What the Income Tax Act 2025 Changed for FY 2026-27

After more than six decades, the Income Tax Act 1961 has been replaced. The Income Tax Act 2025, effective from April 1, 2026, brings structural changes to how income is assessed, reported, and taxed in India.

This is not a minor amendment or a budget tweak. It is a complete replacement of the governing statute. Here is what changed and how it affects individuals, salaried employees, freelancers, and small business owners.

The New Tax Year Concept

The most visible change for every taxpayer is the elimination of the Financial Year and Assessment Year terminology.

How It Worked Before

Under the old Act:

• Financial Year (FY) 2025-26: April 1, 2025 to March 31, 2026 (year income was earned)
• Assessment Year (AY) 2026-27: April 1, 2026 to March 31, 2027 (year income was assessed and return was filed)

This two-year reference system caused confusion, especially for first-time taxpayers and small business owners.

How It Works Now

The Income Tax Act 2025 introduces a single "Tax Year" concept:

• Tax Year 2026-27: April 1, 2026 to March 31, 2027

Income earned in this period is referred to by one label, Tax Year 2026-27. The return for it is still filed after the year ends, in 2027.

For the transition, returns for AY 2026-27 (income of FY 2025-26) are filed in 2026 under the 1961 Act and keep the FY/AY labels. The Tax Year label applies from Tax Year 2026-27 onwards.

Simplified ITR Forms

Returns filed in 2026 are for AY 2026-27 (income of FY 2025-26). These ITR-1 to ITR-7 forms were notified under the 1961 Act, so they still use the old section references such as 80C, 80D and 24(b), and the AY label.

Returns for Tax Year 2026-27, filed from 2027, will use return forms notified under the Income-tax Act, 2025 and the Income-tax Rules, 2026, with the new section numbers. Check the forms and utilities on the e-filing portal when they are released rather than relying on earlier descriptions.

HRA Documentation Under the New Act

If you are a salaried employee claiming House Rent Allowance exemption under the old regime, the documentation expectations carry over to the new Act:

• Landlord PAN is required when annual rent exceeds Rs 1,00,000 (this requirement already applied under the 1961 Act rules for the Form 12BB declaration)
• Keep rent receipts and the rent agreement showing the landlord's name and address
• Employers check HRA proofs before allowing the exemption in salary TDS, which is reported in Form 130 (the TDS certificate replacing Form 16) from Tax Year 2026-27

What This Means for You

• Ensure your landlord provides PAN before March 31 of each tax year
• Keep signed rent receipts for every month
• If you pay rent to a family member, the documentation requirements are the same
• Failure to provide landlord PAN may result in the HRA exemption being disallowed during assessment

CBDT Digital Data Capture and Analytics

The department already collects and matches a large amount of third-party data, and this continues under the Income Tax Act 2025:

Annual Information Statement (AIS)

AIS (in use since 2021) already captures data from many sources, including:

• Interest on savings and deposit accounts, and cash deposits above reporting thresholds
• Mutual fund purchases, redemptions, and dividends
• Registered property purchases and sales
• High-value credit card payments
• Foreign remittances and TCS collected on them
• Transfers of virtual digital assets (crypto) and TDS on them

Taxpayer Information Summary (TIS)

TIS aggregates AIS data into category-wise totals (the reported value and the value after your feedback), which feed the pre-filled return.

What This Means

Every significant financial transaction you make is likely to be reported to the Income Tax Department. The gap between what the department knows and what you report in your ITR has narrowed considerably.

Before filing your return, download and review both AIS and TIS from the e-filing portal. If any transaction is incorrect, you can submit feedback on AIS before filing.

New Income Tax Rules 2026

Alongside the Act, CBDT notified comprehensive Income Tax Rules 2026. Key rules affecting taxpayers:

New Form Numbers

Most tax forms have been renumbered. Key changes:

• Form 130 replaces Form 16 (salary TDS certificate)
• Form 121 replaces Form 15G/15H (declaration for no TDS on interest)
• New four-digit payment codes for TDS in challans and TDS returns

Revised TDS Provisions

• TDS rates remain largely unchanged, but the section references are new
• New TDS payment codes apply from Tax Year 2026-27
• E-TDS return forms have been updated to align with the new Act

Tax Regime Selection

Both old and new tax regimes continue to be available. The new regime (with lower rates but fewer deductions) is the default. To opt for the old regime, you must explicitly choose it before filing.

For business or professional income earners, switching regimes is restricted: after opting out of the new regime, you can switch back to it only once.

What You Should Do Now

1. Familiarize yourself with the new section numbers, especially if you previously tracked deductions by old section references (80C, 80D, etc.)

2. Download and review your AIS and TIS before filing for AY 2026-27

3. Ensure all HRA documentation includes landlord PAN

4. Decide between old and new tax regime. Run calculations under both before choosing.

5. Update your knowledge of ITR forms. Even if you use the same form number as last year, the internal structure is different.

Let Tax Garden Help You Transition

The shift from a 65-year-old law to a new statute is significant. Tax Garden's tax compliance team helps you understand the new provisions, choose the right regime, and file correctly under the Income Tax Act 2025.

Frequently Asked Questions

When is the first return under the Income-tax Act, 2025 due?

The first return under the 2025 Act is for Tax Year 2026-27, covering income from 1 April 2026 to 31 March 2027. It is filed after the year ends, in 2027, with the usual 31 July due date for most individuals and later dates for business and audit cases, subject to the rules then notified. Returns filed during 2026 are still under the 1961 Act.

Is the new tax regime still the default under the Income-tax Act, 2025?

Yes. For Tax Year 2026-27, the new regime continues as the default with the same slabs as FY 2025-26: nil up to Rs 4 lakh rising to 30% above Rs 24 lakh, a Rs 75,000 standard deduction for salaried people and a rebate making taxable income up to Rs 12 lakh tax-free. The old regime remains available if you opt for it by the due date.

Which form replaces Form 16 from Tax Year 2026-27?

Under the Income-tax Rules, 2026, the salary TDS certificate is issued in a new form number from Tax Year 2026-27, reported as Form 130. For salary paid in FY 2025-26, employers still issue Form 16 under the 1961 Act, which is the certificate you use for the AY 2026-27 return. Check the form number with your employer before relying on it.

Will HRA exemption still be available under the new Act?

Yes, under the old regime only. HRA remains exempt within the same three-limit formula, and from Tax Year 2026-27 the Income-tax Rules, 2026 extend the 50% of salary limit to Hyderabad, Bengaluru, Pune and Ahmedabad along with the four older metros. Keep the rent agreement, receipts and landlord PAN where annual rent exceeds Rs 1 lakh.

How does AIS affect my return under the new Act?

The Annual Information Statement collects data reported by banks, employers, registrars, mutual funds and others, and the department uses it to check your return. Before filing, download AIS and TIS, submit feedback for any wrong entry, and make sure every interest, dividend, capital gain and high-value transaction is either reported or explained. Mismatches commonly lead to adjustments or notices.