India’s New Tax Era: Breaking Down the Income Tax Act, 2025 and 2026 Rules

On April 1, 2026, India officially retires the 64-year-old Income Tax Act of 1961, replacing it with the Income Tax Act, 2025. This transition marks a historic shift toward a simpler, digital-first tax regime designed to reduce litigation and increase the "zero-tax" threshold for the middle class.

1. The Death of "Assessment Year"

The most significant structural change is the unification of the "Financial Year" (FY) and "Assessment Year" (AY). Starting today, taxpayers will only refer to a single "Tax Year" (TY). For example, the period from April 2026 to March 2027 is simply Tax Year 2026-27. This aligns India with global accounting standards and removes the confusion of filing for a year that has already passed.

2. Zero Tax for Income up to ₹12.75 Lakh

The New Tax Regime remains the default and most attractive option for salaried individuals. While the core slabs remain consistent with the previous budget, the Section 87A rebate has been optimized:

• Effective Zero Tax: For individuals with a total income up to ₹12 lakh, the tax liability is reduced to zero via a ₹60,000 rebate.
• Salaried Advantage: When you factor in the Standard Deduction of ₹75,000, salaried employees earning up to ₹12.75 lakh effectively pay no income tax.

3. Massive Hikes in Salaried Exemptions

To account for inflation, the Income Tax Rules, 2026 have drastically increased several exemption limits that hadn't been touched in decades:

• Children’s Education Allowance: Jumped from a meager ₹100 to ₹3,000 per month per child.
• Hostel Allowance: Increased from ₹300 to ₹9,000 per month.
• Metro HRA Expansion: For the first time, Bengaluru, Hyderabad, Pune, and Ahmedabad are classified as "Metros" for HRA purposes, allowing residents to claim 50% of their basic salary as an exemption (up from 40%).
• Meal Vouchers: The tax-free limit for employer-provided food coupons is now ₹200 per meal (formerly ₹50).

4. Digital Compliance: Form 130 and TRACES

The era of the "Form 16" is coming to an end. It is being replaced by Form 130, a system-generated certificate from the TRACES portal. This move ensures that the data on your tax certificate exactly matches what the government has in its database, reducing the chances of receiving defective return notices.

5. Higher Costs for Investors and Traders

While the middle class sees relief, high-frequency traders will see a slight dip in margins. The Securities Transaction Tax (STT) on Futures has been hiked to 0.05%, and on Options to 0.15%. Additionally, proceeds from share buybacks will now be treated as Capital Gains, shifting the tax burden from companies to the individual shareholders.

6. New Filing Deadlines

To give taxpayers more breathing room, the filing deadlines have been adjusted:

• Salaried (ITR-1/2): 31 July
• Non-Audit Business (ITR-3/4): Extended to 31 August
• Audit Cases: 31 October

Summary Table: Key Changes at a Glance

Feature	Old Rule (Pre-April 2026)	New Rule (Post-April 2026)
Primary Law	Income Tax Act, 1961	Income Tax Act, 2025
Zero Tax Limit	₹7 Lakh	₹12 Lakh (via Rebate)
Standard Deduction	₹50,000	₹75,000
Education Allowance	₹100/month	₹3,000/month
Form for Salary	Form 16	Form 130