New Income Tax Act 2025

Till now, the Income Tax Act, 1961, has served as the basis of income tax laws in India. However, it lacked clarity in certain areas and was complex and difficult for ordinary citizens to understand. To rectify this gap, modernise and simplify the outdated tax laws, and foster a culture of voluntary tax compliance, the government enacted the New Income Tax Law, India 2025.

The Income Tax Bill, 2025, was scrutinised by the Select Committee of the Parliament for a detailed analysis. Upon receiving the committee's inputs, the government withdrew the original bill and introduced a revised version, the Income Tax (No. 2) Bill, 2025, incorporating the committee’s recommendations and suggested improvements to legal clarity.

Both houses of Parliament passed the bill during the monsoon session, establishing a new tax framework in India. The new act simplifies the language, reduces potential for disputes, and eliminates outdated provisions of the earlier act.

In Budget 2026, it was announced that the Income Tax Act, 2026 would replace the earlier Income Tax Act, 1961 from 1 April 2026 onwards. That said, the Income Tax Act, 2025, will continue the existing tax policy and tax rates of the earlier act to ensure continuity and ensure predictability for taxpayers.

One of the key changes in the Income Tax Act, 2025, is the enhanced clarity it provides through structured schedules and fewer sections. Here are the essential points to note about the Income Tax Act 2025:

Here are the reasons that made the introduction of a new Income Tax Law, India 2025 necessary:

Similar to the Income Tax Act, 1961, the new Income Tax Act, 2025, is well-structured into chapters, with specific sections covering the charge of income tax, computation, exemptions, procedures, and penalties.

The new Income Tax Act, 2025, is organised into 536 sections, 23 chapters, and 16 schedules. Here is a list of chapters contained in the new tax provision:

The central government has introduced the new Income Tax Act, 2025, to modernise India's direct tax framework. Here are the major objectives and guiding principles of the new tax provision:

• Simplification: The new tax replaces the complex legal language and redundant provisions of the outdated act with clear, concise, modern language to improve clarity.
• Taxpayer-Centric Approach: The new tax provision improves the filing process, reduces litigation, and enhances transparency.
• Digital Integration: It enhances faceless assessment and digital compliance, reducing human interface and corruption.
• Global Alignment: The new Income Tax Act, 2025, includes provisions that reflect economic realities, such as the taxation of digital assets and global income.
• Reduce Legal Disputes: The act aims to reduce legal disputes and provide an easier grievance redressal mechanism through streamlined tax administration and modern mechanisms.

The New Income Tax, 2025, will come into effect from 1st April 2026. The new income tax act will apply to various types of taxpayers in the tax year 2026-27, such as:

• Salaried individuals
• Hindu Undivided Families (HUF)
• Association of Persons (AOP)
• Body of Individuals (BOI)
• Artificial Juridical Persons

The New Income Tax Act, 2025, smoothly transitions from the Income Tax Act, 1961. As per current information, the following will be applicable in case of previous filing and appeals that have been made under the earlier Income Tax Act, 1961:

The 5 heads of the Income Tax Act, 2025, specify different rules for deductions and exemptions of income and expenses. Here are the key details of the five heads of income under the new Act:

The Income from Profits and Gains from Business or Profession head includes the profits earned by an individual on any kind of business or profession. The tax is applicable on the total income minus your expenses. Sections 26-66 of the new Income Tax Act, 2025, govern the Income from Profits and Gains from Business or Profession head.

Under the Presumptive Taxation scheme, taxpayers can declare their income as their turnover percentage to simplify compliance under Section 44ADA for professionals or Section 44AD for businesses. Section 58 of the New Income Tax Act, 2025, covers the special provision for computing profits and gains of business or profession on a presumptive basis in the case of certain residents.

The new Income Tax Act, 2025, aligns with the new MSME (Micro, Small and Medium Enterprises) classification based on investment and turnover limit, as follows:

The Income from Capital Gains head includes the profits earned by an individual while transferring or selling an asset held as an investment. It includes most of the assets, such as gold, bonds, mutual funds, and real estate. Sections 67-91 of the new Income Tax Act, 2025, deal with the Income from Capital Gains Head.

The capital gains with their applicable rates are classified as follows:

Under the Income Tax Act, 2025, income from transfer of Virtual Digital Assets including Cryptocurrency/Non-Fungible Tokens, etc. are treated as capital gains with a flat tax rate of 30%. A TDS of 1% is also applicable on such transfers and set-off against losses is not allowed.

The Income from Other Sources head includes all income that is not taxable under the other four heads of income. This part covers earnings such as dividends, interest, rent from plant and machinery, winnings from lotteries, bank deposit interest, gambling or card games, sports prizes, and similar receipts.

The following sections of the new Income Tax Act, 2025, govern the Income from Other Sources head:

• Section 92: Income from Other Sources
• Section 93: Deductions
• Section 94: Amounts not Deductible
• Section 95: Profits Chargeable to Tax

All deduction and exemptions available under the Income Tax Act, 1961 will continue to be available under Income Tax Act, 2025. However, the sections referring to these exemptions and deductions under the 1961 Act, will undergo a change under the new Income Tax Act, 2025.

This applies to both the new and old tax regime. So, a larger number of deductions and exemptions will continue to be available under the old tax regime versus the new tax regime.

That said, under the Income Tax Act, 2025, the new tax regime will continue to offer the same exemptions and deductions that were previously available under the earlier Income Tax Act.

Income Tax Act 2025 has not brought about any changes in the income tax slab and rates under either the new and old tax regime. So the income tax slab rates for tax year 2026-27 are the same as financial year 25-26 in the case of both tax regimes. This has been done to reduce the potential complexity of transitioning to the New Income Tax, 2025 in tax year 26-27.

There is also no change in basic exemption limits. Income Tax Act, 2025 retains the basic exemption limit of ₹4 lakh for the new tax regime. Under the old tax regime, individuals aged less than 60 years will continue to receive basic exemption for income up to ₹2.5 lakh. Whereas, senior citizens (aged between 60 years and 79 years) and super senior citizens (aged 80 years or older) can avail basic exemption limit of up to ₹3 lakh and ₹5 lakh respectively.

The Income-tax Act, 1961, was the landmark legislation governing the taxation system in India. Here is a brief overview of the act:

Since the new Income Tax Act, 2025 has fewer chapter and sections, the chronology of popular tax saving options has changed. The below table provides a short list of some well known sections and subsections of the Income Tax, 1961 vs the corresponding sections in Income Tax Act, 2025:

Note: *Available only under the old tax regime, not available under the new tax regime

The above list of Sections in Income Tax Act 1961 versus corresponding Section in Income Tax Act 2025 are illustrative only, not exhaustive. Please refer the Income Tax Act, 2025 for the complete list.