Income Tax Act 2025 Explained: A Practical Breakdown of India's New
Direct Tax Law for FY 2026-27

If you have logged in to the income tax e-filing portal anytime after April 1, 2026, you have already noticed something different — the term "Assessment Year" has quietly disappeared, replaced by "Tax Year". That single change is the visible tip of a much larger reform: the Income Tax Act 2025 has officially replaced the Income Tax Act 1961 as India's direct tax law. For most taxpayers, the practical impact lands during the ITR filing 2026 season — different terminology, renumbered sections, a clearer slab structure, and a few genuinely new rules that did not exist under the old Act.

This guide breaks down the New Income Tax Act 2025 from the angle that actually matters — what changes for you in real life. Whether you are a salaried employee comparing old vs new regime, a freelancer trying to file ITR-4 under the simplified Income Tax Act 2025 provisions, a private limited company facing first-year tax audit under the new section numbers, or an NRI with Indian rental income, the rules of ITR filing 2026 have shifted. To navigate the transition smoothly, our Income Tax services team handles Income Tax Act 2025 cases daily across our six office locations. Call +91 9821 83 26 83 to speak with a CA today.

Section 1 — What Changes for Individual Taxpayers Under Income Tax Act 2025

Let us start with what most people actually want to know — does my tax bill change under the Income Tax Act 2025? For most salaried individuals, pensioners and freelancers, the short answer is: not much, if you stay on the new regime. The New Income Tax Act 2025 preserves the headline relief of the old regime — zero tax up to Rs.12 lakh of total income, with Rs.75,000 standard deduction taking the effective threshold to Rs.12.75 lakh for salaried. What changes is the wrapping, not the substance.

Three practical shifts to know about for ITR filing 2026:

• • The new regime is now the legislative default under the Income Tax Act 2025 — you have to actively opt out using Form 10-IEA if you want the old regime. Skipping this form locks you into the new regime for the entire Tax Year.
• • HRA exemption now uses an 8-city framework instead of the old 4-metro rule — Bengaluru, Hyderabad, Pune, Ahmedabad, Surat and Gurugram have been added alongside the four traditional metros. This matters for salaried employees in those cities.
• • Capital gains structure carried forward under renumbered sections — 12.5% LTCG on equity above Rs.1.25 lakh, 20% STCG on listed equity. No surprises here, but the section references in your CA's computation sheet will look different.

For a salaried employee earning Rs.18 lakh, the Income Tax Act 2025 produces an identical tax outcome to FY 2024-25 — Rs.1.5 lakh tax (new regime, with standard deduction) — but the language on your Form 16 and ITR will all read "Tax Year" instead of "Assessment Year". For a freelancer under presumptive taxation, the Section 44ADA equivalent under the New Income Tax Act 2025 keeps the same 50% presumption and Rs.50 lakh threshold. Substance preserved, packaging renewed.

Section 2 — The Tax Year Concept: Why "AY 2026-27" No Longer Exists

The single biggest terminology change in the Income Tax Act 2025 is the introduction of "Tax Year" as the unified time period. Under the old Income Tax Act 1961, every taxpayer juggled two parallel years — Previous Year (when income was earned) and Assessment Year (when income was filed and assessed). For a salary earned between April 2024 and March 2025, you filed an ITR in 2025 calling it AY 2025-26. The New Income Tax Act 2025 collapses these into one period — Tax Year 2025-26 means the financial year April 2025 to March 2026, no separate AY needed.

In day-to-day conversation, most CAs and tax professionals will continue using AY/PY language for a while during the transition. But every official document under the Income Tax Act 2025 — ITR forms, AIS, TIS, Form 26AS, notices, assessment orders — uses Tax Year exclusively. If you receive a notice referencing "Tax Year 2025-26", do not confuse it with the old AY 2025-26 (which under old language meant FY 2024-25). The mapping is: Tax Year 2025-26 under the new Act = AY 2026-27 under the old Act.

For tax notice handling on past assessments, the old terminology continues. If you have a Section 148 reassessment notice for FY 2021-22, the notice still says "AY 2022-23" because that proceeding is governed by Income Tax Act 1961 provisions. Our Income Tax Notice response team handles both Income Tax Act 1961 and Income Tax Act 2025 notice work — the legal frameworks will run in parallel for several years.

Section 3 — The Slab Structure Under Income Tax Act 2025 (New Regime)

Here is the new regime slab structure under the New Income Tax Act 2025 for Tax Year 2025-26 — the rates that will determine your ITR filing 2026 computation:

For taxpayers with total income up to Rs.12 lakh, the Section 87A rebate equivalent under the Income Tax Act 2025 brings tax payable down to zero. For salaried with Rs.12.75 lakh of CTC and the Rs.75,000 standard deduction, this means zero income tax in Tax Year 2025-26. From Rs.12.75 lakh upwards, marginal slab rates kick in.

Worked example — a salaried employee with Rs.20 lakh annual income and the new regime under Income Tax Act 2025: taxable income after standard deduction Rs.19.25 lakh. Tax computation: Nil on first 4 lakh + Rs.20,000 on 4-8 lakh slab + Rs.40,000 on 8-12 lakh slab + Rs.60,000 on 12-16 lakh slab + Rs.65,000 on 16-19.25 lakh portion = Rs.1,85,000 + 4% cess = Rs.1,92,400. Compare to old regime with typical Rs.2 lakh of 80C, 80D, HRA deductions — old regime pays around Rs.2,40,000. New regime saves Rs.47,600 for this profile.

Section 4 — What Stays the Same Under Income Tax Act 2025

A common misreading of the New Income Tax Act 2025 is that everything has been rewritten. In reality, most taxpayer-facing rules have been preserved with just renumbering and language cleanup. If you focus only on what genuinely changes, you save yourself unnecessary worry. Here is what is fundamentally unchanged under the Income Tax Act 2025:

For NRI taxation, this stability matters most. Residential status determination, the 182-day rule, DTAA application, repatriation under FEMA, Form 15CA/15CB requirements — all carry forward under the New Income Tax Act 2025 with minor renumbering. NRIs filing for Tax Year 2025-26 will find the substance of their tax position identical to FY 2024-25, just expressed in the new section language. The same applies to transfer pricing under the new Act — Form 3CEB filing continues, contemporaneous documentation requirements continue, but the section references shift.

Section 5 — Income Tax Act 2025 for Businesses, LLPs and Companies

Business taxpayers see deeper architectural change under the Income Tax Act 2025. The 100+ business-related sections of the Income Tax Act 1961 have been consolidated into 4 main chapters covering business income computation, presumptive taxation, partnerships and LLPs, and corporate taxation. The section numbers are different, but the rate structure is preserved — 22% concessional rate for companies (former Section 115BAA), 15% for new manufacturing, MAT at 15% with simplified language.

The biggest procedural impact on businesses is around documentation. Tax Audit report under Form 3CD has been restructured to follow the Income Tax Act 2025 chapter sequence rather than the old Act's scattered section references. Auditors and CAs need new Form 3CD templates from FY 2026-27 onwards. Similarly, TDS return filing under Forms 24Q and 26Q references the new section numbers — payroll software and TDS utilities have been updated by major vendors (Webtel, Saral, ClearTDS) for the new Act.

For Pvt Ltd companies and LLPs, the New Income Tax Act 2025 aligns more cleanly with the Companies Act 2013 — both Acts now use parallel terminology for related-party transactions, dividend distribution, and inter-corporate loans. MCA filings like AOC-4 and MGT-7 also reflect the new Act's section references in disclosure notes. Our Business Tax Filing team has been guiding clients through the documentation refresh for Tax Year 2025-26 onwards.

Transitional rules to know about

Critical to understand — the Income Tax Act 2025 applies prospectively from April 1, 2026. All assessments, reassessments, appeals and scrutiny proceedings for FY 2024-25 and earlier continue under Income Tax Act 1961 provisions. Carried forward losses, MAT credits, unabsorbed depreciation, and similar balances are explicitly preserved through bridging provisions. The Income Tax Department has issued multiple clarification circulars in March-April 2026 covering specific transitional questions — our tax consultancy team tracks these and applies them to client positions during ITR filing 2026.

8-Step Action Plan to Adapt to Income Tax Act 2025

Here is a sequenced action list to make the New Income Tax Act 2025 transition smooth before your ITR filing 2026. Most steps are quick; the entire list takes a single afternoon for an individual, a couple of days for a business. Our Income Tax Consultancy team handles this as a packaged engagement for clients each year-start.

• • Step 1 — Switch to Tax Year terminology in all internal documents, emails, and software references. Stop using AY/PY for new filings.
• • Step 2 — Update payroll systems to reflect the new slab structure under Income Tax Act 2025 from April 2026 onwards. Confirm the new regime is set as default.
• • Step 3 — Decide regime in writing — for each employee or for yourself, run old vs new comparison and file Form 10-IEA only if old regime saves more under the Income Tax Act 2025.
• • Step 4 — Refresh your AIS reconciliation habit — download AIS, TIS, Form 26AS monthly during Tax Year 2025-26 to catch mismatches early before ITR filing 2026.
• • Step 5 — Build a section-mapping cheat sheet for your finance team — map old Income Tax Act 1961 sections you reference often (44AB, 44AD, 87A, 80C) to their Income Tax Act 2025 equivalents.
• • Step 6 — Update audit and TDS templates — confirm your CA is using the revised Form 3CD and updated TDS utility versions aligned to the Income Tax Act 2025.
• • Step 7 — Re-validate tax-saving investments — if you are on the old regime, check that all 80C/80D/HRA proofs are organised for ITR filing 2026 in July-August.
• • Step 8 — Subscribe to CBDT clarifications — first 6-12 months of the Income Tax Act 2025 will see clarifying circulars. Have your CA monitor and update positions accordingly.

Common Mistakes Taxpayers Make During Income Tax Act 2025 Transition

In the first quarter under the New Income Tax Act 2025 (April-June 2026), three patterns of taxpayer error have already emerged. Knowing them helps you avoid them.

Mistake 1 — Assuming the section reference is still the same

Section 80C under Income Tax Act 1961 is not Section 80C under Income Tax Act 2025. The number has changed. Using the old section reference in employee declarations, investment proofs, or even client emails creates confusion. Always use "deduction in respect of life insurance premia, PF and similar instruments under Chapter VI-A of the Income Tax Act 2025" or simply state the substance — the section number is no longer the universal shorthand it was for 65 years.

Mistake 2 — Filing belated returns under wrong section references

A belated return for FY 2024-25 filed today must reference Income Tax Act 1961 section numbers, not Income Tax Act 2025 numbers. The ITR utility on the e-filing portal handles this automatically when you select the correct Tax Year / Assessment Year for the relevant period — but manually typed section references in attached computations have caused defective return notices.

Mistake 3 — Missing the Form 10-IEA window

Under Income Tax Act 2025, if you do not file Form 10-IEA before the ITR filing 2026 due date, you are deemed to be on the new regime — even if old regime would have saved more tax. Salaried employees who used to claim Section 80C, 80D, HRA, home loan interest are most affected. This single mistake has cost taxpayers Rs.30,000 — Rs.1,50,000 in extra tax in the first quarter alone.

N D Savla & Associates has helped hundreds of taxpayers navigate the Income Tax Act 2025 transition across our six office locations — Andheri, Charni Road, Navi Mumbai, Thane, New Panvel, and Goa. From individual ITR-2 return filing for salaried with capital gains, to comprehensive corporate business tax filing with audit, our team has updated workflows, SOPs and templates for the New Income Tax Act 2025.