The Income Tax Act 2025: The Biggest Tax Law Reform Since Independence

Six decades of legislative amendments had made the Income Tax Act, 1961 one of the most complex statutes in India’s legal ecosystem. With 819 sections, 47 chapters, hundreds of provisos, explanations and sub-clauses, and thousands of cross-references, it required genuine expertise simply to navigate — let alone apply correctly. The Explanatory Memoranda to Finance Bills grew longer every year. Judicial interpretation filled volumes. Practitioners spent as much time decoding the structure as analysing the substance.

The Income Tax Act, 2025 — passed by Parliament and receiving Presidential assent in 2025 — replaces this with a 536-section statute written in plain language, with a logical chapter sequence, removal of redundant provisions, and a simplified TDS architecture. The stated objectives: make the law accessible to ordinary taxpayers, reduce litigation arising from ambiguous language, and modernise the framework for a digital economy.

What changed substantively:

• The entire TDS section architecture — 60+ individual sections consolidated into three
• The Assessment Year concept — abolished and replaced by Tax Year
• TDS return forms, certificate forms, and challan codes — all renumbered
• Manpower supply services — now explicitly within TDS scope
• MACT interest — fully tax-exempt without monetary ceiling
• Dividend deduction — interest expense deduction eliminated
• NRI property purchase — TAN requirement removed, PAN-based challan permitted

What did not change:

• TDS rates and monetary thresholds — identical to those under the 1961 Act
• TDS deposit due dates — 7th of the following month (30th April for March)
• Interest rate for TDS defaults — unchanged
• PAN and TAN — continue under the new Act
• Faceless assessment framework — continues uninterrupted

TDS Section Mapping: Complete Old 194-Series → New Income Tax Act 2025 Reference

This is the reference table every accounts team needs on their desk. The rates and thresholds are identical — only the section references and payment codes change for April 2026 onwards.

The Dual-Law Transition Rule: Which Act Governs Each Specific Payment

This is the most technically nuanced aspect of the April 2026 TDS transition, and it is where errors will proliferate. The Income Tax Act, 2025 does not apply retrospectively. The governing principle is elegant in theory but requires careful application in practice:

Understanding “Earlier of Payment or Credit”

This is the same mechanism that has always governed TDS deduction timing, now applied to determine which Act governs the deduction. Consider these examples directly from the Income Tax Department FAQ:

Example 1: Professional fees of ₹1 lakh credited in books of accounts on March 28, 2026. Payment made on April 5, 2026. The earlier event is the credit on March 28. Income Tax Act, 1961 applies. Quote Section 194J. Use Form 26Q for Q4 FY 2025-26. Even though the actual payment left the bank in April 2026.

Example 2: Advance payment made to a contractor on March 28, 2026. Services rendered and credited in April 2026. The earlier event is the advance payment on March 28. Income Tax Act, 1961 applies. TDS should have been deducted in March. Quote Section 194C.

Example 3: Professional fees credited in books on April 2, 2026. Payment made on April 10, 2026. The earlier event is April 2. Income Tax Act, 2025 applies. Quote Section 393 with the relevant payment code. Use Form 140 for Q1 Tax Year 2026-27.

Example 4 (ongoing monthly contract): M/s ABC has a housekeeping contract with monthly payments. March 2026 payment credited on March 31 → Section 194C (old Act). April 2026 payment credited on April 30 → Section 393 (new Act). Same vendor, same contract, different Act for each month’s payment.

Old Returns, Correction Statements, and Lower Deduction Certificates

Three important transition clarifications confirmed by the Income Tax Department:

1. Correction statements for periods governed by the old Act (Q1–Q4 FY 2025-26) must be filed under the old Act framework, using old form numbers and section references — even if the correction is made after April 2026. Correction window: two years from the end of the tax year in which the original statement was due.
2. Proceedings and assessments for periods before April 1, 2026 continue under the old Act. An assessment for AY 2024-25 that is in progress after April 2026 remains governed by the 1961 Act.
3. Lower deduction certificates issued under Section 197 of the old Act remain valid for payments made on or after April 1, 2026, if issued for projected receivables in Tax Year 2026-27. Deductors can apply the lower rate even for April 2026 onwards payments.

Tax Year Replaces Assessment Year: End of a Six-Decade Confusion

Under the Income Tax Act, 1961, every taxpayer had to reference two different financial years for the same income: the Previous Year (when income was earned) and the Assessment Year (when it was assessed, always one year later). Income earned in “Previous Year 2025-26” was assessed in “Assessment Year 2026-27.” This dual-year referencing confused individual taxpayers, created errors in correspondence, and made the law inaccessible to non-specialists.

The Income Tax Act, 2025 abolishes the Assessment Year concept entirely. From April 1, 2026:

• Tax Year equals Financial Year. Income earned in Tax Year 2026-27 (April 2026 – March 2027) is filed and assessed in Tax Year 2027-28.
• The old “Previous Year” is now called Tax Year. The old “Assessment Year” is now the Tax Year in which the return is filed.
• The terms “Assessment Year” and “Previous Year” are deprecated from all new communications, returns, and documentation for Tax Year 2026-27 onwards.

For practical compliance: every ERP system, payroll software, TDS utility, and documentation template must be updated to reference “Tax Year 2026-27” for the period April 2026 to March 2027 — not “FY 2026-27 / AY 2027-28” as was the prior practice. The Income Tax Department has clarified that systems may display “Tax Year 2026-27 (corresponding to FY 2026-27)” during the transition period to avoid confusion.

All New TDS Forms for Tax Year 2026-27: The Complete Reference

Every TDS and TCS return form, TDS certificate form, and challan format has been renumbered under the Income Tax Rules, 2026. The content of these forms is largely unchanged — what changed is the form number, the section references within the form, and the year nomenclature.

Critically important: Form 16 for FY 2025-26 must still be issued to employees before the deadline (June 15, 2026 for Q4 FY 2025-26 returns filed by May 31). This is the last Form 16 — a historical milestone. Form 130 applies from Tax Year 2026-27 onwards. Any employer who issues Form 130 for FY 2025-26 salary income is technically non-compliant.

Payment Codes 1001–1092: The New TDS Challan System

Under the Income Tax Act, 1961, each TDS challan referenced a section number directly — “194C,” “194J,” “194I” — making it immediately clear what nature of payment was involved. The Income Tax Act, 2025 consolidates all non-salary TDS into Section 393 but differentiates payment types using a numeric payment code system, with codes ranging from 1001 to 1092.

These payment codes are mandatory in all TDS challans and quarterly returns filed for Tax Year 2026-27 onwards. The Income Tax Department has published the complete code mapping in the updated challan instruction manual. Your TDS software vendor must have incorporated these codes by now — if your software still shows section numbers like “194C” or “194J” in the challan preparation screen for April 2026 transactions, contact your vendor immediately for an update patch.

Representative payment codes (from the published mapping):

Note: The full code range 1001–1092 covers all payment categories. Download the complete mapping from the official Income Tax Department portal under the TDS Compliance section.

Salary TDS Reset: What Every Employer Must Do From April 2026

Key Substantive Income Tax Changes from April 2026

Beyond the structural renumbering, the Income Tax Act, 2025 introduces several substantive changes that affect tax liability calculations. These are not merely form changes — they change the actual tax position of specific categories of taxpayers.

1. MACT Interest — Fully Tax-Exempt With No Ceiling

Interest awarded by Motor Accident Claims Tribunals (MACT) — typically paid by insurance companies to accident victims and their families — is now fully exempt from income tax. The earlier provision under the 1961 Act allowed an exemption only up to ₹50,000 per year; anything above was taxable and TDS was required to be deducted.

From April 1, 2026: no TDS is to be deducted on MACT interest payments. The entire amount is tax-exempt regardless of quantum. Insurance companies, general insurers, and legal payors must update their payment systems to stop deducting TDS on such awards. Claimants who had TDS deducted on MACT interest in prior years can claim refund in their ITR for those years where deduction was incorrectly made.

2. Dividend Income — Interest Expense Deduction Removed

Under the Income Tax Act, 1961 (specifically Section 57(iii)), taxpayers could deduct interest expenses up to 20% of their dividend income while computing taxable dividend income. This provision allowed leveraged investors who borrowed money to buy dividend-yielding shares to reduce their taxable dividend income.

From April 1, 2026, this deduction is fully removed under the new Act. Investors who have borrowed funds to purchase dividend-yielding shares will now have to pay income tax on the gross dividend, without any deduction for the interest cost of borrowing. This will meaningfully increase the taxable income of leveraged dividend investors — particularly institutions and high-net-worth individuals who operate structured dividend-capture strategies.

3. NRI Property Purchase — TAN No Longer Required

Previously, an Indian resident buyer purchasing immovable property from a Non-Resident Indian was required to first obtain a Tax Deduction Account Number (TAN) before deducting TDS on the purchase consideration. For individual home buyers — who rarely deal with TAN requirements in their personal capacity — this was a significant compliance burden that caused widespread non-compliance and consequent demand notices.

From April 2026, buyers can deduct TDS on NRI property purchases using a simple PAN-based challan, eliminating the TAN registration requirement entirely. This brings NRI property purchase TDS compliance in line with domestic property purchase TDS (Section 194IA equivalent under the new Act), which similarly did not require TAN. The TDS rate on NRI property remains as per treaty or Act provisions applicable to the NRI seller’s home country.

4. Non-Filer Enhanced TDS — Automated Precision

The non-filer enhanced TDS mechanism (previously under Sections 206AB and 206CCA of the old Act) continues under the new Act with tighter automated enforcement. The system now applies a higher TDS rate for taxpayers who have not filed ITRs for the past 3 consecutive years where total TDS or TCS was above ₹25,000 per year. The higher rate is the greater of: twice the specified rate, or 5%.

What changes from April 2026 is the precision of the automated flagging. The income tax portal’s “non-filer” status determination is now done in real-time, not periodically. Deductors who do not check the non-filer status of a payee before making a payment — and who deduct at the standard rate when the higher rate was applicable — face the same liability as if they had underdeducted. Check the income tax portal before every significant payment.

5. Cash Withdrawal TDS — Higher Rate for Non-Filers

The standard TDS on cash withdrawals above ₹1 crore remains at 2% (for persons who have filed ITRs for at least one of the past 3 years). For confirmed non-filers, the enhanced rate now triggers on withdrawals above ₹20 lakh at 2% and remains elevated. Banks must verify filing status before processing large cash withdrawals.

TCS Rate Changes from April 2026: Key Updates

Manpower Supply TDS: The New Explicit Clarification That Has Teeth

Real Scenarios: Three Businesses Navigating the TDS Transition

Scenario 1 — The March Contractor Payment That Tripped Two Acts

Kavya handles accounts for a mid-sized engineering company in Pune. The company has a monthly contract with an IT services vendor — ₹3 lakh per month for software maintenance. For March 2026, the invoice was received and credited in books on March 28. TDS should have been deducted at that point under Section 194J of the Income Tax Act, 1961. Payment was made on April 4, 2026. Kavya’s junior accountant, aware that the new Act is now in force, quoted Section 393 on the April 4 challan.

This is wrong. The credit — the earlier event — occurred on March 28. The old Act applies. The correct section is 194J, not 393. The payment must be reflected in Form 26Q for Q4 FY 2025-26. Kavya catches the error in time, corrects the challan, and files Q4 correctly. The Q4 FY 2025-26 return is due May 31, 2026 — before the new Act return for Q1 Tax Year 2026-27 (due July 15, 2026). Both returns are now filed correctly under their respective Acts.

Scenario 2 — The Security Agency That Escaped TDS for Five Years

A retail chain in Delhi pays a security agency ₹8 lakh per month — ₹96 lakh per year. For the past five years, the accounts team never deducted TDS, under the impression that security services were not “work” under Section 194C. Under the old Act, this was a defensible (if legally weak) position given the circular history. Under the Income Tax Act, 2025, manpower supply is explicitly “work” with no room for doubt.

From April 2026: TDS at 2% = ₹16,000 per month must be deducted. Deposit by the 7th of the following month. Reflect in Form 140 (quarterly) for Tax Year 2026-27. Failure to start now creates a running liability from April 1, 2026 with no ambiguity defence. The company updates its vendor management system and security agency contract to show TDS deduction, effective April 2026. The past five years remain an exposure that the tax officer may revisit during assessment — legal advice is sought.

Scenario 3 — The Employee Investment Declaration Chaos

A 300-person tech company in Bengaluru sends out the standard investment declaration form in April 2026 — the same Word document template used every year with “Section 80C,” “Section 80D,” “Section 24(b)” referenced throughout. Employees fill it and return it. The payroll team processes April TDS accordingly.

HR receives an advisory from their CA firm in late April: investment declarations for Tax Year 2026-27 should reference the new Act’s section numbers — Section 80C → Schedule XV read with Section 123, Section 80D → equivalent in the new Act. The declarations already submitted are technically non-compliant. The CA advises that while the risk of penalty for this specific issue is low in the transition year (the Income Tax Department is unlikely to take action on this), the payroll system and all future declarations should be updated immediately to avoid cumulative non-compliance. The HR team updates the template and reissues declarations for Q2 onwards.

Compliance Checklist: 20 Actions Before Your First Q1 Return

For understanding how TDS credits flow into an employee’s ITR and how to handle TDS mismatches in Form 26AS, see our comprehensive Form 26AS and TDS reconciliation guide. For clients who received a TDS demand notice, our demand notice response guide covers how to approach ASMT-10 and Section 143(1) notices effectively. For ITR filing under the new Act framework, see our ITR filing guide for FY 2025-26 — though note that the new Act applies to Tax Year 2026-27 returns filed in Tax Year 2027-28.

TDS April 2026: The Complete Visual Reference

Frequently Asked Questions

Conclusion: The New Act Is Not About Rates — It Is About the Architecture of Compliance

In conversations across accounting offices in April 2026, a dangerous complacency is visible. “The rates didn’t change” — this phrase is used to justify inaction on software updates, form transitions, and salary TDS resets. It misunderstands what actually changed.

The Income Tax Act, 2025 changed the architecture of how TDS compliance is structured, referenced, filed, and enforced. A business that files its Q1 Tax Year 2026-27 TDS return using Section 194C instead of Section 393 (Code 1006) will not get a gentle warning — it will get a system validation rejection, then a demand notice, then interest for the period the return was unfiled. A payroll team that issues Form 16 for Tax Year 2026-27 salary instead of Form 130 has issued a technically non-compliant certificate.

The dual-law transition rule is elegant but demanding. For businesses with high transaction volumes in March–April 2026, every single payment must be classified by its credit/payment date to determine which Act governs. An ongoing monthly contract that ran under Section 194C for years switches to Section 393 for the April invoice and every invoice after that. The contract itself does not change — the governing law does, automatically, from the first day of the month.

The substantive changes — MACT exemption, dividend deduction removal, manpower supply TDS clarification, NRI property TAN elimination — are fewer in number but significant in impact for the specific categories of taxpayers they affect. If any of these categories applies to your clients or your business, the impact is material and immediate.

The businesses and practitioners that update their systems, issue correct forms, apply the dual-law rule precisely, and start the new Act’s compliance cycle cleanly will find the transition is ultimately a simplification — fewer section numbers to remember, cleaner tabular structure, clearer language. Those who defer will face mounting penalties on an unresolvable foundation. The time to act was April 1. The second-best time is now.