The Income Tax Act, 2025 Is Live – Here’s What You Actually Need to Know

Effective 1 April 2026, the Income Tax Act, 2025 replaces the Income Tax Act, 1961 and the Income Tax Rules, 1962. Before you panic or celebrate, here is the honest headline: this is largely a restatement, not a reinvention. Tax rates, deductions, and core principles are unchanged. What has changed is the structure, the language, the section numbering, and a handful of substantive positions that matter depending on who you are.

The scale of the cleanup is significant. The Act has been compressed from roughly 800+ sections across 47 chapters to 536 sections across 23 chapters. The Income Tax Rules, 1962, which ran to 500+ rules, are simultaneously replaced by the Income Tax Rules, 2026 with just 333 rules. Provisos within provisos, explanations within explanations, gone. Plain language throughout.

Here is everything you need to know, broken down by who you are.

The Structural Shifts

“Tax Year” replaces Previous Year and Assessment Year

The old system, where you earned income in the Previous Year 2025-26 and got assessed in Assessment Year 2026-27, is gone. From 1 April 2026, the year in which you earn income is simply the Tax Year. Tax Year 2026-27 runs from 1 April 2026 to 31 March 2027. This eliminates a long-running source of confusion, especially in multi-year legal documents and fund agreements.

All section references are now stale

Every SHA, PPM, contribution agreement, ESOP scheme document, tax opinion, employment agreement, or compliance checklist that cites a section of the Income Tax Act, 1961 carries an invalid reference from 01 April 2026. This is not a tax change, but it is a real documentation task. Start the audit now.

Two frameworks run in parallel for now

The new Act governs income earned from 1 April 2026 onwards. All pending assessments, appeals, and proceedings relating to earlier years continue under the 1961 Act. Returns for FY 2025-26, filed in July 2026, are still filed under the old Act. Your first return under the Income Tax Act, 2025 will be filed in July 2027.

For Founders and Startups

Startup tax holiday: incorporation deadline extended

Eligible startups can claim a 100% profit deduction for any three consecutive years within the first ten years of incorporation. The eligibility cut-off for incorporation has been extended to April 1, 2030, from the earlier April 1, 2025. If your startup was incorporated after April 2025 and fulfils the eligibility criteria, you now qualify. Verify eligibility with your tax advisor, as conditions around DPIIT recognition and business type still apply.

ESOPs: no change in tax treatment

Perquisite valuation at exercise is unchanged. ESOPs continue to be taxed as a perquisite in the hands of the employee at the time of exercise, based on fair market value minus the exercise price. However, ESOP scheme documents and employment agreements referencing old section numbers will need to be updated.

For HNIs and Angel Investors

Capital gains: rates and holding periods unchanged

Short-term capital gains on equity remain at 20%. Long-term capital gains on equity remain at 12.5%, with a Rs. 1.25 lakh annual exemption. The provisions are now consolidated under Clauses 67 and 196-198. No substantive change, but your references in filings will need to reflect the new clause numbers.

Buyback proceeds: now taxed as capital gains, not dividends

This is a Budget 2026 change now coming into effect. Previously, buyback proceeds were treated as deemed dividends and taxed at slab rates. From 01 April 2026, they are taxed as capital gains. The impact varies significantly by shareholder type:

Shareholder Type	Tax Treatment from 1 April 2026
Retail / non-promoter investors	Capital gains: LTCG at 12.5% or STCG at 20% depending on holding period
Individual promoters	Effective rate of 30% (inclusive of additional tax)
Corporate promoters	Effective rate of 22%

For most retail investors this is likely more favourable. Companies using buyback as an alternative to dividend distribution need to recalibrate their capital return strategy.

Interest deduction against dividend and mutual fund income: removed

Previously, you could deduct interest expenses of up to 20% of income incurred to earn dividend or mutual fund income. From 1 April 2026, no deduction is permitted, regardless of actual borrowing. If you have a leveraged structure built around dividend-yielding stocks or mutual fund distributions, your taxable income goes up. Review such arrangements and assess the post-tax impact.

Sovereign Gold Bonds: capital gains exemption narrowed

The CGT exemption on SGB redemption now applies only to bonds purchased at the original issue and held to maturity. If you bought SGBs on the secondary market, redemption gains will be taxed as capital gains. This significantly affects investors who have been acquiring SGBs on exchanges expecting tax-free exits.

Gift and deemed gift provisions: retained, renumbered

No substantive change. The existing framework for taxation of gifts and deemed gifts is carried over intact. Documentation references simply need to be updated to the new clause numbers.

For AIFs and Fund Managers

PPMs, contribution agreements, investor communications: all carry stale citations

The governing section for AIF pass-through taxation, previously Section 115UB, has been renumbered under the new Act. Every fund document referencing the 1961 Act needs to be updated before your next close, LP communication, or investor report. This is an immediate documentation task, not a future one.

TDS provisions: consolidated

What were 65+ TDS sections under the 1961 Act are now 9 clauses (390-398) under the 2025 Act. Coordinate with your fund administrator and accountants to update withholding workflows and compliance checklists. Technology systems processing TDS deductions should also be reviewed for mapping accuracy under the new numbering.

For Salaried Individuals

Tax slabs and rates: unchanged

The new regime remains the default. Income up to Rs. 12 lakh is tax-free; Rs. 12.75 lakh for salaried individuals after the Rs. 75,000 standard deduction. The old regime remains available via Form 10-IEA.

Form 16 is now Form 130

Several key tax forms have been renamed. They are functionally identical, same purpose, same issuance timelines, just new numbers. Here is what has changed:

Old Form	New Form	Purpose
Form 16	Form 130	TDS certificate for salary / pension income (annual)
Form 16A	Form 131	TDS certificate for non-salary income: rent, interest, fees (quarterly)
Form 26AS	Form 168	Annual tax statement
Form 24Q	Form 138	Quarterly TDS return for salaries

In June 2026, you will still receive the old Form 16 for FY 2025-26 as usual. The first Form 130 will be issued in June 2027 for Tax Year 2026-27.

HRA: 50% exemption extended to 8 cities

The 50% HRA exemption, previously available only in Delhi, Mumbai, Kolkata, and Chennai, now extends to four additional cities: Bengaluru, Pune, Hyderabad, and Ahmedabad. Additionally, HRA claimants must now disclose their relationship with the landlord in the new Form 124, specifically targeting rent paid to family members.

Perquisite values revised

Company-provided car perquisite values, unchanged for years, have finally been updated:

Vehicle Engine Capacity	Monthly Taxable Perquisite Value
Up to 1.6L	Rs. 8,000/month
Above 1.6L	Rs. 10,000/month

Employer-borne commuting costs, including reimbursements and not just employer-provided vehicles, are now also excluded from taxable perquisites. Review your salary structure if you have a car lease or company vehicle arrangement.

Education and hostel allowances revised upward

The education allowance has been updated to Rs. 3,000 per month per child, up from Rs. 100, a figure that had not been revised in decades. Hostel allowance limits have also been revised. These allowances are relevant under the old tax regime only.

Filing deadlines: ITR-3 and ITR-4 extended

Non-audit taxpayers filing ITR-3 or ITR-4 now have until August 31, extended from July 31. ITR-1 and ITR-2 remain due on July 31. The revised return window has been extended to 12 months from the end of the Tax Year, with a fee applicable for revisions filed after the 9-month mark.

The Bottom Line

The Income Tax Act, 2025 is a structural overhaul more than a policy one. For most taxpayers, the immediate obligation is documentation: audit your agreements, update your section references, and familiarise yourself with the new form names and clause numbers. The substantive changes that actually move the needle are the buyback taxation shift, the removal of the interest deduction on dividend income, the narrowing of the SGB exemption, and the HRA city expansion. Everything else is largely housekeeping.