Income-tax Act, 2025: Scheme, Tax Year and Transition

From 1 April 2026, income tax in India is governed by the Income-tax Act, 2025, which replaced the Income-tax Act, 1961. The new Act restates the law in simpler language and a leaner structure, replaces the previous year and assessment year with a single tax year, and moves exemptions and rates into schedules, without changing tax policy. This note explains how the Act came about, how it is organised, and how the transition from the 1961 Act works.

1. From 1922 to 2025

Figure 1: Legislative history

• Earlier laws. The Income-tax Act, 1922 was replaced by the Income-tax Act, 1961, which was amended almost every year by Finance Acts until it ran to over eight hundred sections.
• The 2025 Bill. An Income-tax Bill introduced in February 2025 was examined by a Select Committee and withdrawn; a revised Bill incorporating its recommendations was passed by Parliament on 12 August 2025.
• Enactment. The Income-tax Act, 2025 received assent on 21 August 2025 and came into force on 1 April 2026; the Income-tax Rules, 2026 were notified on 20 March 2026.

2. Structure of the Act

Figure 2: The Act at a glance

The Act has 536 sections in 23 chapters, with 16 schedules. The fall in the number of sections reflects drafting, not a narrower law: obsolete provisions were removed and lists of exemptions, deductions and rates moved into tables and schedules. The Government described the Act as policy neutral; it introduces no new tax, and both the old and new tax regimes continue.

3. The Tax Year

• Old scheme. Income of the previous year was assessed in the following assessment year, so income earned in 2024-25 was assessed in assessment year 2025-26.
• New scheme. Section 3 defines the tax year as the twelve month period beginning on 1 April; income is identified and taxed by reference to the same tax year in which it is earned.
• New business or source. For a business set up or a source of income arising during the year, the first tax year runs from that date to the following 31 March.

4. The Charge and the Core Sections

Figure 3: Core provisions of the 2025 Act

• Charge. Section 4 charges income tax for every tax year, at the rates fixed by the annual Finance Act, on the total income of every person.
• Finance Act. The charging section and the annual Finance Act work together: the Act creates the liability, the Finance Act fixes the rates for the year.
• Continuity. The numbering of the first provisions on definitions, charge, scope of total income and residence (ss.2 to 6) follows the 1961 Act; most later provisions are renumbered, so each later topic gives the old section alongside the new one where it can be confirmed.

5. Repeal and Transition

Section 536 repeals the Income-tax Act, 1961 while saving things done under it. Income earned before 1 April 2026 continues to be governed by the 1961 Act, so assessments, appeals and proceedings for earlier years continue under it. The governing law depends on the year to which the income relates, not on when a return is filed. Judicial decisions under the 1961 Act remain relevant wherever the 2025 Act restates the same rule.

6. Frequently Asked Questions

What is a tax year under the Income-tax Act, 2025?

Under s.3, the twelve month period beginning on 1 April. It replaces the separate previous year and assessment year of the 1961 Act, so income is taxed by reference to the year in which it is earned.

Which law applies to income earned in 2025-26?

The Income-tax Act, 1961. Section 536 saves the old Act for income relating to years before 1 April 2026, so its assessment and appeals continue under the 1961 Act.

7. Related Topics

• Topic 10: Charge of Income Tax and Key Definitions. Person, assessee and income.
• Topic 11: Residential Status and Scope of Total Income. Sections 5 and 6.
• Topic 20: Return of Income and Assessment. Procedure under the new Act.