2026 | Vol 2(1) | January

After careful review of India's more than six decade old income-tax law “The Income-Tax Act, 1961 (Act No.: 43 of 1961),” the Indian government first introduced “The Income-tax Bill, 2025” which was later withdrawn for revision and referred to a Select Committee of Parliament. After recommendations and suggestions received from the Select Committee, again revised the first introduced Bill and introduced second version of said Bill “The Income-Tax (No. 2) Bill, 2025” which was passed by Lok Sabha on August 11, 2025 and Rajya Sabha on August 12, 2025. On August 21, 2025, The Income-Tax Act, 2025 (Act No.: 30 of 2025) received Presidential assent and notified in the Gazette of India which shall come into force on April 1, 2026.

The Income-Tax Act, 2025 (Act No.: 30 of 2025) enacted by Parliament in the Seventy-sixth Year of the Republic of India to consolidate and amend the law relating to income-tax. A step toward simplifying the income taxation laws in India with simplified structure, bringing more transparency, digital integration, easy and improved tax filing process and effective compliance mechanism. The new Act introduced new terminology “Tax Year” replacing it with confusing “Assessment Year” and “Previous Year”.

The primary catalyst for the new Act was the sheer complexity of its predecessor. Over 60 years, the 1961 Act had grown to include over 800 sections, thousands of provisos, and circulars that often contradicted one another.

The 2025 Act achieves four fundamental pillars:

Structural Simplification: The number of sections has been reduced from roughly 819 to 536, organized into 23 chapters and 16 schedules. Approximately 1,200 provisos and 900 explanations were removed or integrated into the main text to eliminate legal "fine print."

Clarity in Language: The Act uses plain English and removes archaic legal jargon (such as "without prejudice to the generality of the foregoing").

Digital Integration: For the first time, concepts like "Virtual Digital Assets" and "Virtual Digital Space" are codified from the ground up rather than being added as afterthoughts.

Taxpayer-Centricity: The Act shifts the burden of compliance through pre-filled forms and consolidated TDS tables.

Fundamental Conceptual Shifts

The 2025 Act introduces two major "identity" changes that simplify how taxpayers view their obligations.

Replacement of "Assessment Year"

In the 1961 Act, taxpayers struggled with the distinction between the "Previous Year" (income earned) and the "Assessment Year" (income taxed). The 2025 Act eliminates this duality, introducing a unified "Tax Year." The Tax Year is defined as the 12-month period of the financial year commencing on April 1st. You now file taxes for the Tax Year in which the income was earned, matching global standards.

Two-Tier Residency Status

The Act simplifies the classification of taxpayers. The old three-tier system (Resident and Ordinarily Resident, Resident but Not Ordinarily Resident, and Non-Resident) has been streamlined into a two-tier residency status. This reduces the complexity of determining tax liability for individuals moving in and out of the country.

The New Tax Regime: The Default Standard

Under the 2025 Act, the New Tax Regime (Section 202) is the default pathway. It has been significantly sweetened to encourage migration away from the old system of exemptions.

Revised Tax Slabs (FY 2025-26 onwards)

The slabs have been restructured to provide maximum relief to the middle class:

Taxable Income (₹)---Tax Rate

Up to 4,00,000---Nil

4,00,001 – 8,00,000---5%

8,00,001 – 12,00,000---10%

12,00,001 – 16,00,000---15%

16,00,001 – 20,00,000---20%

20,00,001 – 24,00,000---25%

Above 24,00,000---30%

[Effective Zero Tax up to ₹12.75 Lakh]

A cornerstone of this Act is the enhanced Section 87A rebate. Resident individuals with a total income up to ₹12 lakh now pay zero tax after claiming a rebate of up to ₹60,000. For salaried individuals, when the increased Standard Deduction of ₹75,000 is added, the effective tax-free limit rises to ₹12.75 lakh.

Key Provisions for Salaried Individuals and Families

Standard Deduction: Increased from ₹50,000 to ₹75,000 in the new regime.

HRA Benefits (Old Regime): The 50% HRA exemption has been extended to include Bengaluru, Hyderabad, Pune, and Ahmedabad, treating them as metro cities on par with Mumbai, Delhi, Kolkata, and Chennai.

Education and Hostel Allowance: The draft rules accompanying the Act propose significant hikes in allowances (e.g., Education allowance up to ₹3,000 per month and Hostel allowance up to ₹9,000 per month).

Unified Pension Scheme (UPS): To support the newly introduced UPS, the Act provides tax exemptions for up to 60% of the pension corpus received upon retirement or superannuation.

Capital Gains and Investment Reforms

The Act preserves the core logic of Capital Gains but reorganizes the sections for better navigation (Clauses 196–198).

Share Buybacks: A major shift occurs here. Previously, buyback proceeds were treated as "deemed dividends" and taxed at slab rates. Under the 2025 Act, these are now taxed as Capital Gains, which often results in a lower tax rate for investors.

Sovereign Gold Bonds (SGB): The tax exemption on redemption is now restricted to bonds bought at the original issue. Bonds purchased in the secondary market will now attract capital gains tax upon redemption.

Virtual Digital Assets (VDA): The definition of VDAs has been expanded to include "Virtual Digital Spaces" (like the Metaverse or cloud servers used for asset storage), ensuring the law stays ahead of technological evolution.

Procedural and Compliance Simplification

One of the most praised aspects of the 2025 Act is the "cleaning up" of the administrative burden on businesses and deductors.

The TDS/TCS Consolidation

In the 1961 Act, TDS (Tax Deducted at Source) provisions were scattered across over 60 sections. The 2025 Act consolidates these into three primary pillars:

Section 392: Salary TDS.

Section 393: Residents, Non-residents, and other persons (structured into three easy-to-read tables).

Section 394: Tax Collected at Source (TCS).

Threshold Rationalization

Many TDS/TCS thresholds have been doubled or standardized:

Senior Citizen Bank Interest: TDS threshold increased from ₹50,000 to ₹1,00,000.

Rental Income: Annual threshold raised from ₹2.4 lakh to ₹6 lakh.

Professional Fees: Threshold raised from ₹30,000 to ₹50,000.

LRS TCS: The rate for overseas tour packages and medical/educational remittances has been flattened to 2%, removing the previous complex 5%/20% multi-rate structure.

Business and Corporate Taxation

The 2025 Act focuses on "Ease of Doing Business" by providing certainty to international and domestic entities.

MAT (Minimum Alternate Tax): The MAT rate is proposed at 14%. Crucially, MAT is now a final tax, meaning companies can no longer accumulate new MAT credits to offset future liabilities, though existing credits can be used until 2036.

Block Assessment for Transfer Pricing: Large corporations can now opt for a 3-year "block assessment" for similar international transactions, reducing the need for annual litigation on arm’s length pricing.

Presumptive Taxation for Electronics: To boost "Make in India," a new presumptive tax regime (less than 10% effective rate) has been introduced for non-residents providing technology for electronics manufacturing.

Abolition of Equalisation Levy: The 6% "Google Tax" on digital advertisements has been removed, aligning India with the Global Minimum Tax (Pillar Two) framework.

Dispute Resolution and Enforcement

The Act introduces a "Trust First, Scrutinize Later" philosophy.

Extended Filing for Updated Returns: Taxpayers now have four years (up from two) to file updated returns and rectify errors voluntarily.

Search and Seizure: The definition of "books and documents" has been modernized to explicitly include "information stored in electronic media or cloud systems."

Penalty Rationalization: Assessment and penalty proceedings will now be integrated into a single order, preventing taxpayers from being dragged through multiple, overlapping legal battles.

Conclusion

The Income Tax Act, 2025 is more than just a re-numbering of sections; it is a fundamental redesign of India's fiscal relationship with its citizens. By reducing the legislative volume by 40%, flattening tax slabs, and digitizing the compliance journey, the government aims to increase the tax-to-GDP ratio through voluntary compliance rather than aggressive enforcement. For the average Indian, it offers the prospect of a simpler filing season and more money in the pocket, while for the global investor, it provides the "predictability and certainty" that the old 1961 Act often lacked.

References

Gazette of India: https://egazette.gov.in/WriteReadData/2025/265620.pdf

Press Information Bureau: https://www.pib.gov.in/PressNoteDetails.aspx?NoteId=155137&ModuleId=3&reg=3&lang=2

India Code: https://www.indiacode.nic.in/bitstream/123456789/2435/1/a1961-43.pdf