India transitions to Income-tax Act, 2025; new tax rules effective April 1

India has ushered in a new era in its taxation framework with the implementation of the Income-tax Act, 2025, replacing the decades-old Income-tax Act, 1961, effective from Wednesday (April 1,2026). The transition coincides with the start of the financial year 2026–27 and brings into force a host of budgetary measures, including higher Securities Transaction Tax (STT) on derivatives trading and reduced Tax Collected at Source (TCS) on select overseas remittances.The newly introduced law aims to simplify and modernize India’s tax structure without significantly altering existing tax rates. Officials have emphasized that the overhaul primarily focuses on making the legislation more logical, streamlined, and easier to understand for taxpayers.
Simplified Tax Framework
One of the key structural changes under the new Act is the introduction of a single “tax year,” replacing the earlier dual concepts of “previous year” and “assessment year.” This move is expected to reduce confusion and improve compliance.During the transition phase, the Income Tax Department has clarified that its e-filing portal will support both the old and new tax systems. Returns for Assessment Year 2026–27, relating to income earned under the old law, will continue to be filed using existing forms. Ongoing assessments and appeals tied to earlier years will also proceed under the Income-tax Act, 1961 until resolution.Advance tax payments for the ongoing fiscal, however, will be governed by the provisions of the Income-tax Act, 2025.
Relief for Taxpayers
In a notable relief measure, the new law allows taxpayers to claim refunds of Tax Deducted at Source (TDS) even if income tax returns are filed after the due date, without attracting penalties. This provision is expected to benefit individuals who miss filing deadlines.Additionally, TCS rates on overseas spending have been significantly reduced. Tax on overseas tour packages has been slashed to 2% from 20%, while remittances under the Liberalised Remittance Scheme (LRS) for education and medical purposes will now attract a lower rate of 2%, compared to the earlier 5%. These changes are aimed at easing the cash flow burden on the middle class.
Higher STT on F&O Trades
A key market-related change effective today is the increase in Securities Transaction Tax on futures and options (F&O) trading. STT on futures contracts has been raised to 0.05% from 0.02%, while options trades will now attract higher rates on premiums and exercise.The move is intended to curb excessive speculative activity in equity derivatives markets. According to regulatory data, retail investors collectively incurred losses exceeding Rs1 lakh crore in FY25, highlighting the risks associated with high-volume derivatives trading.
Boost for Data Centres and IT Sector
The government has also operationalized a 20-year tax holiday, extending until 2047, for foreign companies that procure data centre services in India. This measure is expected to attract global technology firms and boost investments in India’s digital infrastructure ecosystem.Further, the threshold for safe harbour provisions for IT and IT-enabled services has been significantly increased to Rs2,000 crore. The revision is aimed at reducing litigation and providing greater tax certainty to large technology firms operating in India.Experts note that while the legislative shift is significant, most taxpayers are unlikely to see a sharp change in their immediate tax liabilities. The transition is designed to be gradual, ensuring continuity while improving clarity and compliance over time.Overall, the rollout of the Income-tax Act, 2025 marks a major step in India’s efforts to modernize its tax administration, improve ease of doing business, and align with evolving economic realities.

(Business Correspondent)