What You Must Know About New Income Tax Act

The contrast with the old Income-Tax Act is stark.
The 1961 law ran into 512,000 words; the 2025 one pares that down to 259,000.
Chapters have been cut from 47 to 23, while sections have reduced from 819 to 536.
One of the clearest changes is terminological.
The confusing twin concepts of ‘assessment year’ and ‘previous year’ have been scrapped.

Illustrations: Dominic Xavier/Rediff

India has undertaken its most ambitious tax law overhaul in more than 60 years.

With the President’s assent on August 21, the Income-tax Act, 2025 has been notified. It will come into force on April 1, 2026, replacing the wordy, unwieldy 1961 legislation.

Unlike the usual tinkering with rates and slabs during annual Budgets, this Act is a major rewrite, aimed at simplifying direct tax provisions, cutting redundancies, and updating enforcement powers for the digital age.

The Lok Sabha cleared the new Income-tax Bill on August 11, followed by the Rajya Sabha the next day, without any amendments.

While tax rates and slab structures remain untouched, experts say the focus is firmly on clarity and simplification, and on modernising compliance.

A law in fewer words

The contrast with the old Act is stark. The 1961 law ran into 512,000 words; the new one pares that down to 259,000.

Chapters have been cut from 47 to 23, while sections have reduced from 819 to 536.

To improve readability and bring in more clarity, the number of tables has been expanded to 57 (from 18 earlier), and formulae to 46 (from six).

One of the clearest changes is terminological. The confusing twin concepts of ‘assessment year’ and ‘previous year’ have been scrapped.

Instead, the new law makes ‘tax year’, defined as the 12-month financial year beginning April, as the standard for calculating income and liability.

“The new law is intended to ‘modernise and streamline the legal framework by simplifying language, removing redundant provisions, and reducing the number of sections,” explains Amit Maheshwari, tax partner at the accountancy firm AKM Global. Corporate and slab rates have been left untouched, he adds, to ensure stability.

Consolidation of TDS, TCS

A major structural reform lies in the treatment of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS).

Under the 1961 Act, these provisions were across 71 different sections. The new Act has merged them into just 11 sections (392 to 402). TDS rates are now compiled under Sections 393 and 394.

Section 393 specifies TDS provisions for residents, non-residents, and other payees, including income types, thresholds, payer obligations, rates, and exemptions.

Section 394 details provisions for TCS on specified transactions such as sale of scrap and motor vehicles.

For corporations, this clarity could prove transformative, with the language of the law simplified, leaving no ambiguity.

This makes the provisions easier to follow but also places greater responsibility on companies to ensure accuracy in reporting, says Rahul Charkha, partner, Economic Laws Practice, a law firm.

“Minimum Alternate Tax and Alternate Minimum Tax rules have been put in tabular form, which makes them more understandable,” he says.

“The ambiguity around deductions for research and development, repairs, and preliminary expenses has also been removed. This will help companies clearly evaluate the criteria to avail of such deductions.”

Shifts in treatment of income

Beyond simplification, the new Act also updates specific provisions. According to Vivek Jalan, partner at professional services firm Tax Connect Advisory, two key shifts stand out.

First, perquisites relating to employee transport between home and office have been clarified.

Under the old Act, only the use of a vehicle provided by the employer was considered tax-free, he says.

Now, any expenditure incurred by the employer for an employee’s commute — whether cabs, buses, or transport services — will also not be taxed in the employee’s hands, he explains.

This is a positive step, aligning with current corporate practices, he adds.

Second, the law introduces the concept of an ‘unexplained asset’ under Section 104, replacing earlier provisions that covered only unexplained money, bullion, jewellery or valuable articles.

“The definition of asset has been widened to include virtual digital assets as well as anything from which a taxpayer may derive future economic value,” Jalan explains.

“The scope is far broader now, going beyond traditional assets.”

Digital enforcement powers

Enforcement, too, has been brought in step with today’s financial realities.

The 2025 law strengthens the powers of tax officers in search and seizure cases.

Tax officers can now access digital records such as e-mails, cloud storage, online trading accounts, and social media, in addition to physical documents and property.

In such cases, the law will now focus on assessing ‘total undisclosed income’ instead of ‘total income’, in line with the Finance Act, 2025.

“This extends the existing power under Section 132 of the Income-tax Act, 1961, which applied only to physical documents or assets,” says Maheshwari.

Even under the earlier law, tax authorities demanded access to taxpayers’ laptops, hard disks and e-mails, but it was open to contention as the law did not explicitly mention digital records, he adds.

“The intention behind these sweeping powers is to modernise tax enforcement as financial data and transactions have largely moved online,” he says.

Meanwhile, other compliance measures include reducing the correction window for TDS statements from six years to two years.

Pending assessments under the existing law will be completed under the new Act, and carry-forward of losses will remain available, says Maheshwari.

Another significant compliance change lies in Section 395, which broadens the scope of lower or nil TDS certificates. This would be a big enabler to business in managing cash flow, say experts.

“Currently, Section 197 of the Income-Tax Act, 1961 allows taxpayers to apply for a nil or lower TDS certificate only in respect to certain specified payments, such as interest, dividend, rent, commission, professional fees, etc,” explains Kunj Vaidya, partner with PwC India.

“With the Income-Tax Act, 2025, the scope of this facility has been expanded to additional TDS provisions, including new sections like 194R (TDS on benefits or perquisites arising from business or profession) and others.”

Transfer pricing widened

The definition of ‘Associated Enterprise’ (AE) under transfer pricing has also been recast. Under the 1961 Act (amended in 2002), an AE relationship arose only when both a general test of participation in management, capital or control under Section 92A(1), and a specific 26 per cent shareholding threshold under Section 92A(2) were satisfied.

“The new law modifies this by providing that meeting either test would suffice. This is a significant change that could considerably widen the scope of transfer pricing provisions,” says Vaidya.

The road ahead

Experts say the impact of the 2025 Act will differ across stakeholders. For corporations, the provisions are simpler but responsibility higher.

For individuals, stability is ensured. And for tax authorities, investigative reach has expanded in keeping with digital transactions.

As Maheshwari puts it, the new framework underlines the government’s intent ‘to reduce complexity, align tax law with evolving business realities, and provide certainty to taxpayers’.

Punit Shah, partner at Dhruva Advisors, is of the view that while the I-T Act 2025 has not brought about any significant change in the provisions contained in the 1961 law, “it has simplified the language, used less technical jargon, rearranged sections in a logical manner, and deleted obsolete provisions”.

This, he adds, “should help reduce interpretation issues and tax litigation in the future.”

Ultimately, the Income-tax Act, 2025 is less about changing the tax burden and more about rewriting India’s tax code.

For once, the fine print may actually be easier to read.

Feature Presentation: Rajesh Alva/Rediff