New Income Tax Act Effective April 1, Says FM Sitharaman

In her Union Budget 2026-27 presentation on February 1, 2026, Finance Minister Nirmala Sitharaman announced that the new Income Tax Act will come into force from April 1, 2026, replacing the six-decade-old Income Tax Act of 1961.

"In July 2024, I announced a comprehensive review of the Income Tax Act, 1961. This was completed in record time, and the Income Tax Act, 2025 will come into effect from April 1, 2026," the Finance Minister said.

The Finance Minister said the legislation follows a comprehensive review of the existing law that was announced in July 2024 and completed in record time. The objective of the new Act is to simplify tax provisions, improve clarity, and reduce litigation arising from complex and overlapping sections.

From April 1, 2026, the Centre will change how income tax years are described, replacing the terms "assessment year" and "previous year" with a single term, "tax year". The change is being introduced through the new Income Tax Act, 2025 and is aimed at making Income Tax Return filing clearer and more straightforward for taxpayers.

The Income Tax Act, 2025 will replace the Income Tax Act, 1961, bringing changes to the structure and language of the law. While tax slabs and tax rates will remain unchanged, officials say the simplified wording is expected to reduce confusion and make compliance easier.

Under the earlier system, income earned in one financial year was taxed in the following year, known as the assessment year. For instance, income earned in 2024-25 was assessed in 2025-26. This separation between the year of earning and the year of tax filing often caused confusion among taxpayers.

The new law removes this gap in terminology. The year in which income is earned and the year in which tax is filed will now be the same and will be referred to as the "tax year". This alignment is intended to make the tax system easier to understand by placing income and tax filing within a single period.

With the introduction of the tax year concept, Income Tax Returns, assessment orders and other official documents will refer only to the tax year. The government has clarified that no changes are being made to tax rates or slabs, and that the reform is limited to simplifying language and procedures.

The Income Tax Act, 2025 will apply from April 1, 2026, with its full impact reflected in tax filings for 2026-27, which will be referred to as Tax Year 2026-27. Some of the updated terminology may appear in return forms for 2025-26 as part of the transition.

For taxpayers, especially first-time filers, the change means the familiar idea of earning income in one year and paying tax in the next will no longer define the system. The government views this shift as an important step towards a simpler and more taxpayer-friendly income tax framework.