A Landmark Overhaul of India’s Direct Tax System
India’s direct tax regime is set to undergo its most comprehensive transformation in over six decades with the enactment of the Income-tax Act, 2025 , which will replace the long-standing Income-tax Act, 1961 . The new legislation will come into force from April 1, 2026 , and will apply to income earned from the financial year 2025–26 onwards . The reform reflects a decisive shift towards simplification, legal clarity and technology-driven tax administration.
Why a New Income-tax Law Was Needed
Over time, the 1961 Act became highly complex, expanding to over 800 sections through frequent amendments, provisos and explanations. This complexity increased compliance costs and litigation. The government therefore opted for a complete rewrite rather than piecemeal reform, aiming to remove obsolete provisions, reduce interpretational ambiguity and align tax law with the realities of a digital and data-driven economy .
Timeline and Transition
Although the Income-tax Act, 2025 received Presidential assent in August 2025 , its provisions will apply from April 1, 2026 . Returns filed for Assessment Year 2026–27 will still largely be governed by the old Act. However, administrative systems and compliance frameworks will gradually transition during FY 2025–26.
Structural and Procedural Reforms
The new Act significantly streamlines the statute by reducing sections from 819 to 536 and chapters from 47 to 23 . Legal language has been simplified, with tables, formulas and illustrations replacing lengthy textual provisions. A major conceptual reform is the introduction of a single “Tax Year” , replacing the earlier dual concepts of “previous year” and “assessment year”.
Impact on Taxpayers
While tax rates and slabs remain unchanged , the Act supports the revised tax regime with higher rebates and an enhanced standard deduction , effectively making income up to ?12 lakh tax-free . Simplified return forms, expanded faceless processes and clearer rules are expected to reduce disputes and improve certainty for individuals and businesses.
Important Facts for Exams
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Income-tax Act, 2025 replaces the 1961 Act
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Effective from April 1, 2026
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Sections reduced from 819 to 536
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Introduces a single Tax Year concept
Month: Current Affairs - December 26, 2025
Category: Tax Reforms