Simplified Income Tax Act, 2025, to come into force from April 1
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New Delhi: From April 1, the Income Tax Act, 2025, will come into force, replacing the six-decade-old Income Tax Act, 1961. The new legislation will also incorporate all changes to direct tax laws announced in the Union Budget for 2026–27.
The Income Tax Act, 2025, is revenue-neutral and does not alter existing tax rates. Its primary objective is to simplify direct tax laws, remove ambiguities, and reduce the scope for litigation. Compared to the 1961 Act, the new law cuts down the volume of text and the number of sections by nearly 50 per cent.
One of the major reforms introduced is the simplification of the tax timeline. The distinction between the ‘previous year’ and the ‘assessment year’ has been removed and replaced with a single ‘tax year’ system. The Act also permits taxpayers to claim refunds of tax deducted at source even if income tax returns are filed after the prescribed deadlines, without imposing any penal charges.
Any changes relating to the taxation of individuals, companies, Hindu Undivided Families and other entities, as announced in the Union Budget for 2026–27 on February 1, will be incorporated into the Income Tax Act, 2025.
The rules required to operationalise the new law are currently being drafted and are expected to be notified after the presentation of the 2026–27 Budget. Various tax-related forms, including those for advance tax payments and tax deducted at source, will be notified subsequently.
The new Income Tax law was approved by Parliament on August 12, 2025, following scrutiny by a Parliamentary committee. It became an Act after receiving the assent of President Droupadi Murmu on August 21, 2025.
Below is a detailed explainer on the Income Tax Act, 2025:
Q. Why the Income Tax Act, 1961, was reviewed?
A. Income tax law was enacted 64 years ago in 1961 and since then a lot of changes have taken place in the society, in the way people earn money and companies do business. The 1961 Act was framed at a time when Indian republic was young and faced challenges peculiar to those times. Over the time, as the country progressed, the Act was amended to keep pace with changing times.
In view of the technological advancement and changes in the socio-economic fabric of the country, there was a pressing need to completely overhaul the archaic Income Tax Act which has become bulky on account of hundreds of amendments in the law. It has become almost impossible for the common man to comprehend the law and multiple references to different sections, sub-sections, and provisos.
Q. What the new Income Tax Act proposes to do?
A. The new law is leaner and more reader-friendly. The intention of the government is to halve the volume compared to the old law and make the language simpler so that taxpayer can know his exact tax liability. It would also help in reducing litigations and thereby cut down on disputed tax demands.
Q. How will the new law be leaner?
A. The Income Tax Act, 1961, deals with the imposition of direct taxes, personal I-T, corporate tax, securities transaction tax, besides gift and wealth tax. The Act has about 298 sections and 23 chapters. Over time, the government has abolished various levies, including wealth tax, gift tax, fringe benefit tax and banking cash transaction tax. Several sections have been amended, added, removed or have become obsolete over the last 6 decades. The new Act will be free of all the amendments and sections that are no longer relevant.
Q. How the new law will affect tax liability of individuals and others?
A. Any tweak in income tax rates is usually done through Finance Act which is part of the Union Budget presented in Parliament every year on February 1. All amendments announced in the upcoming Budget will be incorporated in the new Bill.
Q. Have governments in the past attempted to replace the 1961 income tax Act?
A. In 2010, 'The Direct Taxes Code Bill, 2010' was introduced in Parliament. It was referred to the Standing Committee for scrutiny. The Bill, however, lapsed because of the change in government in 2014. In November 2017, the government had set up a six-member committee to redraft the Income Tax Act. The panel had submitted its report to finance minister in August 2019.
With PTI inputs