The new income tax act, formally the Income-tax Act, 2025, came into force on 1 April 2026 and replaced the Income-tax Act, 1961. The Central Board of Direct Taxes (CBDT) confirmed the start date in a press release that day. Parliament passed the law on 12 August 2025 and it received Presidential assent on 21 August 2025.
The short answer for most people: your tax rates did not change because of the new Act. It rewrites the law in simpler language, cuts its length and replaces the confusing "previous year" and "assessment year" with a single tax year. The bigger practical change comes in 2027, when you file the first return for income earned under the new law.
What the new income tax act is and why it was written
The 1961 Act had been amended so many times that it became hard to read. In the Union Budget of July 2024, the government announced a comprehensive review, and a new bill was introduced in the Lok Sabha on 13 February 2025. A Select Committee of the Lok Sabha examined it and reported in July 2025.
The government then withdrew that version and introduced a revised Income-tax (No. 2) Bill, 2025 on 11 August 2025, incorporating most of the committee's suggestions. The Lok Sabha passed it on 11 August and the Rajya Sabha on 12 August 2025.
Budget announcement
July 2024: the government announces a full review of the 1961 Act.
First bill
13 February 2025: Income-tax Bill, 2025 introduced in the Lok Sabha.
Committee review
July 2025: the Select Committee submits its report.
Revised bill passed
11–12 August 2025: both Houses pass the No. 2 Bill.
Assent
21 August 2025: the President signs it into law.
In force
1 April 2026: the Act and the Income-tax Rules, 2026 apply.
What changes: the tax year and a shorter law
One "tax year" instead of two
Under the old law, income earned in 2025-26 (the previous year) was assessed in 2026-27 (the assessment year). Many taxpayers mixed the two up. The new Act uses one term: the tax year, which is the financial year from 1 April to 31 March in which you earn the income.
| Old term (1961 Act) | New term (2025 Act) | Example |
|---|---|---|
| Previous year 2026-27 | Tax year 2026-27 | Income earned 1 April 2026 to 31 March 2027 |
| Assessment year 2027-28 | No separate term | Return for tax year 2026-27 filed in 2027 |
| Section-based references | New section numbers | Deductions, TDS and presumptive schemes renumbered |
A shorter, reorganised Act
The new law is far shorter, with 536 sections arranged in 23 chapters and 16 schedules, according to the government. Provisions such as TDS (tax deducted at source) have been regrouped into tables, and explanations and provisos have been rewritten as plain clauses.
What stays the same for individuals
The new income tax act is mainly a rewrite, not a new tax policy. Rates and slabs are still set through the annual Finance Act, and Finance Minister Nirmala Sitharaman's Budget on 1 February 2026 left personal tax slabs and exemption limits unchanged.
Under the new (default) regime, as reported after the Budget:
A rebate (up to ₹60,000) means resident individuals with taxable income up to ₹12 lakh pay no income tax under the new regime. Salaried taxpayers also get a ₹75,000 standard deduction, so salary up to ₹12.75 lakh is effectively tax-free, with marginal relief just above that level. The old regime, with its deductions, remains available for those who choose it.
What it means for small businesses and professionals
For shops, traders, freelancers and small firms, the basic rules carry over. Business income, presumptive taxation schemes for small businesses and professionals, TDS duties and advance tax all continue, but with new section numbers and reworded conditions.
The practical changes are administrative:
- Invoices and contracts that quote TDS sections should use the new references for payments made from 1 April 2026.
- Accounting and payroll software must be updated for the new sections and forms. The CBDT notified a large set of new forms with the Rules.
- Audit and record-keeping dates should be checked against the new Rules rather than last year's calendar.
If your business also deals with indirect tax, our explainer on the new GST rates and the two-slab system covers the separate GST changes.
Which law applies to your 2026 and 2027 returns
This is the point that confuses most people, so it is worth stating plainly. According to CBDT guidance as reported:
- Income earned from April 2025 to March 2026 (financial year 2025-26) is assessed under the 1961 Act. Returns filed in 2026 for this period use the old framework.
- Income earned from 1 April 2026 falls under the 2025 Act as tax year 2026-27. The first returns under the new law will be filed in 2027.
How to prepare for your first return under the new Act
You have time, but starting early saves stress next July.
- Choose your tax regime for 2026-27 and tell your employer if you are salaried
- Collect TDS certificates and check them against your annual tax statement
- Keep rent receipts, insurance premium receipts and investment proofs if you use the old regime
- Update invoices and contracts with new TDS section references
- Ask your software provider whether it supports the new forms
- Pay advance tax on time if your tax liability requires it
- Book a review with your chartered accountant before the filing season
For help, search chartered accountants and tax consultants or compliance consultants near you. Many small firms also use business software to keep TDS and invoices in order. If you plan to save tax through investments or insurance, compare investment advisers and insurance agents, and check that any product you buy is eligible under your chosen regime.
Starting a business this year?
If you are setting up a new firm, the structure you choose (proprietorship, partnership, LLP or company) affects how its income is taxed. Our guide on how to register a business in India explains the options. You can find your local income tax and revenue offices on IndiaYP too.
Final word
The new income tax act changes the words and numbers of the law more than the tax you pay. From 1 April 2026, income is counted in tax years, sections have new numbers and forms have been redrawn, while rates continue to come from each year's Budget. Check your regime choice and update your invoices now, then talk to a tax professional well before your first return in 2027. Professionals can list their practice on IndiaYP to be found by new clients.
Frequently asked questions
When did the new income tax act come into force?
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the Income-tax Act, 1961. Parliament passed it on 12 August 2025, and it received Presidential assent on 21 August 2025. The CBDT announced its commencement in a press release on 1 April 2026, and the Income-tax Rules, 2026 also took effect from that date.
Did income tax rates change under the new Act?
No. The new Act rewrites the law but does not set new rates on its own; rates and slabs come from the annual Finance Act. In the Union Budget on 1 February 2026, the Finance Minister left personal income tax slabs and exemption limits unchanged, and the rebate making income up to ₹12 lakh tax-free under the new regime continued.
What is a tax year under the new law?
A tax year is the financial year, from 1 April to 31 March, in which you earn income. It replaces the old pair of "previous year" and "assessment year". For example, income earned from 1 April 2026 to 31 March 2027 belongs to tax year 2026-27, and the return for it is filed in 2027.
Which law applies to the return I file in 2026?
According to CBDT guidance as reported, returns filed in 2026 for income earned in financial year 2025-26 are assessed under the Income-tax Act, 1961. The new Act applies to income earned from 1 April 2026, so the first returns under it will be filed in 2027. Check the e-filing portal for the forms that apply to you.
Is income up to ₹12 lakh still tax-free?
Yes, for resident individuals under the new tax regime. A rebate of up to ₹60,000 means no tax is payable on taxable income up to ₹12 lakh. Salaried taxpayers also receive a ₹75,000 standard deduction, so salary up to ₹12.75 lakh is effectively tax-free, with marginal relief for incomes slightly above.
Is the old tax regime still available?
Yes. The new regime is the default, but individuals can still choose the old regime, which allows deductions such as those for certain investments, insurance premiums and house rent allowance. Salaried people usually tell their employer their choice at the start of the year. Compare your tax under both regimes before deciding.
What changes for small businesses under the new Act?
The core rules continue: business income, presumptive taxation schemes, TDS duties and advance tax all carry over. What changes is the section numbers, the wording and many forms. Businesses should update invoices, contracts and accounting software that refer to old sections, and check audit and filing dates against the new Rules.
When were the Income-tax Rules 2026 notified?
The CBDT notified the Income-tax Rules, 2026 on 20 March 2026, according to the government's press release, and they came into force on 1 April 2026 along with the Act. A large set of new forms was notified with them, each mapped to an older form. Check the Income Tax Department website for the official text.
Do I need to change TDS sections on invoices?
For payments made from 1 April 2026, TDS falls under the new Act, so references to old section numbers on invoices, contracts and certificates should be updated. Payments and deductions relating to earlier periods follow the old law. Ask your accountant or software provider for the correct new references for each type of payment you make.
Where can I read the official text of the Income-tax Act 2025?
The Income Tax Department publishes the Act, the Rules, the old-to-new section mapping and FAQs on incometaxindia.gov.in. The e-filing portal carries the return forms. For legal interpretation of a specific situation, such as a business restructuring or a large property sale, consult a chartered accountant or tax lawyer.
Source: IndiaYP
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