New Income Tax Act, 2025 to Take Effect from April 1, 2026, Introducing Simplified “Tax Year” System

India is set to usher in a major overhaul of its direct tax framework with the implementation of the Income Tax Act, 2025from April 1, 2026. The new legislation will replace the decades-old Income Tax Act, 1961, aiming to simplify compliance, reduce legal disputes, and modernise tax administration without altering existing income tax slabs. The revamped system will apply from the tax year 2026–27 and is expected to bring structural and procedural clarity for taxpayers across categories. Single “Tax Year” to Replace Existing SystemRevised ITR Filing DeadlinesExtended Window for Revised ReturnsHigher Securities Transaction Tax on DerivativesRationalisation of TCS Under LRSShare Buybacks to Be Taxed as Capital GainsChanges in Sovereign Gold Bond TaxationRelief Measures for TaxpayersSimplified PAN-Based TDS ComplianceStricter Pension Tax Exemption RulesProposed Rules May Increase Allowances Single “Tax Year” to Replace Existing System One of the most significant changes is the introduction of a unified “tax year,” replacing the current distinction between financial year and assessment year. This move is intended to eliminate confusion and make tax filing more straightforward by aligning income earning and assessment within the same period. Revised ITR Filing Deadlines The new framework introduces revised timelines for filing income tax returns (ITRs), tailored to different categories of taxpayers: Individuals filing standard returns (ITR-1, ITR-2): July 31 Individuals with business or professional income (non-audit cases): August 31 Companies and audit cases: October 31 Special category taxpayers: November 30 These updated deadlines will be effective from the 2026–27 tax year. Extended Window for Revised Returns Taxpayers will benefit from a longer window to revise their returns. The deadline will now extend to 12 months from the end of the tax year, compared to the earlier 9 months. However, filings made after nine months will attract additional fees. Lower penalties will apply to individuals with income up to ₹5 lakh, while higher charges will be levied for income exceeding that threshold. Higher Securities Transaction Tax on Derivatives The government has proposed an increase in Securities Transaction Tax (STT) on derivative transactions: Options sales: 0.15% (up from 0.10%) Exercised options: 0.15% (up from 0.125%) Futures transactions: 0.05% (up from 0.02%) This move is expected to impact traders in derivatives markets. Rationalisation of TCS Under LRS Tax Collected at Source (TCS) rates under the Liberalised Remittance Scheme (LRS) will be rationalised: Education and medical remittances above ₹10 lakh: reduced to 2% (from 5%) Overseas tour packages: uniform 2% TCS Other remittances: remain at 20% Share Buybacks to Be Taxed as Capital Gains Under the new regime, proceeds from share buybacks will be taxed as capital gains in the hands of shareholders. Individual promoters will face a tax rate of 30%, while company promoters will be taxed at 22%. Changes in Sovereign Gold Bond Taxation Tax benefits on Sovereign Gold Bond investments will now be restricted to bonds purchased at the time of original issuance. Bonds acquired through the secondary market will be subject to capital gains tax. Relief Measures for Taxpayers The new law introduces several taxpayer-friendly provisions: Interest on compensation awarded by Motor Accident Claims Tribunals will be fully exempt from tax, with no TDS applicable Employer-provided transport facilities or commuting reimbursements will no longer be treated as taxable perquisites Simplified PAN-Based TDS Compliance A key compliance reform includes simplifying the TDS process for property purchases from non-residents. Buyers will now be able to deposit TDS using PAN-based challans, eliminating the need to obtain a TAN. Stricter Pension Tax Exemption Rules Tax exemptions on pensions for armed forces personnel will be limited to cases of discharge due to physical disability. Regular retirement pensions will no longer qualify for such exemptions under the revised provisions. Proposed Rules May Increase Allowances Draft Income Tax Rules, 2026, if approved, propose enhanced allowances and expanded reporting requirements: Education allowance: ₹3,000 per month per child Hostel allowance: ₹9,000 per month per child Read More: Unexplained 435-Day Delay Leads to Dismissal of Tax Revision Petition: Karnataka High Court

New Income Tax Act, 2025 to Take Effect from April 1, 2026, Introducing Simplified “Tax Year” System

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