New Income Tax Act 2025: Your Guide to Budget 2026 Changes

A New Era for Direct Taxation in India

Union Budget 2026 marks a pivotal moment for India's direct tax system. In her ninth consecutive budget presentation, Finance Minister Nirmala Sitharaman announced the implementation of the new Income Tax Act, 2025, which will come into force on April 1, 2026. This new legislation is set to replace the complex and amendment-heavy Income Tax Act of 1961, which has governed the country's tax landscape for over six decades. The primary objective of this overhaul is not to alter tax liabilities but to simplify the law, enhance clarity, and reduce the scope for litigation.

No Changes in Tax Slabs for FY 2026-27

For individual taxpayers, the most immediate question during any budget is about tax rates. The Finance Minister provided clear assurance on this front, confirming that there will be no changes to the income tax slabs or rates for the financial year 2026-27. This stability applies to both the old and the new tax regimes, meaning taxpayers' liabilities for the upcoming year will be calculated based on the existing structures. The government's focus, as outlined in the budget, is on structural reform rather than rate adjustments.

The Core Philosophy: Simplification and Clarity

The new Income Tax Act, 2025 is described as being 'revenue neutral,' reinforcing that its purpose is simplification, not revenue enhancement. The Finance Minister highlighted that the new law reduces the volume of text and the number of sections by approximately 50% compared to the 1961 Act. By removing ambiguities and streamlining provisions, the government aims to create a more user-friendly tax environment that is easier for ordinary citizens to understand and comply with.

Key Structural Changes in the Income Tax Act, 2025

While tax rates remain untouched, the new Act introduces several fundamental structural changes designed to ease the compliance burden.

Introducing the 'Tax Year'

One of the most significant conceptual shifts is the replacement of the dual 'Previous Year' and 'Assessment Year' framework. This system has often been a source of confusion for taxpayers. The new Act introduces a single, unified "Tax Year." This change simplifies the timeline, making it more intuitive to understand that income earned in a financial year is assessed in the subsequent year under a single, consistent label.

Simplified ITR Forms and Procedures

In her speech, the Finance Minister assured that the new rules and redesigned income tax return (ITR) forms will be notified shortly. This is intended to give taxpayers adequate time to familiarise themselves with the new system. The forms are being redesigned to be simpler, enabling individuals to file their returns with greater ease and without extensive professional assistance.

Flexibility in Claiming TDS Refunds

A notable pro-taxpayer measure in the new Act is the provision for claiming Tax Deducted at Source (TDS) refunds. Under the new law, taxpayers will be able to claim their TDS refunds even if they file their ITRs after the specified deadlines. Crucially, this can be done without incurring any penal charges, offering significant relief to those who may miss the filing deadline for various reasons.

Summary of Key Changes: 1961 Act vs. 2025 Act

Feature	Income Tax Act, 1961	Income Tax Act, 2025
Effective From	April 1, 1962	April 1, 2026
Core Philosophy	Complex, layered with amendments	Simplified, concise, reduced ambiguities
Tax Year Concept	Previous Year & Assessment Year	Single 'Tax Year'
TDS Refund on Late Filing	Penalties and restrictions	Allowed without penal charges
Law Volume	Extensive sections and text	Reduced by approximately 50%

Minor Adjustments to Filing Deadlines

While the deadline for individuals filing ITR-1 and ITR-2 remains unchanged at July 31, the budget has provided an extension for certain other categories. Non-audit business cases and trusts will now have until August 31 to file their returns, providing them with an additional month for compliance.

Impact on Taxpayers and the Broader Economy

The transition to the Income Tax Act, 2025 is a long-term reform aimed at improving the ease of doing business and reducing tax-related disputes. For individuals, it promises a less intimidating tax compliance process. For the economy, a simpler tax law can foster greater compliance, improve administrative efficiency, and reduce the legal costs associated with tax litigation. This move aligns with the government's broader economic strategy, which includes a significant push for capital expenditure, estimated at ₹12.2 lakh crore for FY27, and maintaining fiscal discipline.

The Path Forward

The Union Budget 2026 has laid the groundwork for a significant transformation in India's direct tax regime. While taxpayers can be relieved by the stability in tax rates, the focus now shifts to the implementation of the new Income Tax Act, 2025. The upcoming notification of the simplified rules and ITR forms will be the next critical step in this transition, providing the final details that will shape the taxpayer experience from April 2026 onwards.