In a landmark overhaul, Finance Minister Nirmala Sitharaman announced that Income Tax Act 2025 will replace Income Tax Act 1961 starting April 1, 2026.
“In July 2024, I announced a comprehensive review of the Income Tax Act, 1961. This was completed in a record time and the Income Tax Act, 2025 will come into effect from 1st April, 2026,” the Finance Minister said while presenting the Union Budget on Sunday.
The new Income Tax Act was introduced to modernise, simplify and streamline India’s direct tax framework. It aims to make the framework more accessible, transparent, and less prone to litigation.
What Was The Income Tax Act 1961?
Income Tax Act 1961, enforced by the Income Tax Department under the Central Government, defines key elements like tax slabs, deductions (such as Section 80C, 80D, 80G), exemptions, capital gains, taxable income, TDS and the procedures for appeal and penalty.
Here are key features of the act:
● Income tax is a direct tax, paid and borne by the taxpayer, and cannot be shifted to another person.
● The Central Government administers and controls the Act.
● It applies to income earned in the previous year by the taxpayer.
● Tax is calculated based on progressive slab rates-higher income attracts higher tax rates.
● Deductions and exemptions are available, but subject to specified limits each financial year.
● Tax liability depends on the taxpayer’s residential status and source of income.
● The Act covers all sources of income: salary, house property, business/profession, capital gains, and other sources.
● Provisions for Tax Deducted at Source, advance tax, and self-assessment tax ensure timely revenue collection.
● Regular amendments keep the Act relevant to changing economic conditions
What Changes In Income Tax Act 2025?
The new Act aims to simplify the existing tax structures. Primarily, the Act simplifies tax terminology by replacing the previously used and often confusing terms ‘Assessment Year’ and ‘Previous Year’ with a single, unified concept called the ‘Tax Year’. Tax year been defined as the twelve-month period of the financial year commencing on the 1st April.
The Act authorises the Central Government to design new schemes, and brings together multiple provisions for more clarity, for instance, the provisions related to Tax Deducted at Source (TDS), which were earlier distributed across multiple sections, have now been streamlined and grouped under a single section – Section 393.
Notably, the Act furthers the push for a digital first environment, which includes email servers, cloud servers, social media accounts, online investment and trading accounts, and websites for storing details of asset ownership.
The scope of Virtual Digital Assets has been broadened to cover any asset that holds value in digital form. It operates using cryptographic ledger systems such as cryptocurrencies or similar technologies.
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