Income-tax Act, 2025, has been overhauled and designed to modernize and simplify India’s direct tax system starting April 1, 2026
Structural Simplification and Volume Reduction
The Income-tax Act, 2025 was enacted to deliver a modern, streamlined tax code by resolving the complexity accumulated over six decades in the 1961 Act. According to the sources,
- the number of Sections has been significantly reduced from 819 to 536,
- the number of Rules from 511 to 333, and
- the number of statutory forms from 399 to 190.
Introduction of a Unified “Tax Year”
Under the old legislation, the dual use of the terms “previous year” (the year income was earned) and “assessment year” (the year income was taxed and assessed) often caused confusion among taxpayers because they referred to two different, overlapping financial years.
To eliminate this ambiguity, the new Act completely discontinues the concept of the “assessment year” and replaces the “previous year” with a single, unified “tax year“.
Alignment with Financial Year:
A “tax year” is a 12-month period that directly aligns with the Financial Year. For example, income earned during the financial year 2026-27 is now simply referred to and assessed as belonging to “Tax Year 2026-27“.
Assessment Timing: Just like the old system, the income earned during a specific Tax Year continues to be assessed after that Tax Year ends, but it now uses the same unified year reference, eliminating dual-year confusion.
Shorter Tax Years: The sources also note that a “tax year” can be shorter than a full financial year if a business is newly set up or a new income source emerges mid-year. In such cases, the tax year runs from that specific start date until the end of the current financial year.
What are the other major changes in the Income-tax Act 2025?
Rationalization of Tax Slabs and Increased Exemptions
Under the new default tax regime, the basic exemption limit and rebates have been enhanced to benefit the middle class:
A standard deduction of ₹75,000 (extended to the new regime) and a tax rebate of up to ₹60,000 means that salaried individuals earning up to ₹12,75,000 will have zero tax liability.
The revised annual income tax slabs are:
- Nil up to ₹4 lakh;
- 5% for ₹4 lakh to ₹8 lakh;
- 10% for ₹8 lakh to ₹12 lakh;
- 15% for ₹12 lakh to ₹16 lakh;
- 20% for ₹16 lakh to ₹20 lakh;
- 25% for ₹20 lakh to ₹24 lakh;
- and 30% for income above ₹24 lakh.
Comprehensive Capital Gains Tax Overhaul
Simplified Holding Periods:
There are now only two holding periods used to classify long-term capital assets:
year for listed securities and
years for all other assets (including unlisted shares, gold, and real estate).
Rates and Indexation:
The indexation benefit for long-term capital gains has been removed to simplify computations, and simultaneously, the general long-term capital gains rate has been reduced from 20% to 12.5%.
Exemption Limits:
The exemption limit for long-term capital gains on STT-paid listed equities and equity-oriented mutual funds has been increased from ₹1 lakh to ₹1.25 lakh.
Streamlined Reassessment & Compliance Timelines
The time limits for issuing a reassessment notice (income escaping assessment) have been changed to 4 years from the end of the Tax Year for general cases, and 6 years if the escaped income is likely to be ₹50 lakh or more.
Taxpayers now have up to 48 months (4 years) from the end of the succeeding financial year to file an Updated Income Tax Return (ITR-U) to correct errors and pay due taxes.
Consolidation of Statutory Forms
Multiple compliance forms have been merged to reduce the administrative burden:
- Form 26: The traditional tax audit forms (Forms 3CA, 3CB, and 3CD) have been consolidated into a single, structured document.
- Form 121: Forms 15G and 15H (declarations for non-deduction of TDS) have been merged into a single unified form for all eligible taxpayers regardless of age.
- Form 39: Form 10E, used for claiming relief on salary arrears, has been replaced by a smarter, auto-populated Form 39.
New Allowances and Specific Reliefs
Pension Benefits: Full deduction is now allowed for commuted lump-sum pensions. Specific tax benefits have also been extended to subscribers of the new Unified Pension Scheme (UPS) and the NPS Vatsalya scheme (which offers an additional deduction of up to ₹50,000).
Self-Occupied Properties: The condition that previously required a taxpayer to prove job or business obligations elsewhere in order to claim two houses as self-occupied (with nil annual value) has been removed.
ULIP Taxation: Unit Linked Insurance Plans (ULIPs) with annual premiums exceeding ₹2.5 lakh will now have their maturity proceeds taxed on par with capital gains.