Income-tax Act 2025: What Ordinary Taxpayers Should Know

India replaced its 64-year-old income tax law on 1 April 2026. The Income-tax Act 2025 is now the governing statute, and the Income-tax Act 1961 — amended over 65 times and expanded to 819 sections across 47 chapters — has been retired. For most taxpayers, the first question is a reasonable one: does any of this actually affect me? The honest answer is: it affects the language and structure of how your tax obligations are described, and a handful of specific rules have changed. Tax rates have not changed. Most deductions remain exactly where they were. This post explains what is different, what is not, and what you need to do.

Quick answer

The Income-tax Act 2025, effective from 1 April 2026, does not raise taxes or remove major deductions. It simplifies the law’s language, replaces “financial year/assessment year” with a single “tax year,” makes the new tax regime the permanent default, and changes some form numbers and section references. A small number of substantive changes — HRA city coverage, updated return window, and TDS form numbers — do affect what you file and how.

Before assuming nothing has changed for you, check:

1. Are you filing under the new tax regime or the old one? The default has formally shifted to the new regime.
2. Are you in one of the eight cities now covered by the higher HRA exemption?
3. Do you have past years where income was missed or underreported — the window to correct them has expanded to four years.

What the Income-tax Act 2025 actually is

The Income-tax Act 2025 is not a new tax policy. It is a rewrite of the rulebook. The government’s stated objective was to take a law that had grown incomprehensible — filled with provisos, cross-references, and exceptions layered on top of exceptions — and produce something that a non-specialist could read without a law degree.

The result is a statute reduced from 819 sections to 536, and from 47 chapters to 23. Legal jargon has been replaced with plain language. Tables and formulas that were buried in long paragraphs have been pulled out into readable formats. The substantive tax rates, however, carry over unchanged from the Finance Act 2025.

Think of it as what happens when a sprawling government office is reorganised: the staff and their work stay the same, but the room numbers change, the filing system is cleaner, and the signage is easier to read. For most taxpayers, the change is felt in form numbers, section references, and terminology — not in how much they owe.

Change 1: “Tax year” replaces financial year and assessment year

Under the 1961 Act, two separate terms governed every filing. “Previous year” meant the year in which you earned income. “Assessment year” meant the year in which that income was assessed for tax — always one year later. So income earned between April 2023 and March 2024 (previous year 2023-24) was assessed in assessment year 2024-25. The gap between these two terms caused routine confusion, especially when notices, challans, and return forms each referenced the year in a different way.

The Income-tax Act 2025 eliminates both terms. From 1 April 2026 onwards, there is only one reference period: the tax year, defined under Section 11 of the new Act as the standard April-to-March financial year. Income earned in Tax Year 2026-27 is assessed and reported as Tax Year 2026-27. No mental translation required.

For a salaried employee like Rahul, who earns his salary from April 2026 to March 2027, this means his Form 16 (now renamed Form 130), his ITR, and his Annual Information Statement will all carry the same reference — Tax Year 2026-27. The number does not change based on whether you are looking at the earning period or the filing period.

For FY 2025-26 (which ended on 31 March 2026), old terminology still applies. Rahul’s ITR for that year, due in July 2026, is filed as AY 2026-27 under the 1961 Act provisions. The new terminology kicks in for income earned from 1 April 2026 onwards.

If your return touches the Annual Information Statement — which it should — note that the AIS will begin reflecting the tax year label from the next filing cycle.

Change 2: The new tax regime is now the permanent default

The new tax regime — lower slab rates, no major deductions — was introduced in 2020 as an alternative. Budget 2023 made it the default, but the legal framework under the 1961 Act meant taxpayers could still opt out each year. The Income-tax Act 2025 carries this default forward as the baseline position under the new law.

What this means practically: if you do nothing when filing for Tax Year 2026-27, you are taxed under the new regime. To use the old regime — which allows deductions under Section 80C (now renumbered to Section 123 under the new Act), HRA exemption, home loan interest, and other items — you must actively opt in each year.

The new regime slabs for Tax Year 2026-27 (carried over from Finance Act 2025, unchanged by Budget 2026):

Taxable income	Rate
Up to ₹4 lakh	Nil
₹4–8 lakh	5%
₹8–12 lakh	10%
₹12–16 lakh	15%
₹16–20 lakh	20%
₹20–24 lakh	25%
Above ₹24 lakh	30%

A Section 87A rebate of up to ₹60,000 wipes out tax liability entirely for taxable income up to ₹12 lakh. Salaried employees, who additionally get a ₹75,000 standard deduction, reach zero tax at gross salary of up to ₹12.75 lakh.

Under the old regime, the basic exemption is ₹2.5 lakh (₹3 lakh for senior citizens, ₹5 lakh for super senior citizens). The Section 87A rebate is ₹12,500 and applies only up to ₹5 lakh of taxable income. The standard deduction is ₹50,000. The old regime makes sense if you have significant 80C investments, a home loan, or HRA to claim — situations where the deductions outweigh the benefit of lower new-regime rates. A full comparison to help you decide between regimes is available in the old and new tax regime comparison post.

Change 3: More salaried taxpayers get HRA relief

Under the old Act, only Mumbai, Delhi, Kolkata, and Chennai qualified for the 50% HRA exemption — meaning rent paid in these four cities could be exempted up to 50% of basic salary. All other cities attracted a 40% cap.

The Income-tax Act 2025, read with the Income Tax Rules 2026, expands the 50% city list to eight cities: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad now qualify.

Take Priya, a software engineer in Bengaluru with a basic salary of ₹80,000 per month and monthly rent of ₹40,000. Under the old Act, her HRA exemption was capped at 40% of basic — ₹32,000 per month. Under the new rules, the 50% cap applies, allowing exemption up to ₹40,000 per month, which fully covers her actual rent. Her taxable HRA is nil instead of ₹8,000 per month under the old framework.

This change applies from Tax Year 2026-27. If your employer’s payroll system has not updated its HRA computation to reflect the expanded city list, your TDS deduction may be incorrectly calculated — leading to a refund when you file, or requiring adjustment in your return.

Note: HRA exemption is only available under the old tax regime. If you are in the default new regime, this change does not reduce your tax directly — but it may tip the calculation in favour of opting into the old regime.

Change 4: Updated returns now allowed for four years

Under the 1961 Act, if you missed income in a return or under-reported something, you had two years from the end of the relevant assessment year to file an updated return (ITR-U). Budget 2025 extended this to four years, and the Income-tax Act 2025 carries that extended window into the new framework.

This matters more than it might appear. Most taxpayers discover mismatches — a freelance payment missed, a bank interest entry skipped, a dividend not reported — well after the original filing deadline. The four-year window means there is now a meaningful correction period, as long as you proactively file an updated return before the window closes and pay any additional tax due.

Example: Anil filed his return for Tax Year 2026-27 in July 2027 but later realised he missed declaring ₹80,000 in bank interest. Under the new law, he can file an updated return for Tax Year 2026-27 up to 31 March 2031 — four years from the end of the relevant tax year.

There is a cost to this correction: an additional tax of 25% to 70% on the shortfall, depending on how late the updated return is filed relative to the original assessment. But this is far less painful than a notice from the department, which carries both penalty and interest. The ITR-U cannot be used to claim a refund or reduce tax liability — it only works to disclose under-reported income.

Change 5: TDS forms and section numbers have changed

The 1961 Act had more than 60 separate TDS sections — from Section 192 to Section 194T. Each covered a different payment type, with its own threshold and rate. The Income-tax Act 2025 consolidates all TDS provisions into three sections: Section 392 (salary TDS), Section 393 (TDS on payments to residents and non-residents), and Section 394 (TCS provisions).

Rates and thresholds are largely unchanged. What has changed is the administrative wrapper — form numbers, section references in challans, and the names of certificates.

The most visible changes for salaried employees:

• Form 16 is now Form 130. For income earned from 1 April 2026 (Tax Year 2026-27), your employer must issue Form 130 as your TDS certificate. If your HR or payroll team issues a document labelled “Form 16” for Tax Year 2026-27 salary, it is technically non-compliant and may cause mismatches on the e-filing portal.
• Form 24Q is replaced by Form 138 for quarterly salary TDS returns filed by employers.
• Old section references — 194C for contractors, 194J for professionals, 194I for rent — no longer exist in the new Act. These are consolidated under Section 393 with structured tables.

For this filing season (AY 2026-27 / the old FY 2025-26), the old form numbers still apply. Form 16 remains Form 16. The new form names begin only for Tax Year 2026-27 income.

What does NOT change for most taxpayers

It is worth being explicit about what the Income-tax Act 2025 does not change, because the volume of coverage can create the impression that everything has been overhauled.

Tax rates are unchanged. The Finance Act 2025 set the slabs, and Budget 2026 made no modifications. The Section 87A rebate remains at ₹60,000 (new regime) and ₹12,500 (old regime). Standard deduction remains ₹75,000 (new regime) and ₹50,000 (old regime). Section 80C (now Section 123) retains its ₹1.5 lakh limit. The home loan interest deduction, Section 80D health insurance deduction, and capital gains provisions carry over in substance.

Past assessments completed under the 1961 Act remain valid. A completed assessment for AY 2023-24 does not need to be redone. The transition is forward-looking: the new Act governs income earned from 1 April 2026 onwards.

What you should do before filing for Tax Year 2026-27

Here is a visual summary of the five changes and the action each requires from you.

For most taxpayers, the practical checklist before filing for Tax Year 2026-27 is short:

1. Decide whether you are filing under the new regime or the old. If you had significant 80C investments, a home loan, or are now in one of the eight expanded HRA cities, run the comparison before assuming the default new regime is best.
2. Confirm your employer’s payroll team has updated their systems — correct HRA city classification and the right form numbers matter for your TDS certificate.
3. Review any past returns where income may have been missed. The four-year updated return window is a genuine safety net, but it comes with a cost if used late.
4. When you receive your TDS certificate for Tax Year 2026-27, expect it to be labelled Form 130, not Form 16. Mismatches on the e-filing portal can result from using the wrong form reference.

When to be cautious about assuming nothing has changed

Not everyone is unaffected. Watch out for these situations:

You are a business owner or freelancer whose employer or client continues using old section numbers. TDS deducted under Section 194J (now Section 393) is still valid, but the return reference must use the new numbering. Filing with old section numbers for Tax Year 2026-27 transactions will generate portal validation errors.

You are an NRI. The Income-tax Act 2025 tightens the reporting requirements for foreign assets. Failure to disclose foreign bank accounts, overseas property, or shares held abroad can attract penalties under the new Act. If your tax position involves foreign assets, the transition is not simply cosmetic.

You are expecting a refund from a past year. The refund mechanics are unchanged, but the provisions now sit in a dedicated chapter in the new Act rather than being scattered across the statute. If you have a pending refund matter, the section references in correspondence from the department will use new numbers from April 2026.

You assumed Form 16 is still the document to use. For Tax Year 2026-27 salary, it is Form 130. An incorrect certificate can cause AIS mismatches, which then require reconciliation before your return can be processed cleanly.

Documents and checks before filing for Tax Year 2026-27

• PAN card and Aadhaar (no change in linking requirements)
• Form 130 (salary TDS certificate) from your employer — not Form 16 for Tax Year 2026-27
• Annual Information Statement downloaded from the e-filing portal — verify all entries match
• Proof of regime choice if opting into the old regime — investment proofs, home loan certificate, rent receipts
• HRA documentation: rent agreement and receipts if claiming under the old regime, especially if in Bengaluru, Hyderabad, Pune, or Ahmedabad where the exemption limit has changed
• Details of any income missed in past returns if considering an updated return filing
• Foreign asset disclosures if you are an NRI or resident with overseas holdings

Final takeaway

The Income-tax Act 2025 is a structural overhaul, not a tax hike. The law has been simplified, section numbers have changed, and the terminology has been modernised — but the rules governing how much you owe have largely carried over from the Finance Act 2025. The changes that actually affect what you file are specific: the tax year terminology, the HRA city expansion, the four-year updated return window, and the new TDS form numbers. Understanding these five changes, and acting on the ones that apply to you, is what the transition actually demands from an ordinary taxpayer.

Unsure how the Income-tax Act 2025 affects your specific filing — old versus new regime, HRA computation, or past year corrections? eTaxMate can review your situation, identify which provisions apply, and handle your filing or compliance correctly.

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This blog post is for general information only and does not constitute professional advice. Tax laws are subject to change and their application depends on individual facts and circumstances. Readers should consult a qualified professional before taking any action based on this content. eTaxMate accepts no liability for any action taken based on the information in this post.

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