Library / Income-tax Act, 2025: The Professional's Master Guide

1. The Big Picture

1.1 Why a new Act?

The Income-tax Act, 1961 was amended almost every year for more than six decades. It grew to 819 sections carrying numbers such as 80CCD(1B), 115BAC and 194-IA, and its provisos, explanations and cross references made it difficult to read even for experienced practitioners.

The Income-tax Act, 2025 received Presidential assent on 21 August 2025 and came into force on 1 April 2026. It replaces the 1961 Act with a shorter and more orderly structure.

Feature	1961 Act	2025 Act
Number of sections	819 (after insertions)	536
Chapters	47	23
Schedules	14	16
Year concept	Previous Year and Assessment Year	Single "Tax Year" (section 3)
Exempt incomes	Section 10 with 50 plus clauses	Section 11 read with Schedules II to VII
TDS provisions	Sections 192 to 194T (60 plus sections)	Sections 392 (salary), 393 (others), 394 (TCS)
Presumptive taxation (residents)	44AD, 44ADA, 44AE	One section, 58
Company tax regimes, MAT and AMT	115BA, 115BAA, 115BAB, 115JB, 115JC	199, 200, 201, 206
Style	Long provisos and explanations	Tables, formulas and plain language

1.2 What has changed and what has not

Largely unchanged: slab rates, the new regime as default, deductions like 80C and 80D (with new numbers), capital gains rates, presumptive taxation, TDS rates and thresholds, transfer pricing principles, and the assessment and appeal structure.

Changed in form or in substance:

"Tax Year" replaces Previous Year and Assessment Year.
All TDS and TCS consolidated into three sections with tables and payment codes.
Exemptions moved into Schedules; eligible investments for section 123 listed in Schedule XV.
Forms renumbered under the Income-tax Rules, 2026 (Form 16 is now Form 130, Form 26AS is now Form 168, Form 3CEB is now Form 48, and so on).
Finance Act 2026 changes effective from Tax Year 2026-27: buyback taxed as capital gains, MAT rate reduced to 14% and made a final tax, ITR due date of 31 August for non-audit business cases, 12 months for revised returns, higher STT on derivatives, TCS rationalised, and a larger safe harbour for IT services.

1.3 The transition rule: which Act applies?

This is the first question on any file. The rule is simple: the period decides the law.

Situation	Law that applies
Income earned in FY 2025-26 (return filed in 2026 for AY 2026-27)	1961 Act. Quote 80C, 44AD, 194J etc.
Income earned from 1 April 2026 (Tax Year 2026-27 onwards)	2025 Act. Quote 123, 58, 393 etc.
Pending scrutiny, appeal or reassessment for years up to FY 2025-26	Continues under 1961 Act provisions (saved by section 536)
TDS on a payment made or credited on or after 1 April 2026	2025 Act, section 392/393/394 with new payment codes
Losses, unabsorbed depreciation and MAT credit of old years	Carried forward and used under the 2025 Act

Illustration 1: Two returns, two Acts

In July 2026, Mehta & Co. files the return for income earned from April 2025 to March 2026. That return is under the 1961 Act: deductions under 80C and 80D, and TDS credit checked in Form 26AS.

In July 2027, the same firm files the return for income earned from April 2026 to March 2027. That is Tax Year 2026-27 under the 2025 Act: deductions under sections 123 and 126, and credit checked in Form 168.

Practice note

During 2026 and 2027 you will work with both Acts side by side. Keep the mapping table in Appendix A handy and write both references in working papers, for example "section 123 (old 80C)".

1.4 How the Act is arranged

Chapter area	Sections	What it covers
Preliminary and basis of charge	1 to 10	Definitions, Tax Year, charge, scope, residence, deemed accrual (with Schedule I)
Exempt incomes	11, 12	Exemptions through Schedules II to VIII
Computation of income	13 to 95	Five heads of income
Clubbing and aggregation	96 to 106	Income of others, unexplained credits
Losses	108 to 121	Set off and carry forward
Deductions	122 to 154	Old Chapter VI-A
Rebates and relief	155 to 160	Rebate, arrears relief, DTAA relief
Avoidance of tax	161 onwards	Transfer pricing (161 to 173), other anti-avoidance (174 to 177), GAAR
Special rates and regimes	Including 196 to 210	Capital gains rates, company regimes (199 to 201), new regime (202), MAT and AMT (206), non-resident rates (207)
Tonnage taxation	226 to 234	Optional scheme for shipping companies
Returns and assessment	262 to 286	PAN, returns, assessment, reassessment
Non-profit organisations	332 to 355	Registration and taxation of NPOs
TDS, TCS, advance tax, recovery	392 to 422	Collection and recovery
Interest, fees, refunds, penalties	423 onwards	Consequences of default
Repeal and savings	536	Transition from the 1961 Act

1.5 Reading the new Act: how it is drafted

A professional who opens the 2025 Act for the first-time will notice that it reads differently. The drafters followed a few clear rules, and knowing them makes the Act much easier to navigate.

One idea, one place. Provisions that were scattered across the 1961 Act have been brought together. For example, all presumptive schemes for residents are in section 58, all non-salary TDS for residents is in a table in section 393(1), and all company rate options sit next to each other in sections 199 to 201.
Tables instead of provisos. Where the old Act used a long chain of provisos ("provided that... provided further that..."), the new Act uses tables with columns for the nature of payment, the threshold, the rate and the conditions. When you read a table, read the column headings first, then the row, then any notes below the table.
Formulas. Computations such as the cost of shares on demerger or the relief for arrears of salary are written as formulas with defined letters (A, B, C). Always identify what each letter stands for before applying the formula.
Schedules. Long lists that change often (exempt incomes, eligible investments for section 123, deemed accrual categories, charitable purposes) have been moved to Schedules. This keeps the main sections short and makes future amendments simpler.
Removal of dead provisions. Deductions and exemptions that had expired (sunset clauses long past) and procedures no longer in use have been dropped.
Consistent terms. "Tax year" replaces two terms; "assessee" is used consistently; references to "Assessing Officer" and other authorities follow a single pattern.

1.6 Key definitions (section 2)

Section 2 contains the definitions that run through the whole Act. The important ones for daily work are explained below in simple terms.

Term	Meaning in practice
Person	Includes an individual, HUF, company, firm (including LLP), AOP or BOI, local authority and every artificial juridical person. Each is a separate taxable unit.
Assessee	A person by whom tax or any other sum is payable, and includes a person against whom proceedings have been started, a deemed assessee (such as a legal heir) and an assessee in default (such as a person who failed to deduct TDS).
Income	An inclusive definition. Besides ordinary income it specifically includes items such as perquisites, capital gains, winnings, gifts taxable under section 92, subsidies and deemed incomes. Because it is inclusive, a receipt not listed can still be income if it has the character of income.
Business	Includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade. A single transaction can be business if it has the features of trade.
Capital asset	Property of any kind held by the assessee, and securities held by FPIs, and ULIPs above the premium limit, but excluding stock-in-trade, personal effects (other than jewellery, art, drawings, archaeological collections), rural agricultural land and specified gold bonds and deposit schemes.
Dividend	Includes actual dividends and the deemed dividend items (distribution of accumulated profits by way of assets, on liquidation, on reduction of capital, and loans to substantial shareholders of closely held companies).
Relative	For gifts to an individual: the spouse; brother or sister; brother or sister of the spouse; brother or sister of either parent; any lineal ascendant or descendant of the individual; any lineal ascendant or descendant of the spouse; and the spouse of any of these persons. For an HUF, any member of the HUF.
Tax year	The financial year from 1 April to 31 March, or the shorter period for a new business or source (section 3).

1.7 Basic principles of interpretation

Tax laws are interpreted using settled principles laid down by the courts. These principles continue to apply to the 2025 Act because the language and the concepts are largely carried over.

Charging provisions are read strictly. If a receipt is not clearly brought to tax by the words of the charging section, it is not taxable. There is no tax by implication.
Machinery provisions are read to make the charge work. Provisions for computation, assessment and collection are interpreted so that the charge is not defeated.
Exemptions are read strictly at the threshold. The Supreme Court in Commissioner of Customs v. Dilip Kumar and Company (2018, Constitution Bench) held that the person claiming an exemption must show that he falls squarely within it; any ambiguity at that stage goes in favour of the revenue. Once eligibility is established, the exemption is applied liberally.
Beneficial provisions that are meant to give relief (such as deductions for incentives) are construed to further their purpose.
Substance over form applies where a transaction is a sham or colourable device. However, genuine tax planning within the law is permitted.
Explanatory notes, CBDT circulars and the Memorandum to the Finance Bill are relevant aids. Circulars that are beneficial to taxpayers bind the department, but not the courts or the taxpayer.

Judicial view: Binding nature of circulars

UCO Bank v. CIT (Supreme Court, 1999): circulars issued by the CBDT to ensure proper administration of the Act are binding on the tax authorities, even if they relax the strict letter of the law in favour of taxpayers.

Commissioner of Central Excise v. Ratan Melting and Wire Industries (Supreme Court, Constitution Bench, 2008): circulars bind the department, but a circular contrary to the statute has no effect, and circulars do not bind the courts or the taxpayer.

Judicial view: Tax planning and avoidance

McDowell and Co. Ltd. v. CTO (Supreme Court, 1985) stated that colourable devices cannot be part of tax planning.

Union of India v. Azadi Bachao Andolan (Supreme Court, 2003) upheld the use of the India-Mauritius treaty by genuine residents and recognised that legitimate tax planning is permissible.

Vodafone International Holdings B.V. v. Union of India (Supreme Court, 2012) held that the transfer of shares of a foreign company was not taxable in India under the law as it stood, and that the revenue must look at the transaction as a whole rather than dissect it. Parliament then introduced indirect transfer taxation with retrospective effect, which was later withdrawn for past transactions by the Taxation Laws (Amendment) Act, 2021.

Today, statutory rules such as GAAR and the treaty Principal Purpose Test sit on top of these principles.

1.8 The charge of tax (sections 4 and 5)

Section 4 is the charging section. It says that income tax is charged for every tax year at the rates prescribed by the Finance Act of that year, on the total income of every person. Three points follow from this:

The rate comes from the annual Finance Act (or the special rate sections of the Act), not from the section that computes the income.
Tax is charged on total income, which is the result of the whole computation, after set off of losses and deductions.
Where the Act says that tax is to be deducted or paid in advance, that tax is part of the same charge; TDS and advance tax are only ways of collecting it early.

Section 5 then sets the scope: which income of a person is included in total income depending on residence (explained in the chapter on residential status).

1.9 Concepts and terms: 1961 Act compared with 2025 Act

Concept	Under the 1961 Act	Under the 2025 Act
Year of income	Previous year; assessed in the assessment year	Tax year; income and references use a single year
Exemptions	Section 10 with many clauses	Section 11 with Schedules II to VII
Deductions	Chapter VI-A, sections 80C to 80U	Sections 122 to 154, with Schedule XV for section 123 investments
New regime	Section 115BAC (default from 2023-24)	Section 202 (default)
Presumptive taxation	Three sections	One section with a table (section 58)
TDS	More than 60 separate sections from 192 to 196D	Sections 392 and 393 with tables and payment codes
TCS	Section 206C with sub-sections	Section 394 with a table
Company regimes	115BA, 115BAA, 115BAB	199, 200, 201
MAT and AMT	115JB and 115JC	Section 206 (with the Finance Act 2026 changes)
Transfer pricing	92 to 92F	161 to 173
Charitable trusts	Sections 11 to 13, 12A, 12AB, 115BBC, 115TD, 10(23C)	Sections 332 to 355, "registered non-profit organisation"
Procedure	139 to 158	Sections 262 onwards
Interest and fees	234A to 234F, 244A	423 to 428, 437
Penalty for under-reporting	270A	439
Forms	Forms under the Income-tax Rules, 1962	Renumbered forms under the Income-tax Rules, 2026
Style	Provisos, explanations, "notwithstanding" clauses	Tables, formulas, fewer cross references

Chapter summary

• The Income-tax Act, 2025 came into force on 1 April 2026 with 536 sections, 23 chapters and 16 schedules.

• It is mainly a rewrite and renumbering; most rules and rates continue.

• The period decides the law: FY 2025-26 and earlier under the 1961 Act; Tax Year 2026-27 onwards under the 2025 Act.

• Exemptions are in Schedules, TDS in three sections, and many forms are renumbered.

• Charging provisions are read strictly; exemptions are construed strictly at the threshold; genuine tax planning is permitted.