The Income-tax Act 2025: transition from the 1961 Act

In short

The Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 April 2026. It is a rewrite, not a new tax policy: the charge of tax, the five heads of income, residence tests, slab structure, TDS machinery and appellate hierarchy survive almost unchanged, but the language is shorter, the structure is consolidated into tables and schedules, and every section number has changed. The single biggest substantive change for students is the replacement of the "previous year / assessment year" pair with one concept, the tax year. CA Inter and Final, CS, CMA, university B.Com and M.Com papers, and recruitment tests at the Big Four, mid-tier firms and corporate tax teams now examine the 2025 Act, so knowing which concepts moved, which only got renumbered, and how the repeal-and-savings machinery works is essential.

Explained

Why the Act was replaced

• The 1961 Act had run for 64 years and had accumulated roughly 4,000 amendments through annual Finance Acts, making it long, cross-referenced and hard to read.
• Repeated attempts at replacement — the Direct Taxes Code (DTC) 2009 draft / DTC Bill 2010 (lapsed), the Easwar Committee (2016) and the 2017-19 Task Force on Direct Tax Law — set the stage.
• The 2025 Act was introduced as the Income-tax Bill, 2025, examined by a Select Committee of the Lok Sabha, and enacted in 2025 to commence from 1 April 2026.
• Stated objective: simplification and consolidation, broadly tax-neutral. Rates, exemptions and the overall tax burden were not the vehicle of reform — those continue to be set by the annual Finance Act.
• Drafting devices used: shorter sentences, removal of provisos and explanations in favour of numbered sub-sections, tables and formulae inside the section, consolidation of scattered provisions (for example all TDS rates brought together), and plain-language definitions.

What is genuinely new

• Tax year: the twelve-month period beginning 1 April for which income is computed and taxed. It replaces the pair "previous year" and "assessment year". For a new business or newly created source, the tax year begins on the date of setting up and ends on the following 31 March.
• Consequence: a return, assessment or appeal is now described by a single year. Income earned in the year beginning 1 April 2026 belongs to tax year 2026-27 — under the old law this was previous year 2026-27 / assessment year 2027-28.
• Consolidated tables: TDS/TCS rates, presumptive rates, and the list of exempt incomes appear as tables and schedules rather than long lettered clauses, so reading is by row rather than by sub-clause.
• Renumbering: the Act has 536 sections in 23 chapters with 16 schedules — more numbered sections than the 1961 Act's nominal ~298, but far fewer words, because the lettered insertions (115BAC, 194-IA, 206C style) that had swollen the old Act to some 800-odd effective sections are folded into plain sequential numbering. Alphanumeric sections are largely gone. Forms and rules were reissued under the new Income-tax Rules, 2026.
• Schedules: much detail formerly in rules or long provisos (for example valuation of perquisites, categories of exempt entities) sits in schedules to the Act.
• Caution for exams: quote a 2025 Act section number only where you are certain; otherwise name the provision ("the section charging income tax", "the provision on deduction of tax from salary"). Examiners in the transition period accept the provision by name and generally accept either numbering where the question does not specify.

What carried over substantially unchanged

• Charge of tax on the total income of every person at rates fixed by the Finance Act; person still covers individual, HUF, company, firm, AOP/BOI, local authority and artificial juridical person.
• Residential status: the 182-day and 60-day + 365-day tests for individuals, the "resident but not ordinarily resident" category, the deemed-resident rule for high-income Indian citizens not taxed elsewhere, and place-of-effective-management for companies.
• Five heads of income: salaries; income from house property; profits and gains of business or profession; capital gains; income from other sources.
• Scope of total income: residents taxed on world income, non-residents on income received, accruing or arising in India or deemed to do so.
• Two regimes: the default simplified regime with lower slab rates and very few deductions, and the optional old regime with deductions and exemptions. The slab rates and rebate for each year come from the Finance Act, not from the Act itself.
• Machinery: PAN/TAN, advance tax in four instalments, TDS/TCS, self-assessment, return filing, processing, scrutiny and reassessment, faceless assessment and appeal, CIT(A) → ITAT → High Court → Supreme Court, penalties and prosecution, Advance Rulings, and the General Anti-Avoidance Rule.
• International taxation: treaty override in favour of the assessee, transfer pricing with arm's length methods, safe harbour, APAs, and equalisation-style provisions as amended.
• GST, customs and other indirect taxes are untouched — the 2025 Act is a direct-tax statute only.

Repeal and savings — how the two Acts coexist

• The 1961 Act is repealed, but a repeal-and-savings provision preserves everything already done under it. The 1961 Act therefore continues to govern the periods it applied to.
• Rule of thumb: the law of the year of income governs the computation of that year's income. Income of previous year 2025-26 (assessment year 2026-27) is computed and assessed under the 1961 Act even though the assessment work happens after 1 April 2026.
• Pending proceedings — assessments, reassessments, appeals, revisions, rectifications, refunds, penalty and prosecution matters relating to assessment year 2026-27 and earlier — continue under the 1961 Act, before the same authorities, as if it had not been repealed.
• Notifications, circulars, approvals, registrations (for example of trusts), certificates (lower-deduction certificates), and PAN/TAN issued under the 1961 Act stay valid to the extent they are consistent with the 2025 Act.
• Losses and unabsorbed depreciation brought forward from years under the 1961 Act continue to be carried forward and set off under the 2025 Act, for the remaining part of their original eight-year (or indefinite, for unabsorbed depreciation) window.
• Cost of acquisition, dates of acquisition, written-down value of blocks of assets, and MAT credit carry over as determined under the 1961 Act.
• Judicial precedent on provisions re-enacted in the same terms continues to be persuasive — a settled interpretation of identical words survives renumbering. Where the 2025 Act deliberately changes the words, old case law on those words is weakened.

Mapping old to new — how to work in practice

• The Income Tax Department published a section-mapping utility (old section → new section and new section → old section) along with the Act; practitioners rely on it rather than memory.
• Practical habit in firms and in answer books: state the concept first, then the number — "deduction of tax at source on salary under the 2025 Act (formerly section 192)".
• Software, ERP TDS masters, payroll engines, Form 16/16A/26AS layouts, ITR schemas and audit report formats were all reissued; a transition project in a company typically means remapping section codes in the payroll/AP system, not changing rates.
• Documents drafted before the transition (loan agreements, employment contracts, trust deeds, DTAA-related certificates) cite 1961 Act sections; these are read with the help of the general clause that a reference to a repealed enactment is construed as a reference to the corresponding provision of the new one.

Finance Act 2026 changes layered on top

• MAT is 14% of book profit and is a final tax — this removes the earlier credit-and-set-off mechanism for years it applies to, though MAT credit earned in earlier years is dealt with under the transition rules.
• Buy-back of shares is taxed as capital gains in the shareholder's hands from 1 April 2026 (the earlier company-level buy-back tax / deemed-dividend treatment no longer applies to buy-backs from that date).
• GST compensation cess ended 1 February 2026 (relevant to indirect tax questions, not to the direct-tax Act).
• Slab rates, rebate, surcharge and cess for a tax year must be taken from the Finance Act for that year; do not assume last year's numbers.

Advantages and limitations of the new Act

• Advantages: shorter and more readable; tables reduce cross-referencing; one "tax year" removes the commonest beginner confusion; consolidation makes TDS and presumptive provisions easier to apply; digital-first forms and faceless machinery are built into the structure.
• Limitations / transition costs: every citation in textbooks, judgments, software, contracts and internal manuals is now out of date; two statutes run in parallel for several years because of pending old-year assessments; fresh litigation is likely on whether re-drafted words changed meaning; precedent value of old case law on altered wording is uncertain; practitioners and students must hold both numbering systems for a while.

Key points

• Income-tax Act, 2025 - replaced the Income-tax Act, 1961 from 1 April 2026; a rewrite for simplicity, broadly tax-neutral.
• Tax year - single twelve-month period from 1 April replacing "previous year" + "assessment year"; for a new source it starts on the date of setting up.
• Mapping - income of 1 April 2026 to 31 March 2027 = tax year 2026-27 = old PY 2026-27 / AY 2027-28.
• Repeal and savings - the 1961 Act continues to govern assessment year 2026-27 and earlier, including pending appeals and penalties.
• Renumbering - every section and form number changed; alphanumeric sections (115BAC, 194-IA style) largely eliminated; use the department's mapping utility.
• Income-tax Rules, 2026 - the rules and forms reissued under the new Act.
• Unchanged core - charge of tax, person, residential status tests, five heads, scope of total income, two regimes, TDS/advance tax, appellate hierarchy, GAAR, transfer pricing.
• Rates still come from the Finance Act - the Act carries machinery; the annual Finance Act carries slabs, surcharge, cess and rebate.
• Carry-forward continuity - brought-forward losses, unabsorbed depreciation, WDV of blocks and cost of acquisition carry over as computed under the 1961 Act.
• Registrations and certificates - trust registrations, lower/nil deduction certificates, PAN and TAN remain valid.
• Precedent - case law on identically re-enacted words remains persuasive; on deliberately changed words it weakens.
• MAT 14% and final (Finance Act 2026) - no longer a credit-generating minimum tax for the years it covers.
• Buy-back - taxed as capital gains in the shareholder's hands from 1 April 2026.
• Lineage - DTC 2009/2010 draft, Easwar Committee 2016, Task Force 2017-19 preceded the 2025 Act.
• Exam practice - name the provision; add the number only when sure of it; state which Act applies to the year in question.
• No change to indirect tax - GST (5%/18%/40% slabs since 22 September 2025) and customs are governed by their own statutes.

Formulas and examples

Example 1 — Which Act applies? Mr Rao earns professional income in the twelve months ended 31 March 2026 and files his return in July 2026. The department issues a scrutiny notice in December 2026 and the matter goes to appeal in 2028.

• Income period = 1 April 2025 to 31 March 2026 → previous year 2025-26, assessment year 2026-27.
• That year falls before the commencement date, so computation, return, assessment and appeal all run under the Income-tax Act, 1961, preserved by the repeal-and-savings provision.
• The fact that the work happens in 2026, 2027 and 2028 is irrelevant. His next year's income (1 April 2026 to 31 March 2027) is tax year 2026-27 under the 2025 Act.

Example 2 — Year naming for a new business Ms Iyer sets up a design studio on 1 September 2026 and closes her first accounts on 31 March 2027.

• Her first tax year is 2026-27, running 1 September 2026 to 31 March 2027 — a period of 7 months, not 12.
• Her second tax year is 2027-28, a full twelve months.
• Under the old vocabulary the first period would have been previous year 2026-27 (7 months) assessed in assessment year 2027-28; the 2025 Act collapses this into one label.

Example 3 — Carry-forward across the transition A company has a business loss of ₹40,00,000 for previous year 2024-25 (assessment year 2025-26) and unabsorbed depreciation of ₹12,00,000 from the same year, both determined under the 1961 Act. In tax year 2026-27 its business profit before set-off is ₹30,00,000.

• Business loss of AY 2025-26 is eligible for set-off against business income for 8 assessment years, i.e. up to AY 2033-34 — equivalently up to tax year 2032-33. Tax year 2026-27 is well inside the window.
• Set-off order: current depreciation, then brought-forward business loss, then unabsorbed depreciation.
• Business loss set off = ₹30,00,000 → taxable business income nil; business loss still to carry forward = 40 − 30 = ₹10,00,000; unabsorbed depreciation of ₹12,00,000 carries forward in full (no time limit).
• The entitlement is preserved by the savings provision; the quantum is the figure determined under the 1961 Act.

Example 4 — Tax computation under the 2025 Act machinery Mr Khan, resident individual below 60, tax year 2026-27, opts for the simplified default regime. Salary income after standard deduction ₹13,20,000; interest from savings bank ₹18,000; no other income; TDS on salary ₹92,000. Assume the Finance Act, 2026 slabs for the default regime are: nil up to ₹4,00,000; 5% on ₹4,00,001-8,00,000; 10% on ₹8,00,001-12,00,000; 15% on ₹12,00,001-16,00,000 (verify the year's slabs from the Finance Act before use — they change annually).

• Total income = 13,20,000 + 18,000 = ₹13,38,000.
• Tax: first ₹4,00,000 → nil; next ₹4,00,000 at 5% → ₹20,000; next ₹4,00,000 at 10% → ₹40,000; balance ₹1,38,000 at 15% → ₹20,700.
• Tax before cess = 20,000 + 40,000 + 20,700 = ₹80,700. Cess at 4% = ₹3,228. Total tax = ₹83,928.
• Less TDS ₹92,000 → refund of ₹8,072. Note the deduction for savings-bank interest and most Chapter-VI-A style deductions are not available in the default regime.

Example 5 — MAT as a final tax (Finance Act 2026) A domestic company for tax year 2026-27 has book profit ₹5,00,00,000 and normal total income computed under the Act of ₹1,20,00,000; assume its normal tax (ignoring surcharge and cess) is ₹27,00,000 at 22.5%-type effective rates used for illustration.

• MAT at 14% of book profit = 0.14 × 5,00,00,000 = ₹70,00,000.
• MAT (₹70,00,000) exceeds normal tax (₹27,00,000), so MAT applies, plus applicable surcharge and cess.
• Because MAT is now a final tax, the excess of ₹43,00,000 does not become MAT credit available for set-off in later years — a key difference from the 1961 Act's position.

Where it is used

• Big Four and mid-tier tax practice (Deloitte, PwC, EY, KPMG, Grant Thornton, BDO, and Indian firms): re-drafting opinions, engagement letters, tax notes and audit checklists with new citations; dual-numbering client memos during the transition.
• Corporate tax and finance teams: remapping TDS section codes in SAP/Oracle/Tally masters, payroll Form 16 configurations, vendor-master TDS logic, and tax-audit working papers.
• Statutory audit and tax audit: disclosure of the applicable statute per year, deferred-tax remeasurement for the MAT change, and verification of brought-forward losses across the transition.
• Litigation and appellate work: old-year appeals argued under the 1961 Act while advisory work is given under the 2025 Act; arguing the continuity of precedent on re-enacted wording.
• Banking, insurance and capital markets: interest and dividend TDS certificates, buy-back structuring now taxed as capital gains, and withholding on non-resident payments under the new section codes.
• Roles: Article assistant, tax associate, direct-tax manager, transfer pricing analyst, payroll compliance executive; recruitment tests at these firms ask year-naming and applicable-statute questions directly.

Interview questions

• Q: When did the Income-tax Act, 2025 come into force and what did it replace? A: It came into force on 1 April 2026 and replaced the Income-tax Act, 1961, which stands repealed subject to a savings provision.
• Q: What is a "tax year"? A: The twelve-month period from 1 April to 31 March for which income is computed and taxed; for a newly set-up business or source it starts on the date of setting up and ends on the following 31 March.
• Q: Income earned between 1 April 2025 and 31 March 2026 — which Act governs it? A: The Income-tax Act, 1961, because the 2025 Act applies to income of periods beginning on or after 1 April 2026; the savings provision keeps the old Act alive for earlier years and pending proceedings.
• Q: Did the 2025 Act change the number of heads of income? A: No — the same five heads continue: salaries, house property, business or profession, capital gains, and other sources.
• Q: Has the tax burden changed because of the new Act? A: Not by the Act itself; it is broadly tax-neutral machinery. Rates, surcharge, cess and rebate continue to be fixed by the annual Finance Act, and the Finance Act 2026 made separate changes such as MAT at 14% and buy-back taxation.
• Q: What happens to a loss carried forward from assessment year 2024-25? A: It continues to be carried forward and set off under the 2025 Act for the balance of its original eight-year window, at the quantum determined under the 1961 Act.
• Q: Is case law decided under the 1961 Act still useful? A: Yes, where the 2025 Act re-enacts the same words, settled interpretation remains persuasive; where the wording was deliberately changed, the old precedent carries much less weight.
• Q: What is the status of a lower-deduction certificate or a trust registration granted under the 1961 Act? A: It remains valid under the savings provision to the extent consistent with the 2025 Act; such approvals were not required to be obtained afresh merely because of the repeal.
• Q: How is the change in MAT relevant to accounts? A: MAT at 14% as a final tax removes the future set-off benefit for the years it applies to, so any MAT credit asset recognised on that expectation has to be reassessed under Ind AS 12 / AS 22.
• Q: How would you cite a provision safely during the transition? A: State the concept and, where needed, both numbers — for example "TDS on salary under the 2025 Act (formerly section 192)" — and rely on the department's section-mapping utility rather than memory.
• Q: Did the 2025 Act change GST or customs? A: No. It is a direct-tax statute; GST (with 5%, 18% and 40% slabs since 22 September 2025) and the Customs Act are separate and unaffected.
• Q: Name the earlier attempts at replacing the 1961 Act. A: The Direct Taxes Code draft of 2009 and the DTC Bill 2010 (which lapsed), followed by the Easwar Committee of 2016 and the Task Force on Direct Tax Law of 2017-19.

Common mistakes

• Writing "assessment year" for income of a period beginning on or after 1 April 2026 — that income belongs to a tax year, with one label only.
• Equating tax year 2026-27 with assessment year 2026-27; tax year T corresponds to the old assessment year T+1.
• Applying the 2025 Act to assessment year 2026-27 or earlier assessments and appeals — those remain under the 1961 Act.
• Assuming the new Act changed slabs, deductions or exemptions; rates come from the Finance Act, and the Act itself was broadly neutral.
• Quoting a 2025 Act section number from guesswork, or assuming new numbers are the old ones shifted by a fixed amount — they are not; name the provision if unsure.
• Treating brought-forward losses, WDV or cost of acquisition as having to be recomputed under the new Act, instead of carried over as determined earlier.
• Continuing to claim MAT credit for years in which MAT is a 14% final tax, or applying the old buy-back treatment to buy-backs on or after 1 April 2026.

Related topics

Income tax basics · Corporate tax basics · TDS and tax filing basics · Deductions from total income and set-off and carry-forward of losses · Income tax assessments, notices, appeals and faceless proceedings · International taxation: residence, DTAA and transfer pricing