The Income Tax Act, 2025 comes into force April 1, 2026, replacing 1961 law, introducing structural and procedural changes despite no change in tax rates or deductions. Budget 2026 proposals via Finance Act 2026 will apply alongside it.
The Income Tax Act, 2025, comes into force today (1 April 2026), replacing the Income Tax Act, 1961. Although tax rates and deductions remain unchanged, this new legislation brings significant structural, conceptual, and procedural modifications to the direct tax framework.
Additionally, tax proposals presented in the Union Budget 2026, once enacted through the Finance Act 2026, are set to also take effect from 1 April 2026 and will function alongside this new legislative framework.
Key Changes from 1 April 2026
- Introduction of “Tax Year” and Continuity of Individual Slab Rates:
The ITA 2025 introduces a unified “Tax Year”, eliminating the prior distinction between “previous year” and “assessment year” found in the ITA 1961. Furthermore, the existing individual slab rates under both the old and new concessional tax regimes will remain unchanged, ensuring stability in personal tax obligations.
With the new law effective from April 1, 2026, salaried taxpayers will face several notable changes.
Below are the top 10 changes that will affect taxpayers under the Income Tax Act, 2025:
- HRA enhancements: House Rent Allowance (HRA) benefits have been expanded. Salaried employees living in rented accommodation in cities such as Bengaluru, Hyderabad, Pune and Ahmedabad may now claim larger HRA exemptions potentially up to 50% of basic salary in these locations.
- Higher limits for meals and gifts: The exempt amount for employer-provided meals, non-alcoholic beverages, and meal vouchers rises from Rs 50 per meal to Rs 200 per meal. Employer-provided gifts up to Rs 15,000 and medical loans up to Rs 2 lakh are also tax-exempt.
- Bigger education and hostel allowances: Tax-free education allowance has been raised significantly, from Rs 100 per month per child to Rs 3,000 per month per child. Hostel allowance has been increased from Rs 300 per month per child to Rs 9,000 per month per child.
- Higher valuation for company cars: The monthly taxable value for company-car perquisites has increased, which will raise the taxable benefit for employees. For example, the valuation for a company car with an engine capacity up to 1.6 litres has been increased from Rs 1,800 to Rs 5,000 per month.
- Form 130 replaces Form 16: From April 1, Form 130 will take the place of Form 16 as the primary TDS certificate for salaried individuals and senior citizens. Employees will receive Form 130 for FY 2026–27 onwards.
- PAN requirement for large cash withdrawals: A PAN must now be furnished for any cash withdrawal exceeding Rs 1 lakh from bank accounts. Banks will report such transactions to the tax department, so taxpayers should keep clear records of income and withdrawals to avoid inquiries.
- Simplified TDS for small businesses and professionals: TDS provisions under sections such as 194C, 194H, 194J and 192 have been revised to simplify compliance for small businesses, employers and self-employed professionals.
- STT changes affecting derivatives: Adjustments to Securities Transaction Tax (STT) will impact derivatives trading, including futures and options a development relevant for market participants using high-risk instruments.
- Sovereign Gold Bonds: Investors in Sovereign Gold Bonds who redeem before maturity will now be liable to capital gains tax. No tax will apply if the bonds are held through to their maturity.
- Revised tax treatment for buybacks and dividends: New provisions change taxation of share buybacks and dividends: promoter shareholders will face a 30% tax, while other shareholders will be subject to 12.5% long-term capital gains tax. Interest-related dividend exemptions for business use have been removed.
Taxpayers have been given an extended window to revise their income tax returns. While the earlier cut-off date was December 31, the deadline has now been pushed to March 31.
However, revisions made after December 31 will attract additional charges. The timeline for filing belated returns remains unchanged.
In another key tax update, the Budget has introduced an increase in Securities Transaction Tax (STT) on Futures and Options (F&O) transactions.
The STT on futures contracts has been raised from 0.02% to 0.05%. For options, the tax on premiums and exercise has been increased to 0.15%, compared to the earlier rates of 0.1% and 0.125%, respectively.
Under the revised framework, Tax Collected at Source (TCS) has been substantially reduced. The rate on international tour packages has been cut down from 20% to 2%.
Additionally, remittances made under the Liberalised Remittance Scheme (LRS) for education and medical expenses will now attract a reduced TCS of 2%, down from 5%. This step is intended to ease financial pressure on middle-income taxpayers.
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