Quick Answer
13 min read|Updated: Apr 1, 2026|Income-tax
Quick Answer: The Income Tax Act 2025 replaces the 1961 Act effective 1 April 2026 (AY 2026-27). Major changes include: new tax regime as default, simplified two-tier capital gains holding periods, permanent indexation removal, rationalised TDS rates, and simplified penalty structure.
3.5 Penalty Structure Simplified
The 2025 Act replaces the complex, multi-layered penalty regime of the 1961 Act with a more rationalised framework. Key changes include clearer quantification of penalties and reduced discretion for assessing officers. See our penalties guide.
3.6 Faceless Assessment as Statutory Default
Under the 1961 Act, faceless assessment was introduced administratively via notifications. The 2025 Act makes faceless assessment (including faceless appeals before CIT(A)) the statutory default for most proceedings.
3.7 Updated Return Provision Retained
Section 139(8A) equivalent — the updated return — continues under the 2025 Act, allowing taxpayers to file updated returns within 24/36/48 months from the end of the relevant AY with additional tax of 25%/50%/70%.
4. What Stays the Same
Despite the overhaul, many fundamental features of Indian income tax law are preserved in the 2025 Act:
- Five heads of income: Salary, House Property, Business/Profession, Capital Gains, Other Sources — the foundational structure is unchanged
- Assessment Year / Financial Year: The AY/FY concept continues. Income earned in FY is assessed in the following AY
- TDS/TCS machinery: The deduction-at-source and collection-at-source framework continues with the same operational structure
- Advance tax: Quarterly instalment schedule (15 June, 15 Sept, 15 Dec, 15 March) continues as before
- Appeal hierarchy: CIT(A) / JCIT(A) as first appeal, ITAT as second appeal, High Court on substantial questions of law, Supreme Court as final appellate authority
- Chapter VI-A deductions (old regime): Sections 80C, 80D, 80E, 80G, 80TTA, 80TTB, and others continue for taxpayers under the old regime
- Corporate concessional rates: Section 115BAA (22%) and 115BAB (15%) continue with the same conditions
- MAT at 15%: Minimum Alternate Tax on book profits continues for non-concessional regime companies
- Presumptive taxation: Sections 44AD, 44ADA, 44AE continue with the same thresholds
- DTAA provisions: All existing treaties continue to apply; no renegotiation needed
- Residential status rules: The criteria for determining resident/non-resident/RNOR status remain substantively the same
5. Comprehensive Comparison — Income Tax Act 1961 vs 2025
| Feature | 1961 Act (up to AY 2025-26) | 2025 Act (AY 2026-27 onward) |
|---|---|---|
| Number of sections | ~298 (with extensive sub-sections) | Reduced and consolidated |
| Default tax regime (individuals) | Old regime (pre-AY 2024-25); New regime default from AY 2024-25 | New regime (115BAC) as permanent default |
| Tax slab rates (new regime) | 0% up to Rs 3L, 5% Rs 3-7L, 10% Rs 7-10L, 15% Rs 10-12L, 20% Rs 12-15L, 30% above Rs 15L | Same structure continued with possible refinements |
| Section 87A rebate | Up to Rs 25,000 (new regime, income up to Rs 7L / effectively Rs 12L with marginal relief) | Continues — up to Rs 12 lakh effectively tax-free under new regime |
| Capital gains — LTCG holding period | Three-tier: 12 months (listed equity), 24 months (immovable property, unlisted), 36 months (others like gold, debt MF) | Two-tier: 12 months (listed equity/MF/REIT), 24 months (all others) |
| LTCG rate (listed equity) | 10% above Rs 1 lakh (pre-July 2024); 12.5% above Rs 1.25 lakh (post-July 2024) | 12.5% above Rs 1.25 lakh |
| LTCG rate (other assets) | 20% with indexation (pre-July 2024); 12.5% without indexation (post-July 2024) | 12.5% without indexation |
| STCG rate (listed equity) | 15% (pre-July 2024); 20% (post-July 2024) | 20% |
| Indexation of cost | Available for assets acquired before 23 July 2024 (transitional); removed for later acquisitions | Permanently removed |
| Standard deduction (salary) | Rs 50,000 (old regime); Rs 75,000 (new regime from AY 2025-26) | Rs 75,000 (new regime); Rs 50,000 (old regime) |
| Section 80C limit | Rs 1,50,000 (old regime only) | Rs 1,50,000 (old regime only — unchanged) |
| Angel tax (Sec 56(2)(viib)) | Applicable (with DPIIT exemption notifications) | Abolished — not carried into 2025 Act |
| TDS sections | 30+ distinct TDS sections (192 to 206) | Rationalised — fewer sections, consolidated thresholds |
| Penalty for underreporting | Section 270A: 50% (underreporting), 200% (misreporting) | Simplified penalty framework (equivalent provisions continued) |
| Assessment — faceless | Administrative (notification-based) | Statutory default |
| Updated return (Sec 139(8A)) | Available (24/36/48 months with 25%/50%/70% additional tax) | Continued with same framework |
| Corporate tax — 115BAA | 22% + 10% surcharge + 4% cess = 25.17% | Same — 25.17% effective |
| MAT rate | 15% of book profits | 15% of book profits (unchanged) |
| DDT | Abolished from AY 2021-22 | Remains abolished |
| Buyback tax | Shifted from company to shareholder (Oct 2024) | At shareholder level (deemed dividend) |
| Presumptive (44AD) limit | Rs 2Cr / Rs 3Cr (95% digital) | Rs 2Cr / Rs 3Cr (unchanged) |
| Five heads of income | Salary, HP, PGBP, CG, OS | Same five heads retained |
| Appeal hierarchy | CIT(A) → ITAT → HC → SC | Same hierarchy retained |
6. Transitional Rules — Detailed
The 2025 Act contains comprehensive transitional provisions to ensure smooth migration. For an in-depth treatment, see our dedicated transitional provisions guide.
6.1 Depreciation WDV Carry-Forward
- WDV of each block of assets as per the 1961 Act books on the transition date (31 March 2026) carries forward to the 2025 Act
- No recomputation of depreciation previously claimed — amounts allowed under the 1961 Act stand
- New depreciation rates under the 2025 Act apply from FY 2025-26 onward
- Additional depreciation claimed under the 1961 Act is not disturbed; unabsorbed depreciation continues to carry forward indefinitely
6.2 Brought-Forward Losses
- Business loss: remaining period out of 8 years from the original AY of loss under the 1961 Act
- Capital loss: remaining period out of 8 years
- Speculative loss: remaining period out of 4 years
- Condition: the return for the year of loss must have been filed by the due date under the 1961 Act
- Set-off rules of the 2025 Act apply to brought-forward 1961 Act losses
6.3 MAT Credit
- MAT credit balance as on the transition date carries forward for the remaining period (15 years from the year of credit)
- Set-off mechanism unchanged — excess of regular tax over MAT in future years
- Companies opting for 115BAA permanently lose all accumulated MAT credit
6.4 Capital Gains — Pre-Transition Assets
- Cost of acquisition: as per 1961 Act rules (original cost or FMV as on 1 April 2001, whichever is higher)
- Holding period: counted from original date of acquisition, not the transition date
- Pre-July 2024 assets: transitional election between old method (20% with indexation) and new method (12.5% flat) — taxpayer computes both and pays the lower amount
- FMV grandfathering for listed equity (31 January 2018 price) continues
6.5 Ongoing Proceedings and Appeals
- Assessments in progress under the 1961 Act: continue under 1961 Act procedure and substantive law
- Appeals filed under the 1961 Act: heard under 1961 Act provisions by the respective appellate authority
- Reassessments / reopenings initiated under the 1961 Act: continue under the old Act
- New proceedings for AY 2026-27 onward: governed by the 2025 Act
- Advance rulings: pending applications continue to be heard and disposed of
6.6 Deductions with Unexpired Period
- Chapter VI-A deductions with multi-year tenure (80-IA: 10/15 years, 80-IAB, 80-IAC: 3 out of 10 years) continue for the remaining unexpired period under the 2025 Act
- The conditions for claiming these deductions remain the same as under the 1961 Act
7. Timeline of Transition
| Date / Period | Event | Governing Act |
|---|---|---|
| Up to 31 March 2025 | FY 2024-25 income earned | 1961 Act (AY 2025-26) |
| 1 April 2025 – 31 March 2026 | FY 2025-26 income earned | 2025 Act (AY 2026-27) |
| 1 April 2026 | Income Tax Act 2025 effective date; AY 2026-27 begins | 2025 Act |
| 31 July 2026 | ITR due date for non-audit individuals (AY 2026-27) — first returns under 2025 Act | 2025 Act |
| 31 October 2026 | ITR due date for audit cases, companies, firms (AY 2026-27) | 2025 Act |
| Ongoing after 1 April 2026 | Pre-existing assessments / appeals for AY 2025-26 and earlier | 1961 Act (procedure and substantive law) |
| AY 2027-28 onward | All income, compliance, and proceedings | 2025 Act exclusively |
8. What Changes vs What Stays — Summary
| Changes Under 2025 Act | Stays the Same |
|---|---|
| New regime as default | Five heads of income |
| Two-tier capital gains holding (12/24 months) | AY / FY concept |
| Indexation removed permanently | TDS/TCS machinery |
| LTCG flat 12.5% (all assets) | Advance tax quarterly schedule |
| TDS rates rationalised | Appeal hierarchy (CIT(A) → ITAT → HC → SC) |
| Penalty structure simplified | 80C, 80D deductions (old regime) |
| Faceless assessment — statutory default | 115BAA (22%), 115BAB (15%) |
| Angel tax abolished | MAT at 15% of book profits |
| Section numbers reorganised | Presumptive taxation (44AD/44ADA/44AE) |
| Fewer total sections | DTAAs — all existing treaties |
| Buyback taxed at shareholder level | Residential status determination rules |
9. Action Items for Taxpayers and CAs
| Action Item | Who | Priority | Deadline |
|---|---|---|---|
| Perform regime selection analysis (old vs new) for AY 2026-27 | All individual/HUF taxpayers | High | Before ITR filing |
| Reconcile depreciation schedules — verify WDV transition | Businesses, companies, CAs | High | April-June 2026 |
| Document brought-forward losses — list each loss, AY of origin, remaining years | All taxpayers with losses | High | April 2026 |
| Verify MAT credit balance and compute expiry dates per year | Companies (not 115BAA) | High | April 2026 |
| Review capital gains positions — identify pre-July 2024 assets, compute both methods | Investors, property owners | Medium | Before any asset sale |
| Update accounting software for new section numbers and provisions | CAs, tax professionals | Medium | June 2026 |
| Review TDS compliance — new rates and consolidated sections | All deductors | High | April 2026 |
| Evaluate 115BAA option — cost-benefit of opting in (if not already opted) | Companies | Medium | Before ITR due date |
| File Form 10-IE (or equivalent) to opt out of new regime if old regime preferred | Individuals, HUFs (business income) | High | Before ITR due date |
| Train staff on new section numbers and return forms | CA firms, tax departments | Medium | May 2026 |
Expert Insight — CA V. Viswanathan
The transition from the 1961 Act to the 2025 Act is the most significant event in Indian direct tax history since the original enactment. While the substantive impact is less dramatic than the structural overhaul might suggest — since many key changes (115BAC default, capital gains reforms, DDT abolition) were already implemented via amendments to the 1961 Act — the compliance transition demands careful attention. The highest-risk areas are: (1) depreciation WDV reconciliation, where any discrepancy between the 1961 Act computation and the 2025 Act opening balance will trigger scrutiny; (2) brought-forward loss documentation, where missing or incomplete records could result in permanent loss of carry-forward benefit; and (3) the capital gains transitional election for pre-July 2024 assets, which requires computing tax both ways. I strongly recommend that every taxpayer with business income, significant investments, or corporate entities undergo a formal “transition audit” — a one-time exercise to reconcile all positions from the 1961 Act into the 2025 Act framework. For assistance, contact our team.
Key Takeaways
- The Income Tax Act 2025 is effective from 1 April 2026 for AY 2026-27, replacing the 1961 Act
- New tax regime (115BAC) is the permanent default — opt-out required for old regime
- Capital gains simplified: two-tier holding period (12/24 months), 12.5% LTCG rate, no indexation
- Five heads of income, AY/FY concept, TDS/TCS machinery, appeal hierarchy — all unchanged
- Chapter VI-A deductions (80C, 80D etc.) continue under old regime; corporate rates (115BAA/BAB) unchanged
- Transitional rules preserve depreciation WDV, brought-forward losses, MAT credit, and ongoing proceedings
- Angel tax abolished; faceless assessment made statutory default; TDS rationalised
- Pre-July 2024 capital assets get transitional election between old (20% indexed) and new (12.5% flat) method
- Critical action: perform transition audit — reconcile depreciation, document losses, verify MAT credit
- Section numbers have changed — refer to the mapping guide for cross-references
Frequently Asked Questions — Income Tax Act 2025 vs 1961 Transition
Q: When does the Income Tax Act 2025 come into effect?
The Income Tax Act 2025 is effective from 1 April 2026, applicable for Assessment Year 2026-27 (Financial Year 2025-26). Income earned during FY 2025-26 is assessed under the 2025 Act. The 1961 Act ceases to govern new income from this date onward, although proceedings already initiated under the 1961 Act for earlier years continue under that Act.
Q: What are the major differences between the 2025 Act and the 1961 Act?
Key differences include: new tax regime as the permanent default for individuals/HUFs, simplified two-tier capital gains holding periods (12 and 24 months), permanent removal of indexation, rationalised TDS rates with fewer sections, simplified penalty structure, faceless assessment as statutory default, angel tax abolition, fewer total sections with reorganised chapters, and buyback taxation at the shareholder level. However, many fundamentals remain unchanged.
Q: Is the new tax regime the default under the 2025 Act?
Yes. The new tax regime under Section 115BAC (equivalent) is the default for individuals, HUFs, AOPs, and BOIs. This was already the case from AY 2024-25 under the amended 1961 Act and is now a permanent structural feature of the 2025 Act. Taxpayers who prefer the old regime must actively opt out by filing the prescribed form (equivalent of Form 10-IE) before the ITR due date. Salaried employees without business income can switch between regimes each year.
Q: What happens to brought-forward losses under the 2025 Act?
Losses properly incurred and reported under the 1961 Act carry forward under the 2025 Act for their remaining period. Business losses carry for the remaining portion of 8 years from the original AY of loss, capital losses for 8 years, and speculative losses for 4 years. The set-off rules of the 2025 Act apply going forward. The condition of timely filing under the 1961 Act must have been satisfied for the loss year.
Q: How is depreciation WDV carried forward to the 2025 Act?
The Written Down Value of each block of assets as computed under the 1961 Act on the transition date (31 March 2026) carries forward as the opening WDV under the 2025 Act. No recomputation of previously claimed depreciation is required. New depreciation rates specified under the 2025 Act apply from FY 2025-26. Additional depreciation and unabsorbed depreciation carry forward as well.
Q: What happens to MAT credit under the 2025 Act?
MAT credit accumulated under the 1961 Act carries forward to the 2025 Act for the remaining period out of 15 years from the year of credit. The set-off mechanism remains the same — credit is available against the excess of regular tax over MAT. Companies that opt for Section 115BAA permanently forfeit all accumulated MAT credit since MAT itself does not apply under the concessional regime.
Q: Do ongoing assessments under the 1961 Act continue?
Yes. Assessment proceedings, reassessments, appeals, and revisions already initiated under the 1961 Act for AY 2025-26 and earlier continue to be governed by the 1961 Act — both procedurally and substantively. Pending appeals before CIT(A), ITAT, High Courts, and the Supreme Court are heard under the 1961 Act provisions. Only new proceedings relating to AY 2026-27 onward fall under the 2025 Act.
Q: Is indexation available under the Income Tax Act 2025?
No. Cost Inflation Index (CII) based indexation has been permanently removed under the 2025 Act. All long-term capital gains are computed at actual cost of acquisition without inflation adjustment and taxed at 12.5%. For assets acquired before 23 July 2024, a transitional election is available — the taxpayer can compute tax under both the old method (20% with indexation) and the new method (12.5% without) and pay the lower amount.
Q: What should taxpayers do to prepare for the transition?
Key preparatory actions: (1) perform regime selection analysis comparing old vs new regime for AY 2026-27; (2) reconcile depreciation schedules and verify WDV transition; (3) document all brought-forward losses with AY of origin and remaining carry-forward period; (4) verify MAT credit balance and expiry dates; (5) review capital gains positions for pre-July 2024 assets and compute both methods; (6) update accounting and tax software for new section numbers; (7) engage a CA for a formal transition audit.
Q: Do DTAAs continue to apply under the 2025 Act?
Yes. All existing Double Taxation Avoidance Agreements negotiated under the 1961 Act continue to be valid and applicable under the 2025 Act. Treaty provisions override domestic law where they provide more beneficial treatment to the taxpayer. No renegotiation of treaties is required. The 2025 Act’s domestic provisions apply only to the extent they are not overridden by an applicable DTAA.
Q: Are Section 80C, 80D deductions still available under the 2025 Act?
Yes, for taxpayers who opt out of the default new regime and choose the old regime. Sections 80C (Rs 1.5 lakh), 80D (medical insurance), 80E (education loan interest), 80G (donations), 80TTA/80TTB (savings/FD interest), and other Chapter VI-A deductions continue to be available. Under the new regime (115BAC default), these deductions are not available except employer NPS contribution under Section 80CCD(2).
Q: How are capital gains holding periods changed under the 2025 Act?
The 2025 Act simplifies capital gains holding periods into a clean two-tier system: (1) 12 months for listed equity shares, equity-oriented mutual fund units, and units of business trusts (REITs/InvITs); (2) 24 months for all other capital assets — unlisted shares, immovable property, gold, jewellery, debt mutual funds, bonds, and any other asset. The earlier three-tier system under the 1961 Act (12/24/36 months for different asset classes) is eliminated.
Disclaimer: This article is for educational purposes and does not constitute legal or tax advice. The transition from the 1961 Act to the 2025 Act involves complex considerations specific to each taxpayer. Consult a qualified chartered accountant for personalised advice. For transition audit and advisory services, visit Virtual Auditor.
