India’s direct tax framework is set for a major overhaul from April 1, 2026, when the new Income-tax Act, 2025, will come into force, replacing the over six-decade-old Income-tax Act, 1961.
The new law
aims to simplify tax provisions, remove redundancies and streamline compliance, while several proposals announced in the Union Budget 2026 will also take effect simultaneously once enacted through the Finance Act, 2026.
Tax experts say that while the overall tax burden for individuals remains largely unchanged, the new framework introduces structural changes in the way income is assessed, returns are filed and certain investments are taxed.
CA Suresh Surana explained that the upcoming changes will impact filing timelines, taxation of buybacks, derivatives trading, TCS rates and deductions related to investment income.
Introduction of ‘Tax Year’ replaces old system
One of the most significant structural changes is the introduction of a single ‘Tax Year’.
Under the existing system, taxpayers deal with two different concepts — previous year (the year in which income is earned) and assessment year (the year in which that income is assessed for tax).
The new law replaces both with a single tax year, which is expected to make the system easier to understand for taxpayers and simplify compliance.
Despite the change in terminology, the personal income tax slab structure under both the old and new regimes remains unchanged, ensuring continuity in the tax burden for individuals.
New deadlines for filing income tax returns
The government has also revised the due dates for filing income tax returns for certain categories of taxpayers.
The move aims to give additional time to individuals engaged in business or profession whose accounts do not require an audit.
Under the revised framework:
• 31 July: Individuals filing simple returns such as ITR-1 or ITR-2
• 31 August: Taxpayers with business or professional income not requiring audit, and partners of such firms
• 31 October: Companies and taxpayers whose accounts require audit, along with partners of audited firms
• 30 November: Assessees covered under special provisions
These revised timelines will apply from Tax Year 2026-27 onwards.
More time to revise tax returns
The new law also extends the window for filing revised income tax returns.
Currently, taxpayers can revise their returns within nine months from the end of the relevant tax year. The new legislation extends this limit to twelve months.
However, a fee will apply for revised returns filed after nine months:
• Rs 1,000 if total income is up to Rs 5 lakh
• Rs 5,000 if total income exceeds Rs 5 lakh
The change aims to give taxpayers additional time to correct errors in their returns.
Higher Securities Transaction Tax on derivatives
The government has also decided to increase Securities Transaction Tax (STT) on derivatives trades, citing rapid growth and rising speculative activity in the futures and options segment.
From 1 April 2026, the proposed rates will be:
• Sale of options: 0.10% → 0.15%
• Sale of options when exercised: 0.125% → 0.15%
• Sale of futures: 0.02% → 0.05%
The change could increase trading costs for derivatives traders.
Changes in TCS rates on certain transactions
The government has also proposed rationalising Tax Collected at Source (TCS) rates across several categories to simplify compliance.
Some key changes include:
• Alcohol for human consumption: 1% → 2%
• Tendu leaves: 5% → 2%
• Scrap: 1% → 2%
• Coal, lignite and iron ore: 1% → 2%
For overseas spending under the Liberalised Remittance Scheme (LRS) exceeding Rs 10 lakh:
• Education or medical treatment: 5% → 2%
• Other purposes: unchanged at 20%
TCS on overseas tour packages will also be simplified to a uniform rate of 2%, replacing the earlier two-tier structure.
However, the 1% TCS on the sale of motor vehicles and other luxury goods will continue unchanged.
Relief on employer-paid commuting costs
The new law also clarifies the taxation of commuting benefits provided by employers.
Earlier, only vehicles provided by employers for home-to-office travel were excluded from taxable perquisites.
Under the new law, the exemption will also apply to commuting expenses paid or reimbursed by the employer, ensuring such benefits are not taxed as a perquisite in the hands of employees.
Major change in taxation of share buybacks
The tax treatment of share buybacks is also set to change.
Currently, the amount received by shareholders during a buyback is treated as dividend income and taxed accordingly.
Under the proposed framework, the amount received on buyback will instead be taxed under the head “capital gains.”
Experts say this change could significantly alter the tax liability of shareholders, particularly promoters.
Interest deduction on dividend and mutual fund income removed
Another major change affects investors earning dividend income or income from mutual fund units.
Under the existing law, taxpayers can claim a deduction of up to 20% of such income for interest expenses incurred to earn it.
The new law removes this deduction entirely, meaning investors will no longer be able to claim interest costs against dividend or mutual fund income.
However, interest expenses incurred to earn other forms of interest income will continue to remain deductible under general tax provisions.
A structural shift in India’s tax framework
Experts say the Income-tax Act, 2025, represents a structural overhaul rather than a major tax rate change.
While the personal tax burden for most individuals remains the same, the new law aims to simplify terminology, extend compliance timelines and rationalise certain provisions.
For taxpayers, however, the changes will still require careful understanding as the new framework begins to apply from the 2026-27 tax year.
