India is set to usher in a new era of direct taxation from April 1, when the Income Tax Act, 2025, comes into force, formally replacing the six-decade-old Income Tax Act, 1961. The new legislation is aimed
squarely at simplification, clarity and ease of compliance, without altering existing tax rates.
Crucially, the new law is revenue-neutral. There is no change in personal or corporate tax rates. Instead, the focus is on rewriting the law in simpler language, removing ambiguities and cutting down the scope for litigation. Compared with the 1961 Act, the new legislation reduces the overall volume of text and sections by nearly 50%, making it far more accessible for taxpayers.
Why was the 1961 Income Tax Act replaced?
The Income Tax Act, 1961, was enacted when India was a young republic with a vastly different economic structure. Over the last 64 years, the economy, technology, and ways of earning income have changed dramatically. While successive governments amended the law to keep pace, the result was a bulky and complex statute filled with cross-references, provisos and obsolete sections.
With hundreds of amendments layered over decades, the law became difficult even for professionals to navigate, let alone ordinary taxpayers. The overhaul was driven by the need to modernise the framework and make it understandable in today’s economic and technological context.
What does the new Income Tax Act aim to achieve?
The Income Tax Act, 2025, is designed to be leaner and reader-friendly. The government’s objective is to allow taxpayers to clearly understand how their tax liability is computed, reduce interpretational disputes, and lower the volume of tax litigation. By removing redundant provisions and simplifying structure and language, the new law seeks to bring certainty and transparency to direct taxation.
How is the new law leaner?
The 1961 Act covered multiple direct taxes, including personal income tax, corporate tax, securities transaction tax, wealth tax and gift tax. Over time, several levies — such as wealth tax, gift tax, fringe benefit tax and banking cash transaction tax — were abolished, but many related sections continued to clutter the statute.
The old Act comprised around 298 sections across 23 chapters, many of which became obsolete or irrelevant. The new law cleans up this legacy, removing outdated provisions and presenting a consolidated, amendment-free statute that reflects the current tax regime.
No change in tax rates, but Budget changes will apply
Any changes in tax rates or slabs are typically announced through the Finance Act as part of the Union Budget presented every year on February 1. Accordingly, all tax proposals announced in the Union Budget for 2026-27 — covering individuals, corporates, HUFs and other taxpayers — will be incorporated into the new Income Tax Act, 2025.
This ensures continuity while allowing the simplified law to remain fully aligned with the latest policy decisions.
Key structural changes taxpayers should note
One of the most important reforms is the simplification of the tax timeline. The long-standing distinction between the “previous year” and the “assessment year” has been removed. The new law introduces a single ‘tax year’ concept, making compliance easier and more intuitive.
Another significant relief is on TDS refunds. Under the new framework, taxpayers will be able to claim refunds of tax deducted at source even if they file their income tax returns after the due date, without facing penal consequences, an important change for delayed filers.
Rules and return forms to follow Budget 2026-27
While the Act itself takes effect from April 1, the rules for implementing the new law are currently being framed. These are expected to be notified after the presentation of the FY27 Union Budget. Subsequently, various procedural forms — such as those for advance tax payments, TDS and income tax returns — will also be notified in line with the new framework.
Legislative journey of the new law
The Income Tax Act, 2025, was approved by Parliament on August 12, 2025, after scrutiny by a Parliamentary committee. It became law after receiving the assent of Droupadi Murmu on August 21, 2025.
Have such reforms been attempted earlier?
This is not the first attempt to replace the 1961 Act. In 2010, the Direct Taxes Code Bill was introduced in Parliament and referred to a Standing Committee, but it lapsed following a change in government in 2014. Later, in November 2017, the government constituted a six-member committee to redraft the income tax law, which submitted its report to the finance minister in August 2019. The Income Tax Act, 2025 is the culmination of that long reform process.
From April 1, India’s direct tax regime will become simpler, clearer and more modern legal foundation. While taxpayers will not see immediate changes in tax rates, they can expect easier compliance, reduced confusion and fewer disputes. With Budget-driven changes seamlessly integrated into the new law, the Income Tax Act, 2025, marks a structural shift aimed at making taxation more transparent and taxpayer-friendly.
(With PTI Inputs)
