Old vs New Income Tax Act: What applies for ITR filing in 2026?

Old vs New Income Tax Act

• Taxpayers will file returns under only one law during transition.
• FY25-26 taxed under old Act; new Act from FY26-27.
• New rules boost HRA, allowances, tighten salaried compliance

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India’s income tax system is set for a major shift with the rollout of the new Income Tax Act, 2025 from April 1, 2026. But for taxpayers, the immediate concern is how to file ITR this year during the transition.

Experts say there is no confusion in practice, as the current law will continue to apply for this filing cycle.

The transition follows a year-wise approach. Income earned in FY 2025–26 (April 1, 2025, to March 31, 2026) will continue to be governed by the Income Tax Act, 1961 and will be filed in AY 2026–27.

The new Income Tax Act, 2025 will apply only to income earned from FY 2026–27 onwards, ensuring there is no overlap between the two laws.

“Think of it year-wise. FY 2025–26 will go under the old law and be filed in AY 2026–27. The new law applies from FY 2026–27. One year, one law, one return,” said Pratibha Goyal, a New Delhi-based chartered accountant.

Whatever changes have been proposed by Finance Bill 2026, in Income Tax Act 1961 will be followed while filing ITR in 2026, added Goyal.

The Central Board of Direct Taxes (CBDT) notified the Income Tax Rules, 2026 on Friday, introducing a revised framework for allowances and perquisites for salaried employees.

What changes from FY 2026–27

The newly notified Income Tax Rules, 2026, bring a mix of relief and tighter compliance for salaried taxpayers. Key changes include higher HRA exemption limits with more cities qualifying for the 50 percent bracket, a sharp increase in children’s education allowance (Rs 3,000/month) and hostel allowance (Rs 9,000/month), and a revised method for valuing perquisites like company cars, which could increase taxable income in some cases.

At the same time, limits for tax-free benefits such as gifts (Rs 15,000 annually) and meal vouchers (Rs 200 per meal) have been raised. However, the rules also introduce stricter disclosure requirements and documentation norms, especially for HRA and deductions, signalling a shift towards greater transparency and compliance even as certain benefits are enhanced

Moreover, the terms "financial year" and "assessment year" will be replaced with a "tax year" to bring greater uniformity and make the tax framework easier to understand.