# Income Tax Act 2025 — Complete Guide for Salaried, Founders & MSMEs

Effective April 1, 2026 | President's Assent: 21 August 2025 | Replaces: Income Tax Act, 1961

Quick context: The Income Tax Act, 2025 contains 536 sections across 23 chapters and 16 schedules, replacing the 819 sections, 47 chapters and 14 schedules of the Income Tax Act, 1961. It is the biggest overhaul of India's direct tax law in over six decades. Tax rates, slabs, and most core principles remain unchanged — what's changed is the structure, language, section numbers, and forms. Source: Income Tax Department FAQ — Objective and Scope of the New Act.

This guide explains every meaningful change in plain language — no legalese, no jargon — with examples salaried employees, founders, MSMEs, NRIs and senior citizens can actually use.

# ⚠️ Read This FIRST — The Single Biggest Misunderstanding

Aap July 2026 mein jo ITR file kar rahe ho woh OLD Act (1961) ke under hi file hogi.

Yeh confusion ka biggest source hai. Let's clear it once:

The new Act became effective from April 1, 2026. But it governs income earned from April 1, 2026 onwards. The income you earned in FY 2025-26 (which you're filing right now) is still governed by the 1961 Act.

So in practical terms: - For salaried filing in July 2026: Your Form 16 is still called Form 16. Sections 80C, 80D, 24(b), 87A, 115BAC all apply as you know them. - From Tax Year 2026-27 onwards (filing in 2027): Form 16 becomes Form 130. Section 80C becomes Section 123. New Act applies in full.

Section 536(3) of the new Act explicitly bridges this transition — any reference to a "tax year" under the new Act for past years shall be read as the corresponding "previous year" under the old Act. So no taxpayer is left in limbo.

# Section 1 — Why a New Act Was Needed

The Income Tax Act, 1961 was drafted for an India with: - No computers - A largely cash economy - Limited international trade - ~2 lakh income tax assessees

Over 64 years, it accumulated: - Over 4,000 amendments - ~1,200 provisos - ~900 explanations - Sections like 80CCD(1B), 115BAC(1A)(ii), 194-IA — alphanumeric chaos - Cross-references that required a flowchart to follow

The Parliamentary Select Committee chaired by MP Baijayant Panda formally noted that simplification — not incremental amendment — was the only realistic solution. The CBDT-led drafting process took two years. The Income-tax (No. 2) Bill, 2025 was passed by Lok Sabha on August 11, 2025 and received Presidential assent on August 21, 2025.

# Quick stats — Old vs New

The reduction isn't from cutting tax provisions — it's from removing redundancy, dropping obsolete sections, and absorbing provisos into the main text using tables and formulas.

# Section 2 — Tax Year Replaces Previous Year + Assessment Year

This is the biggest conceptual change.

# The old system (confusing)

Under the 1961 Act, every income event had two year references: - Previous Year (PY) / Financial Year (FY): The year you actually earned the income (April–March) - Assessment Year (AY): The year after the PY, in which the return is filed and income is assessed

So income earned in FY 2024-25 was assessed in AY 2025-26. New taxpayers — and frankly, half of seasoned ones — routinely got confused which year to mention where.

# The new system (single timeline)

Under the new Act, both are replaced by a single concept: Tax Year.

"Tax Year" means the financial year (April 1 to March 31) in which income is earned. There is no separate "assessment year." — Section 2 (Definitions), Income Tax Act, 2025

The Income Tax Department's official FAQ confirms: "The concept of 'Tax Year' is applicable from 01 April 2026. Simply put, Tax Year concept under the new Act corresponds to Previous Year concept under the Income Tax Act, 1961."

# Worked example

Special case: If a new business starts mid-year (say December 1, 2026), its first Tax Year runs from December 1, 2026 to March 31, 2027 — same as Previous Year treatment under the old Act.

# What does not change

• Financial year still runs April 1 to March 31
• Tax calculation logic is unchanged
• Books of accounts, statutory audit dates, GST cycles — all unchanged
• Existing PAN, TAN, faceless assessment systems all continue

# Section 3 — All Major Section Numbers Have Changed (Renumbering)

Almost every section number you've memorized is now different. The benefits are identical — only the references have changed.

# Salaried employee cheat sheet

# Capital gains cheat sheet

# TDS cheat sheet

For a full section-by-section mapping, the CBDT Section-to-Clause correspondence is the official reference.

# Section 4 — Section 393: TDS Consolidated Into ONE Section

If you run a business and deduct TDS, this is the most important change for you.

# What changed

Under the 1961 Act, TDS provisions were scattered across 40+ sections (192, 193, 194, 194A, 194B, 194BA, 194C, 194D, 194-IA, 194J, 194Q, 194R, 195, 206AA, 206C…). Every payment type had its own section, its own rate, its own threshold, its own form.

Under the new Act: - Section 392 — TDS on salary (kept separate because of detailed slab-based calculation) - Section 393 — TDS on all other payments (rent, contractor, professional fees, interest, commission, dividend, etc.) - Section 394 — TCS (Tax Collected at Source) — all categories

Section 393 organizes everything into six tables based on payment type, with rates and thresholds in a tabular, easy-lookup format.

# Why this matters operationally

• TDS return forms (26Q, 27Q, 27EQ) now use numeric payment codes (1001 to 1067) instead of old section numbers like 194C, 194J
• Using "194C" in a return for a payment made on/after April 1, 2026 will trigger validation errors
• Your accounting software / payroll system needs updating before April 1, 2026

# Substantive changes (not just renumbering)

A few real changes from rates and threshold simplifications:

1. Manpower supply explicitly included under "work" — earlier ambiguity is resolved. If you outsource workers, TDS applies.
2. Motor Accident Claims Tribunal interest — fully exempt now. Earlier ₹50,000 ceiling removed.
3. CBDT circulars now have statutory force under Section 400(2) — the old "circulars are merely advisory" argument no longer holds.

# Section 5 — New Tax Forms: Form 130, 131, 121, 168 and More

Most form numbers you know are getting renamed from Tax Year 2026-27 onwards. Here's the master list:

# Form 130 (the new Form 16) — what's actually different

Form 130 is structurally similar to Form 16 but with more detailed disclosures: - Quarter-wise TDS breakup - Component-level salary disclosure (not just aggregates) - Mandatory issue via TRACES portal (no offline issuance) - Includes Annexure II for senior citizens opting out of ITR filing where bank-deducted TDS is the only tax (Section 393 read with Section 402(39))

# When do new forms start?

• For FY 2025-26 salary (issued June 2026): Still Form 16 — old format
• For Tax Year 2026-27 salary (issued June 2027): Form 130 — new format
• Form 121 for nil TDS declaration: Started April 1, 2026 — submit Form 121, not 15G/15H

# Section 6 — Section 123: All Deductions Under One Section

This is the change every salaried person and tax planner needs to understand.

Under the old Act, deductions were scattered: - Section 80C — life insurance, PPF, ELSS, home loan principal, etc. (₹1.5 L) - Section 80CCC — pension funds - Section 80CCD(1) — NPS employee contribution - Section 80CCD(1B) — additional NPS ₹50,000 - Section 80CCD(2) — NPS employer contribution

Under the new Act: - Section 123 read with Schedule XV — combines 80C, 80CCC, 80CCD(1) into one provision with the same combined cap of ₹1.5 lakh - The additional ₹50,000 NPS (old 80CCD(1B)) and employer NPS contribution (old 80CCD(2)) continue separately

Schedule XV lists every eligible instrument: - Life insurance premiums (own/spouse/children) - PPF, ELSS, NSC - 5-year tax-saving FD - Sukanya Samriddhi Yojana - Tuition fees (max 2 children) - Home loan principal repayment - Stamp duty + registration on house purchase - Senior Citizen Savings Scheme

Critical reminder: Section 123 deductions, like the old 80C, are available only under the old tax regime. If you opt for the new tax regime (Section 202), you forfeit these deductions in exchange for lower slab rates and ₹75,000 standard deduction.

# Section 7 — HRA New City List: Bengaluru, Hyderabad, Pune, Ahmedabad Added

Under the old Act, only four cities were classified as "Metro" for the 50% HRA exemption: Delhi, Mumbai, Kolkata, Chennai. All other cities — including Bengaluru, Hyderabad, Pune, Ahmedabad — got only 40%.

This was an old, anachronistic list. India's tech and economic geography had moved on.

# What the Income Tax Rules, 2026 changed

Effective April 1, 2026, the 50% HRA exemption category now includes: - Delhi, Mumbai, Kolkata, Chennai (already included) - Bengaluru, Hyderabad, Pune, Ahmedabad (newly added)

# Real ROI for a Bengaluru salaried employee

Take an employee in Bengaluru earning ₹15 lakh CTC, paying ₹40,000/month rent (₹4.8 lakh annually):

Under old rules (Bengaluru = 40% city): - HRA exemption (least of three): ~₹2.4 lakh exempt - Taxable HRA portion: higher

Under new rules (Bengaluru = 50% city): - HRA exemption: ~₹3.0 lakh exempt - Additional tax saving (30% bracket): ~₹18,720 per year

This applies only if you opt for the old tax regime, since HRA exemption isn't available under the new regime.

# Section 8 — Updated Return (ITR-U) Window Doubled to 48 Months

Under the old framework, if you missed reporting income or made an error after the belated return deadline, you had 2 years (24 months) from the end of the relevant assessment year to file ITR-U.

The Finance Act 2025 extended this window to 48 months (4 years) — and the new Income Tax Act, 2025 codifies this under Section 263.

# Tiered additional tax (penalty for late truth-telling)

Strategic implication: The earlier you file ITR-U after discovering an error, the cheaper the additional tax. Don't wait.

# What ITR-U cannot do

• Cannot be used to claim a refund or reduce tax liability
• Cannot be used to convert a return into a loss return
• Cannot be filed if scrutiny is already in progress
• Can be filed only once per tax year

For a salaried person who realizes (say) freelance income wasn't reported, this is now a 4-year safety net. Use it before the IT department's AIS catches it — penalty is much lower than a Section 271AAB penalty after detection.

# Section 9 — Schedule II: Exemptions (Old Section 10) Moved Here

Almost every exemption you've heard of — under Section 10 of the old Act — is now consolidated into Schedule II of the new Act:

• HRA exemption (old 10(13A))
• Leave Travel Concession / LTA (old 10(5))
• Gratuity exemption (old 10(10))
• Leave encashment exemption (old 10(10AA))
• Provident fund accumulated balance (old 10(11), 10(12))
• PPF interest (old 10(11))
• Sukanya Samriddhi interest (old 10(11A))
• NRE interest (old 10(4)(ii))
• Education scholarships (old 10(16))
• Agricultural income (old 10(1))

The amounts and conditions are largely unchanged. The Schedule format makes it easier to reference and amend in future.

# Section 10 — Virtual Digital Assets (VDA): Expanded Definition

The new Act has significantly tightened the definition of Virtual Digital Assets (cryptocurrencies, NFTs, etc.):

• Section 2 definition expanded
• Undisclosed income now explicitly includes VDA — earlier the definition covered "money, bullion, jewellery or other valuable articles." Now VDA is added.
• Implication: undisclosed crypto holdings can now be assessed under Section 158 (search and seizure provisions) just like undisclosed cash or gold
• Tax rates unchanged: 30% on gains under Section 115BBH (renumbered as Section 199 in new Act), 1% TDS under Section 194S (now within Section 393)

If you held undisclosed crypto, the legal exposure just expanded materially. Disclose proactively.

# Section 11 — Faceless Assessment as a Statutory Right

Under the old Act, faceless assessment was introduced via CBDT schemes — administrative in nature, hence procedurally vulnerable.

The new Act codifies faceless administration as a statutory right of the taxpayer. This is a meaningful upgrade because: - Statutory rights are enforceable in court - Departmental discretion to opt out is curtailed - Predictability of process improves for taxpayers

In practical terms, the change is invisible to most taxpayers — but it makes the digital-first model irreversible.

# Section 12 — What Has NOT Changed (Important to Know)

To avoid panic, here's what's identical between the old and new Act:

If anyone tells you tax rates have changed because of the new Act — they're wrong. The Finance Act each year still controls rates. The new Act controls structure.

# Section 13 — Impact by Audience

# For Salaried Employees (FY 2026-27 onwards)

• Form 16 → Form 130 (issued by June 15, 2027)
• Form 12BB → Form 124 (year-end declaration)
• Form 15G/15H → Form 121 (for bank/payer)
• Bengaluru / Hyderabad / Pune / Ahmedabad employees: claim 50% HRA, not 40%
• New tax regime stays default under Section 202
• Standard deduction ₹75,000 under new regime; ₹50,000 under old
• Section 87A rebate ₹60,000 means zero tax up to ₹12 lakh (₹12.75 lakh including SD)
• Section 156 replaces Section 87A

Action item: When your employer asks for Form 124 (replacing Form 12BB) in late 2026, declare actual rent for HRA correctly based on new city classification.

# For Founders / Business Owners

• Section 393 consolidates all your non-salary TDS — your accounting software must be updated by April 1, 2026
• TDS challans use new payment codes 1001–1067, not old section numbers
• Tax audit forms 3CA/3CB/3CD consolidated into Form 26
• Section 44ADA professional presumptive ₹50L / ₹75L (digital) unchanged
• Section 44AD business presumptive ₹2 cr / ₹3 cr (digital) unchanged
• ITR-3 and ITR-4 due date is August 31 (extended from July 31) for non-audit cases

Action item: Audit your payroll and AP system before March 31, 2026. Map old TDS sections (194C, 194J, 194I, 194Q) to new Section 393 sub-clauses. Any mismatch = filing rejection.

# For MSMEs

• New ITR-3 includes a column for interest on delayed MSME payments under Section 16 (old) / equivalent new section. Mandatory disclosure.
• Section 269ST limits unchanged (₹2 lakh cash receipt cap)
• TDS payment codes restructured — update accounting system

# For NRIs

• NRE account interest still tax-free (Schedule II)
• Foreign asset reporting (Schedule FA) stricter under new Act
• Schedule FA disclosure now linked to Section 158 search provisions
• Section 195 TDS on payments to non-residents now within Section 393

# For Senior Citizens

• Old regime higher basic exemption (₹3 L / ₹5 L for super-senior) continues
• Form 15H merged into Form 121 (one form for all ages now)
• TDS threshold on interest income raised — check Section 393 thresholds
• Specified senior citizens with pension + bank interest only can claim ITR filing exemption under Section 402(39)

# Section 14 — Practical Transition Checklist

Use this for the next 6 months:

# For You (Individual Taxpayer)

• [ ] File AY 2026-27 ITR by July 31 / August 31, 2026 under old Act references
• [ ] Don't get confused: your AY 2026-27 return uses old section numbers (80C, 87A, etc.)
• [ ] From Tax Year 2026-27 (filing in 2027), use new references (Section 123, Section 156)
• [ ] If you're in Bengaluru/Hyderabad/Pune/Ahmedabad and claim HRA, plan for 50% benefit from FY 2026-27
• [ ] If you have undisclosed crypto/foreign assets, consider ITR-U for past years (now 48-month window) — much cheaper than post-detection penalty

# For Your Business

• [ ] Update accounting / payroll software to new TDS payment codes by March 31, 2026
• [ ] Train accounts team on Section 392 (salary) vs Section 393 (everything else)
• [ ] If you outsource manpower, explicitly include TDS deduction from April 1, 2026
• [ ] If you make foreign remittances, use new Form 145 (replacing 15CA) and Form 146 (replacing 15CB)
• [ ] Update Form 121 declarations from suppliers/vendors (replacing 15G/15H)

# For Your Records

• [ ] Save old Form 16s — you'll need them for any past assessment / scrutiny
• [ ] Maintain section-mapping cheat sheet for next 2–3 years until new references become muscle memory

# Section 15 — Frequently Asked Questions

Q1. When exactly does the new Income Tax Act 2025 apply to me? For income earned from April 1, 2026 onwards (Tax Year 2026-27). Your ITR for income earned in FY 2025-26 (filed in July/August 2026) is still under the old Act.

Q2. Do I need to pay more or less tax under the new Act? Neither. Tax rates and slabs are governed by the Finance Act, not the structural Act. Tax amounts remain identical — only the section numbers and forms have changed.

Q3. My employer issued Form 16 for FY 2025-26 in June 2026. Is that valid? Yes. Form 16 is the correct form for FY 2025-26 salary. Form 130 starts from Tax Year 2026-27 salary, which employers issue by June 15, 2027.

Q4. Section 80C ka new section number kya hai? Section 123 of the Income Tax Act, 2025, read with Schedule XV. Combined cap of ₹1.5 lakh remains the same. Still only under the old tax regime.

Q5. What is the new section for 87A rebate? Section 156. The rebate amount (₹60,000 under new regime up to ₹12 lakh income; ₹12,500 under old regime up to ₹5 lakh) is unchanged.

Q6. New regime ka section number? Section 202 (replacing Section 115BAC). It remains the default regime — you must explicitly opt out using Form 10-IEA if you want the old regime (and only if you have business/professional income; salaried can switch every year directly in ITR).

Q7. Is the previous year / assessment year concept completely gone? For income earned from April 1, 2026 onwards — yes, only "Tax Year" applies. For pre-April 2026 income, old PY/AY references continue. Section 536(3) bridges the two.

Q8. Will my old assessment proceedings continue under the 1961 Act? Yes. Assessments, appeals, reassessments, and any proceedings relating to pre-April 2026 periods continue under the Income Tax Act, 1961 — even if they are completed after April 1, 2026.

Q9. Have updated return (ITR-U) rules changed? Yes. Under Section 263, you now have 48 months (4 years) from the end of the FY succeeding the tax year to file an updated return — doubled from 24 months. Additional tax tiered from 25% (within 12 months) to 70% (within 48 months).

Q10. HRA cities ka new list kya hai? 50% HRA cities now include: Delhi, Mumbai, Kolkata, Chennai, plus newly added Bengaluru, Hyderabad, Pune, Ahmedabad. Effective from FY 2026-27 onwards.

Q11. Cryptocurrency tax has changed? The 30% rate and 1% TDS remain unchanged. What's changed: VDA is now explicitly within the definition of "undisclosed income" — so non-disclosure exposure has materially expanded.

Q12. Will the income tax portal change? The portal will support both old and new section references during the transition. The Income Tax Department has provided a Section Mapping Utility on incometax.gov.in for cross-referencing.

# Section 16 — Official References

For verified, authoritative information, always refer to:

1. Income Tax Department — Objective and Scope of the New Act FAQ: https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/objective-and-scope-new-act

1. Income Tax Bill 2025 — Full Text and Section Mapping: https://incometaxindia.gov.in/Pages/income-tax-bill-2025.aspx

1. CBDT Executive Summary on the Comprehensive Simplification of the Income-tax Act: Published February 13, 2025 by the Central Board of Direct Taxes

1. Press Information Bureau (PIB) — Understanding The Income Tax Act, 2025: Official press release explaining the rationale and objectives

1. Income Tax Rules, 2026: Notified by CBDT on 20 March 2026, operationalizing the Income Tax Act, 2025

# Final Word — Founder's Perspective

The Income Tax Act, 2025 is not a tax-rate reform. It's a legibility reform.

For 64 years, the 1961 Act became progressively unreadable. A salaried person needed a CA to interpret Section 17(2)(viia)(iii) read with Rule 3(7)(iii). A founder needed a lawyer to navigate Chapter XII-DA buyback tax. The new Act is the government acknowledging that tax laws unreadable by taxpayers are unfair laws.

The good news: nothing you legitimately do under the 1961 Act becomes illegal under the 2025 Act. Your tax planning, deductions, exemptions all carry forward.

The work: from April 1, 2026, learn the new section numbers, update your forms, and recognize that your AIS, TIS, and AIMS data will be more comprehensive than ever under the digital-first Section 400 framework.

If you want section-by-section deep dives — Tax Year explained, Section 123 deductions complete list, Section 393 TDS rate chart, Form 130 vs Form 16, Updated Return ITR-U strategy — those are coming as part of our Income Tax Act 2025 series over the next two weeks.

For specific situations, consult a qualified Chartered Accountant. The principles in this guide are correct as of [Tax Year 2025-26 / Income Tax Rules, 2026 notification dated 20 March 2026], but tax law is updated annually via the Finance Act.

Author: Prabhakar Kumar is a practising Chartered Accountant (ICAI, Nov 2019), founder of VittSphere ONE — the AI-powered Personal CFO for Indian families — and Prabhakar Kumar & Co., a CA firm based in Pune specializing in GST, Income Tax, Audit, Virtual CFO and government subsidy advisory.

Disclaimer: This article is for educational purposes only and does not constitute tax or legal advice. Reference: Income Tax Act, 2025 (Act No. 11 of 2025) as enacted on 21 August 2025 and effective from 1 April 2026. Income Tax Rules, 2026 as notified by CBDT on 20 March 2026.

Written by

Prabhakar Kumar

Chartered Accountant (ICAI, Nov 2019)

Founder of VittSphere Technologies. Practicing CA serving 200+ MSME clients across Pune. 86% win-rate at AO and CIT(A) level tax appeals. Writes on Indian taxation, capital gains, and personal finance.