requires the corresponding Section 393 reference.

The Income Tax Department has specifically warned that using old section references for transactions governed by the new Act may result in system-level validation issues.

5. TDS Transition Depends on the Earlier of Credit or Payment

Businesses handling TDS need to pay particular attention to the transition rule.

The applicable Act depends on when the earlier of credit or payment occurs.

If the earlier event occurs on or before 31 March 2026, the Income Tax Act, 1961 applies.

If the earlier event occurs on or after 1 April 2026, the Income Tax Act, 2025 applies.

Example

Suppose a company credits professional fees to a consultant on 25 March 2026 but pays the consultant in April 2026.

Since the earlier event is the credit in March 2026, the old Act applies to that TDS obligation.

This becomes particularly important for:

• Professional fees
• Contractor payments
• Rent
• Commission
• Interest
• Salary
• Recurring service contracts

Finance teams should therefore update accounting and TDS systems rather than relying solely on old section numbers.

6. Reassessment Has a New Framework Under Sections 279–286

The reassessment framework has also been reorganised.

For Tax Year 2026–27 onward, reassessment provisions are contained in Sections 279 to 286 of the Income Tax Act, 2025.

These provisions govern matters relating to reassessment proceedings and associated timelines.

The Income Tax Department states that the reassessment order under Section 279 is generally required to be passed within one year from the end of the financial year in which the notice under Section 280 was served, subject to specified extensions and exclusions.

What happens to old reassessment cases?

This is where the transition provisions become extremely important.

If reassessment proceedings relating to an earlier tax year were already initiated under the Income Tax Act, 1961 before 1 April 2026, those proceedings continue under the old Act.

Therefore, a taxpayer receiving an old-law reassessment notice should not assume that the new Act automatically applies simply because the proceedings continue after April 2026.

7. Existing Tax Appeals and Litigation Continue Under the Old Act

The new Act does not reset ongoing tax litigation.

Pending proceedings relating to periods governed by the Income Tax Act, 1961 continue under the old legislation in accordance with the transitional provisions.

The new Act reorganises the appeal framework into sections covering:

• First appeals
• ITAT appeals
• High Court appeals
• Supreme Court appeals
• Revision
• Dispute Resolution Committee
• Advance ruling mechanisms

The Income Tax Department states that the overall appellate hierarchy remains materially unchanged:

Assessing Officer → JCIT(A)/CIT(A) → ITAT → High Court → Supreme Court.

If an appeal concerning AY 2026–27 or an earlier year is filed after 1 April 2026, it can still be governed by the old Act because the underlying tax year began before 1 April 2026.

Practical implication

Taxpayers involved in:

• Income-tax appeals
• Reassessment
• Scrutiny
• Penalty proceedings
• Rectification
• Litigation

must identify the relevant tax year and governing law before preparing their response.

8. Losses From Earlier Years Continue to Be Recognised

The transition to the new Act does not automatically wipe out tax losses accumulated under the old legislation.

The Income Tax Department has clarified that losses determined for periods governed by the Income Tax Act, 1961 can continue to be carried forward and set off under the new Act, subject to the applicable conditions.

Section 536 contains repeal-and-saving provisions that preserve specified rights, liabilities and tax attributes from the earlier framework.

For businesses, this is particularly important for:

• Business losses
• Capital losses
• Unabsorbed depreciation
• MAT-related tax attributes
• Other carried-forward tax positions

The important point is that the origin of the loss may be under the old Act, while its utilisation in later tax years may be governed by the new Act.

This makes proper documentation and reconciliation of brought-forward losses essential.

9. The New Act Simplifies the Structure Without Creating a Completely New Tax System

The Income Tax Act, 2025 is often described as a major tax reform, but taxpayers should understand what the reform actually does.

The new legislation is primarily a structural and drafting overhaul.

The Income Tax Department states that the new Act does not itself impose a new tax merely because the legislation has been replaced. Its objectives include simpler language, clearer provisions, consolidation and reduced interpretational complexity.

The reduction in the number of sections is significant:

The new structure incorporates many explanations and provisos into the principal provisions and uses more tables and formulas where appropriate.

For ordinary taxpayers, this should eventually make the law easier to navigate.

However, during 2026, the bigger challenge is learning the new section numbering and transition rules.

10. The New Tax Regime Continues Under Section 202

The new Income Tax Act does not eliminate the new tax regime.

Under the Income Tax Act, 2025, the new tax regime is provided under Section 202.

The Income Tax Department confirms that the new regime continues to be the default tax regime for eligible taxpayers, while taxpayers can opt out subject to the applicable conditions.

This means taxpayers should not assume that the introduction of the new Act automatically means an entirely new tax-regime choice.

Instead, taxpayers should separately evaluate:

• Income level
• Salary structure
• Deductions
• Home-loan interest
• Investments
• Business income
• Eligible exemptions
• Tax regime selection

The Act and the applicable Finance Act provisions should be read together when determining the actual tax payable for a particular tax year.

Income Tax Act 1961 vs Income Tax Act 2025: Quick Comparison

What Should Taxpayers Do Differently in 2026?

The most important step is not memorising hundreds of new section numbers.

Instead, taxpayers should update their compliance process.

1. Identify the applicable tax year

Before filing a return, paying tax or responding to a notice, determine whether the matter relates to:

AY 2026–27 or earlier → generally old Act

Tax Year 2026–27 onward → new Act

2. Update accounting and payroll software

Businesses should ensure their:

• TDS software
• Payroll systems
• Accounting software
• Tax-payment workflows
• Compliance checklists

reflect the new provisions.

3. Update TDS section references

Finance teams should not automatically use familiar old sections such as 194C or 194J for transactions governed by the new Act.

4. Maintain old-year records

Do not discard old tax records simply because the 1961 Act has been repealed.

Past returns, assessments, notices, appeals, losses and tax proceedings can continue to be governed by the old Act.

5. Reconcile carried-forward losses

Businesses should verify:

• Opening losses
• Unabsorbed depreciation
• MAT-related balances
• Capital losses
• Set-off history

before preparing Tax Year 2026–27 computations.

6. Review notices carefully

A tax notice should be analysed based on:

• Relevant year
• Section quoted
• Nature of proceeding
• Date of initiation
• Applicable Act
• Response deadline

Do not assume that every notice issued after 1 April 2026 is automatically under the new Act.

New Income Tax Act 2025: Section Number Changes You Should Know

For taxpayers and finance professionals, these are some of the most useful section-number changes to remember:

These references are especially useful when creating tax content, responding to notices, updating internal SOPs or searching for guidance under the new legislation.

Does the Income Tax Act 2025 Increase Your Tax?

Not automatically.

The replacement of the Income Tax Act, 1961 with the Income Tax Act, 2025 is primarily a restructuring and simplification exercise.

The Income Tax Department specifically states that the new Act does not itself impose a new tax simply by replacing the old legislation. Tax rates and other substantive tax provisions continue to be determined by the applicable law, including relevant Finance Act provisions.

Therefore, taxpayers should avoid assuming that every change in section numbering represents a change in the amount of tax payable.

Why Businesses Need to Pay Special Attention in 2026

For companies, startups, MSMEs and growing businesses, the impact of the new Act extends beyond individual ITR filing.

Businesses should review their entire tax-compliance workflow because the new framework affects:

• TDS
• TCS
• Advance tax
• Income-tax returns
• Reassessment
• Appeals
• Loss carry-forward
• Tax payments
• Notices
• Documentation
• Internal tax controls

The Income Tax Department has also rolled out new challans and portal functionality for payments under the Income Tax Act, 2025 from 1 April 2026.

This makes 2026 an important year for businesses to update tax SOPs rather than simply changing a few section numbers in their templates.

2026 Income Tax Compliance Checklist

Before completing your tax compliance for Tax Year 2026–27, check:

☑ Correct Tax Year selected

☑ Correct Income Tax Act selected

☑ New TDS section references updated

☑ Payroll and accounting systems updated

☑ Advance-tax payments made under the applicable framework

☑ Previous-year losses reconciled

☑ AIS and tax information reviewed

☑ Income and deductions properly documented

☑ Old assessment and litigation records preserved

☑ Tax notices checked for the correct governing Act

☑ ITR provisions under Section 263 understood

☑ Updated-return eligibility reviewed where required

Frequently Asked Questions

1. When did the Income Tax Act, 2025 come into force?

The Income Tax Act, 2025 came into force from 1 April 2026. It applies to tax years beginning on or after that date, while the old Act continues to govern earlier tax years and specified transitional proceedings.

2. Is the Income Tax Act, 1961 completely irrelevant now?

No. The 1961 Act continues to apply to tax years beginning before 1 April 2026 and to specified pending or transitional proceedings. For example, income earned during FY 2025–26 is reported as AY 2026–27 under the old Act.

3. What is a Tax Year under the Income Tax Act, 2025?

A Tax Year is a 12-month period beginning on 1 April. Tax Year 2026–27 refers to the period from 1 April 2026 to 31 March 2027.

4. What is the new section for ITR filing?

Section 263 of the Income Tax Act, 2025 contains the provisions relating to income-tax returns. It covers original, belated, revised and updated returns under different sub-sections.

5. What is the new section for ITR-U?

Updated Return provisions are contained in Section 263(6) of the Income Tax Act, 2025. An updated return is subject to specific eligibility conditions and additional tax provisions.

6. What is the new TDS section under the Income Tax Act, 2025?

Salary TDS is covered under Section 392, while TDS on other specified payments is primarily consolidated under Section 393.

7. Has the new Act changed TDS rates?

The Income Tax Department states that TDS rates and monetary thresholds have largely been retained. The major change is the consolidation and restructuring of provisions.

8. What happens to old income-tax appeals after 1 April 2026?

Pending proceedings relating to periods governed by the old Act generally continue under the Income Tax Act, 1961 under the transitional provisions. A taxpayer does not need to restart an existing appeal merely because the new Act has commenced.

9. Can old tax losses be carried forward under the new Act?

Yes. The repeal-and-saving provisions preserve eligible losses from earlier tax years, subject to the applicable conditions. Their utilisation in later tax years is governed by the applicable framework under the new Act.

10. Does the Income Tax Act, 2025 introduce a completely new tax system?

No. The Act substantially restructures and simplifies the legislation. Many core tax concepts and compliance obligations continue, although their provisions and section numbers have been reorganised.

Conclusion

The Income Tax Act, 2025 is not simply a renumbered version of the Income Tax Act, 1961. It represents a major restructuring of India’s direct-tax legislation, with a new Tax Year framework, consolidated return provisions, reorganised TDS rules, new reassessment provisions and a cleaner appellate structure.

For taxpayers, the biggest issue in 2026 is understanding the transition.

If your income relates to FY 2025–26, the old Act and AY 2026–27 remain relevant. If your income relates to FY 2026–27, the Income Tax Act, 2025 and Tax Year 2026–27 apply.

For businesses, the priority should be updating TDS systems, accounting processes, tax-payment workflows, internal compliance checklists and documentation.

The best approach is not to rely on old section numbers or assumptions. Taxpayers should identify the relevant tax year first, determine the applicable Act, and then apply the correct provision.

For professional assistance with income-tax compliance, ITR filing, tax planning, assessments, appeals, scrutiny and the transition to the Income Tax Act, 2025, ABSM & Associates can help businesses and taxpayers navigate the new framework with structured tax and compliance support.

BLOG BY: ABSM & ASSOCIATES

For income tax and GST compliance, see our Taxation Services service.