Explainer: Simplified Income Tax Act, 2025, to come into force from April 1

The new law simplifies the tax timeline by doing away with the distinction between the assessment year and the previous year, replacing it with a single 'tax year' framework.

Beginning April 1, the Income Tax Act, 2025, will come into force, replacing the six-decade-old tax law, and the changes made in tax laws in the 2026-27 Budget will be incorporated in the new legislation.

The 2025 I-T law is revenue-neutral with no change in tax rates. It has only made direct tax laws simple to understand, removed ambiguities, and thus reducing the scope for litigation. It reduces text volume and sections by about 50 per cent vis-à-vis the 1961 Income Tax Act.

The new law simplifies the tax timeline by doing away with the distinction between the assessment year and the previous year, replacing it with a single 'tax year' framework. It also allows taxpayers to claim TDS refund even when ITRs are filed after deadlines, without any penal charges.

Any changes with regard to taxation of individuals, corporates, HUFs and others, which are announced in the Budget for 2026-27 on February 1, will be incorporated in the new I-T Act, 2025.

The rules to implement the new Income Tax law are being framed and likely to be notified after the presentation of the FY27 Budget.

The new Income Tax law was approved by Parliament on August 12, 2025, after scrutiny by a Parliamentary committee. It had become an Act after receivingthe  assent of President Droupadi Murmu on August 21, 2025.

The rules relating to the Income Tax Act, 2025, are being worked out, while the various tax return forms, like those relating to payment of Advance Tax, TDS, will be notified thereafter.

Following is an explainer about the Income Tax Act, 2025.

Q. Why was the Income Tax Act, 1961, reviewed?

A. Income tax law was enacted 64 years ago in 1961, and since then, a lot of changes have taken place in society, in the way people earn money and companies do business. The 1961 Act was framed at a time when the Indian Republic was young and faced challenges peculiar to those times. Over 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 does the new Income Tax Act propose 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 taxpayers can know their exact tax liability. It would also help in reducing litigation 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 will the new law affect the tax liability of individuals and others?

A. Any tweak in income tax rates is usually done through the 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 the finance minister in August 2019.