The Income-tax Act, 2025 marks a significant restructuring of India’s direct tax framework, replacing the Income-tax Act, 1961 with effect from 1 April 2026. The new legislation applies to income earned from FY 2026–27, referred to as Tax Year 2026–27, and introduces a more streamlined framework intended to simplify the structure and administration of income-tax law. While several provisions have been reorganised and consolidated, the new Act does not represent a wholesale change in the underlying tax policy.
For businesses, the transition will primarily involve adapting existing tax and compliance processes to the new framework, including changes to statutory references, reporting requirements and tax administration. Businesses will also need to distinguish between matters governed by the Income-tax Act, 1961 and those falling under the new Act, as existing tax years and proceedings will continue to be governed by the earlier legislation.
From “Previous Year” and “Assessment Year” to “Tax Year”
One of the most visible changes for businesses is the replacement of the traditional terminology of “previous year” and “assessment year” with the concept of a “tax year.”
For FY 2026–27, income earned between 1 April 2026 and 31 March 2027 will constitute Tax Year 2026–27. This effectively aligns the income-earning period with the financial year and removes the need to refer to a subsequent assessment year merely for identifying the relevant tax period. The Income Tax Department has specifically clarified that the change is one of terminology and structural alignment and does not require businesses to alter their accounting year or financial reporting cycle.
The distinction remains important during the transition. For example, income earned during FY 2025–26 will continue to be governed by the Income-tax Act, 1961 and will be reported under AY 2026–27. On the other hand, income earned from 1 April 2026 will be governed by the Income-tax Act, 2025.
Corporate Tax Rates: Limited Change, Greater Focus on the Tax Regime
The new Act does not represent a fundamental restructuring of corporate income-tax rates. The existing concessional regimes for domestic companies continue under the new framework, including the 22% regime for eligible domestic companies and the 15% regime applicable to qualifying new manufacturing domestic companies, subject to the prescribed conditions. The standard rates applicable to domestic companies also broadly continue.
The more significant development for companies arises from the changes to Minimum Alternate Tax (MAT) introduced alongside the new framework through the Finance Act, 2026. The MAT rate has been reduced from 15% to 14%, while MAT paid from 1 April 2026 is intended to operate as a final tax, meaning that fresh MAT credit will not accumulate in respect of such tax. Existing MAT credit accumulated up to 31 March 2026 continues to receive transitional treatment.
For domestic companies shifting to the new tax regime, brought-forward MAT credit may be utilised subject to the prescribed limitations, including a cap of 25% of the tax liability for the relevant year.
TDS and TCS: Key Changes for Businesses
The new Act consolidates the TDS framework into Sections 392 and 393, with Section 392 covering salary payments and Section 393 covering other specified payments. While this restructuring is largely intended to simplify the statutory framework and the existing rates and thresholds have generally been retained, businesses will need to update their tax compliance systems, accounting software and internal documentation to reflect the new section references.
The transition will depend on when the TDS obligation arises. For payments other than salary, the applicable law is generally determined by the earlier of credit or payment. Thus, transactions triggered on or before 31 March 2026 remain governed by the 1961 Act, while those arising from 1 April 2026 fall under the 2025 Act. Salary TDS, meanwhile, is determined based on the date of payment. Businesses should therefore ensure that their TDS reporting systems distinguish between transactions under the two Acts during the transition.
TCS provisions have similarly been consolidated under Section 394, alongside certain rate rationalisation measures introduced through the Finance Act, 2026. Notably, the TCS rate on specified goods, including alcoholic liquor, scrap and specified minerals, has been revised to 2%.
New Forms and Digital Compliance Architecture
The transition to the 2025 Act is accompanied by a new set of Income-tax Rules, 2026 and corresponding income-tax forms. The Government notified the Rules on 20 March 2026, shortly before the new Act came into force. The new forms have been described by CBDT as simplified, standardised and process-reengineered.
For businesses, the effect will extend beyond the tax department. Organisations will need to review the forms and reporting requirements used by their finance and tax teams and ensure that tax-return preparation, TDS/TCS reporting and supporting documentation are compatible with the new framework.
Certain previously separate forms have also been consolidated. For example, Form 141 now operates as a consolidated challan-cum-statement for specified TDS transactions under Section 393, replacing multiple forms used under the earlier framework for specified transactions.
The broader direction is therefore towards reducing fragmented compliance. Businesses should nevertheless expect a transition period during which legacy forms and procedures remain relevant for earlier tax years while new forms apply to Tax Year 2026–27 onwards.
Return Filing and Compliance: Structural Simplification
The new Act consolidates provisions relating to original, belated, revised and updated returns under Section 263, while largely retaining the existing filing framework. For businesses, the key consideration is the transition between the two Acts: returns relating to FY 2025–26 (AY 2026–27) will continue to be governed by the 1961 Act, even when filed after 1 April 2026, whereas returns for Tax Year 2026–27 onwards will fall under the 2025 Act. Businesses should accordingly ensure that their tax records, computations and compliance processes clearly distinguish between periods governed by the two legislative frameworks.
Reassessment and Tax Litigation: Parallel Regimes During Transition
The repeal of the Income-tax Act, 1961 does not affect proceedings relating to earlier tax years. Assessments, reassessments, appeals, penalties and other proceedings governed by the 1961 Act will continue under that framework, even after 1 April 2026. For Tax Year 2026–27 onwards, reassessment will instead be governed by the corresponding provisions of the Income-tax Act, 2025. Businesses with ongoing tax disputes will therefore need to identify the applicable legislation based on the relevant tax year and stage of proceedings, rather than assuming that the new Act applies to all matters after 1 April 2026.
Buyback Taxation: A Significant Change for Shareholders and Promoters
One of the substantive changes introduced through the 2026 tax amendments concerns the taxation of share buybacks.
Under the framework initially contained in the Income-tax Act, 2025, consideration received by shareholders on a buyback was treated as dividend income. The Finance Act, 2026 has changed this treatment by providing that consideration received on buyback of shares will be taxed under the head “Capital gains.” This treatment applies across shareholder categories, allowing the cost of acquisition to be considered in determining the capital gain.
The reform also introduces an additional tax burden for promoters. Domestic corporate promoters are subject to an additional tax mechanism designed to produce an aggregate tax burden of 22%, while non-corporate promoters are subject to an effective rate of 30%, subject to the detailed statutory provisions.
ICDS and the Transition Towards Accounting Standard Integration
Another development with a longer-term impact on businesses concerns the relationship between Income Computation and Disclosure Standards (ICDS) and Indian Accounting Standards.
The Union Budget 2026 proposed the integration of ICDS requirements into Ind AS, with the objective of eliminating the requirement for separate ICDS-based accounting from Tax Year 2027–28. A joint committee comprising the Ministry of Corporate Affairs and CBDT has been proposed for this purpose.
Although the immediate impact for FY 2026–27 is limited, the proposal signals a broader move towards reducing divergence between financial reporting and tax computation. Companies following Ind AS should therefore monitor the resulting amendments closely, particularly in relation to revenue recognition, financial instruments, provisions and other areas where accounting and tax treatment may currently differ.
What Businesses Should Do for FY 2026–27
The transition to the Income-tax Act, 2025 requires businesses to treat FY 2026–27 as a compliance and systems transition year, rather than merely a change in statutory terminology. Businesses should review their tax compliance matrices and update references to the 1961 Act, particularly across TDS/TCS processes, payroll, tax payments and return preparation. ERP and accounting systems should also be aligned with the new provisions, rates and reporting requirements applicable from 1 April 2026.
Companies with ongoing tax assessments or litigation should maintain a clear distinction between matters governed by the 1961 Act and those falling under the 2025 Act. In parallel, businesses should assess the impact of substantive changes introduced through the Finance Act, 2026, particularly in relation to MAT, buyback taxation and TCS. Taken together, these measures will require businesses to align their tax systems, internal processes and compliance documentation with the new framework from FY 2026–27 onwards.
Author: Sheetal Patodiya, Senior Associate
Co author: Ridhi Bagla
FAQs
Which legislation will govern a business's tax obligations during the transition from the Income-tax Act, 1961 to the Income-tax Act, 2025?
The Income-tax Act, 1961 will continue to govern income earned up to 31 March 2026, including FY 2025–26 (AY 2026–27), even where the relevant return is filed or assessment proceedings are undertaken after 1 April 2026. The Income-tax Act, 2025 will apply to income earned from 1 April 2026 onwards, corresponding to Tax Year 2026–27. Accordingly, businesses must maintain a clear distinction between the two legislative frameworks when managing tax returns, assessments, appeals and other compliance obligations.
What changes should businesses make to their TDS and TCS compliance systems under the new Act?
The Income-tax Act, 2025 consolidates TDS provisions under Sections 392 and 393 and TCS provisions under Section 394. Although most existing TDS rates and thresholds have been retained, businesses must update their accounting software, payroll systems, tax documentation and reporting processes to reflect the revised statutory references and forms. For TDS on payments other than salary, the applicable legislation is generally determined by the earlier of credit or payment, while salary TDS is determined with reference to the date of payment. Businesses must therefore ensure that transactions arising before and after 1 April 2026 are appropriately classified.
Does the Income-tax Act, 2025 introduce changes to corporate tax rates and Minimum Alternate Tax (MAT)?
The new Act broadly retains the existing corporate tax structure, including the concessional rates of 22% for eligible domestic companies and 15% for qualifying new manufacturing companies, subject to prescribed conditions. However, amendments introduced through the Finance Act, 2026 reduce the MAT rate from 15% to 14%. Further, MAT paid from 1 April 2026 will operate as a final tax, without generating fresh MAT credit. Existing MAT credit accumulated up to 31 March 2026 will continue to receive transitional treatment, subject to the prescribed utilisation restrictions.
What are the key compliance measures businesses should undertake before transitioning to the Income-tax Act, 2025?
Businesses should review and update their tax compliance matrices, accounting systems, ERP platforms, payroll processes and internal documentation to reflect the new statutory provisions, forms and reporting requirements. They should also ensure that finance and tax teams are familiar with the revised TDS/TCS framework and maintain separate records for tax years governed by the two Acts. Additionally, businesses should evaluate the implications of the changes to MAT, buyback taxation and TCS to identify potential financial and compliance risks arising from the transition.
