On 21 August 2025, the President gave assent to the Income-Tax (No. 2) Act, 2025, thereby replacing the six-decades-old Income-tax Act, 1961. The new law is slated to come into force from 1 April 2026 (unless specific provisions specify otherwise).
This is one of the most sweeping overhauls of India’s direct tax legislation. Below are the key provisions that businesses need to understand — and plan for — ahead of the transition.
1. Structural & Conceptual Changes
A. Consolidation, Simplification & Reduction of Complexity
The new Act condenses provisions: from over 800 sections in the 1961 Act to 536 sections, reorganized into 23 chapters and 16 schedules.
The numerous provisos and explanations in the old Act have largely been replaced with clearer subsections, clauses, or sub-clauses.
Legal and language ambiguities are intended to be reduced, making compliance and interpretation easier.
B. “Tax Year” Replaces “Previous Year / Assessment Year”
The new Act introduces a single “Tax Year” concept, moving away from the distinction between “Previous Year” and “Assessment Year.”
This change is expected to streamline timing of income determination, filing cycles, and fiscal alignment.
2. Tax Rates, Rebates & Deductions
A. Revised Slabs under the New Regime
Under Clause 202(1) of the new Act, new tax slabs have been prescribed. India Briefing
Income up to ₹4,00,000: Nil
₹4,00,001 to ₹8,00,000: 5%
₹8,00,001 to ₹12,00,000: 10%
₹12,00,001 to ₹16,00,000: 15%
₹16,00,001 to ₹20,00,000: 20%
₹20,00,001 to ₹24,00,000: 25%
Above ₹24,00,000: 30%
An enhanced standard deduction of ₹75,000 under the new regime has also been proposed
B. Revised Rebate Provisions
- The rebate under Section 87A (residents) continues, but under the new regime the rebate is allowed up to ₹60,000 (or 100% of tax payable, whichever is lower).
- The act carries forward some earlier rebate structures, but with tweaks to limits to benefit middle-income taxpayers.
C. Deductions, Exemptions & Clarifications
- Clarifications are introduced that taxes paid on income (including surcharge/cess) cannot be deducted under business income computations.
- The new Act explicitly provides for full deduction of commuted lump-sum pensions drawn from specified pension funds.
- Provisions around interest on home loans, standard deductions on house property, etc. are refashioned for greater clarity.
3. Business & Corporate-Focus Provisions
A. Presumptive Taxation for Non-Residents & Services
- The Bill introduces a presumptive taxation scheme for non-resident entities engaged in rendering services or technology transfers in India. India
- Under the proposed scheme (for non-resident services), income might be computed as 25% of (A + B) (where A/B components are defined) — reducing compliance burden.
B. Loss-Set Off & Carry Forward
- The new law continues mechanisms for set-off and carry forward of losses, but simplifies/updates various thresholds and rules.
- In a notable change, a one-time relief is proposed, allowing long-term capital losses incurred up to 31 March 2026 to be set off against short-term capital gains from Tax Year 2026-27 onward.
C. Donations, Anonymous Contributions & Trusts
- The Act places restrictions on anonymous donations to certain religious or charitable trusts.
- More stringent disclosures and compliance norms are expected for institutions receiving foreign or large donations.
4. Compliance, Assessment & Dispute Resolution
A. Faceless & Digital-First Approach
- The Act strengthens faceless assessments and digital compliance pathways to reduce human interface and corruption risks.
- Faster refunds are envisaged post-return filing deadlines.
- Before taking enforcement action (e.g. recovery), tax authorities must issue prior notice, as mandated in certain provisions.
B. Taxpayer Certainty & Dispute Minimization
- The new law seeks to reduce litigation by clarifying ambiguous provisions, removing redundant clauses, and consolidating rules.
- Some legacy provisions of the 1961 Act that caused interpretative conflict have been omitted or revised.
5. Transition & Impact Considerations for Businesses
A. Timing & Phased Rollout
- Most provisions will apply from 1 April 2026, so financial year 2026-27 will be the first full year under the new regime.
- Entities must plan for parallel accounting, systems changes, and transitional disclosures.
B. Systems, Accounting & Tax Planning Adjustments
Businesses will need to rework tax accounting logic in ERP / tax software for:
Recalibrated slab rates, new rebate limits
New definitions (e.g. “Tax Year”)
New presumptive regimes and loss off-set rules
Revised rules on deductions, exemptions, and prohibited deductions (e.g. tax on income)
C. Cash Flow & Effective Tax Rate Impacts
Some companies may see different effective tax burdens due to the shift in slabs or loss treatment.
- Provisioning for tax liabilities and planning for estimated payments must be revisited.
D. Disclosures & Compliance Overheads
- With the Act’s emphasis on clarity and reduced dispute, stricter internal documentation will be critical.
- Audit committees, tax teams, and boards should stay abreast of final notified rules and guidance.
E. Stakeholder Communication
- Investors, lenders, and rating agencies may expect clarity on the transition impact.
- Publicly listed companies should flag in forward guidance the impact of the new Act on earnings and tax outflows.
The Income-Tax Act 2025 represents a bold leap forward — a structural, conceptual, and operational revamp of India’s direct tax framework. For businesses, the key will be to proactively assess, adapt, and build transition pathways before April 2026.
By simplifying the law, clarifying provisions, and introducing modern compliance tools, the government’s goal is to reduce litigation, increase tax certainty, and make India more business-friendly. But the real success will depend on how well corporate India adapts to the new regime — from systems and accountancy to tax strategy and stakeholder communication.
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