Happy New Financial Year — and Welcome to the New Income Tax Act
1 April 2026 is not merely the start of a new financial year. It is the date on which India’s tax administration crossed a generational threshold. The Income Tax Act, 2025, has come into force today, replacing the six-decade-old legislation of 1961 — a statute that had, over time, become less a coherent law and more an archaeological site of accumulated amendments, court orders, circulars, and contradictory provisions that even practising tax professionals often found difficult to navigate with confidence.
For the salaried employee drawing a monthly pay cheque, and for the pensioner living on a fixed monthly disbursement, the instinctive question is a simple one: Does any of this actually affect me? The answer deserves a careful, unhurried reply.
One Law, Not One Regime
The first thing to be cleared up—and it is causing genuine confusion in many quarters—is the difference between a new Act and a new regime. The Income Tax Act, 2025 is the legal container; it is the statute book. It consists of 536 sections across 23 chapters and 16 schedules, and its stated purpose is to modernise the direct tax system, simplify compliance, and reduce litigation. What it has emphatically not done is abolish the old and new tax regimes in favour of a single unified system. Both regimes—the old, deduction-rich regime and the new, lower-rate regime—survive intact under the new Act.
The new tax regime remains the default tax regime under the Income Tax Act, 2025, and is covered under Section 202 of the new statute. The old tax regime slab rates are preserved as well. The ordinary taxpayer, therefore, faces no compulsion to abandon positions carefully built up over years of investment in provident funds, life insurance, and housing loans. The choice remains. What has changed is the legal architecture within which that choice is exercised.
Same Rates, Cleaner Statute
The good news is that nothing substantive has changed in terms of rates, deductions, and exemptions. The only major difference is how the law is written and organised — and it is considerably cleaner than before. The legislature has resisted the temptation to use a structural overhaul as the occasion for introducing new tax burdens. For the salaried class and pensioners, this is an important reassurance. The slabs to which they were subject in tax year 2025–26 continue unchanged into tax year 2026–27.
Since FY25–26, total income up to ₹12 lakh has been fully tax-free under the new regime by virtue of a rebate of ₹60,000 under Section 87A. For salaried persons, the tax-free threshold rises further to ₹12.75 lakh on account of a standard deduction of ₹75,000. For the vast majority of government servants drawing modest pay, schoolteachers, bank employees, and pensioners receiving a regular monthly pension, this means that no tax liability arises whatsoever, provided income from other sources—interest, rent, or capital gains—does not push total income above these thresholds.
One Term Where Once There Were Two
The single most significant conceptual change under the new Act concerns terminology rather than liability. The concepts of ‘Financial Year’ and ‘Assessment Year’ have been replaced by a single term: ‘Tax Year’. For the past six decades, salaried taxpayers have had to grapple with the intellectually unsatisfying arrangement under which income earned in one year was assessed in the next — a Previous Year earning its tax reckoning in an Assessment Year. The new statute collapses this into a single tax year, aligning the period of earning with the period of computation. The practical effect on most individuals will be modest, but the simplification of language will reduce confusion, particularly for first-time filers.
The Filing Calendar: Note the Revised Deadlines
The 31st July deadline for salaried individuals filing tax returns remains unchanged. Non-audit cases—self-employed taxpayers and professionals—will now have until 31st August to file their returns. For pensioners and salaried employees, this is therefore business as usual on the filing front. There is, however, a welcome liberalisation of the revision window: taxpayers will now have a longer period to revise their returns, with the deadline extended to 31st March, though additional charges will apply for delayed submissions beyond December.
What Salaried Employees Gain
Several specific changes under the new Act and the accompanying Income Tax Rules, 2026, merit attention from the salaried class. On the HRA front, cities such as Bengaluru and Hyderabad now qualify for the higher 50% HRA exemption — a benefit previously confined to the four metros of Mumbai, Delhi, Kolkata, and Chennai. This is a long-overdue recognition that the cost of living in India’s technology capitals is now fully comparable to that of the older metros.
The allowance for children’s education, currently fixed at ₹100 per child per month, is being raised to ₹3,000 per child per month. Similarly, the hostel expenditure allowance will increase sharply from ₹300 per child per month to ₹9,000 per child per month. These benefits continue to apply to a maximum of two children and remain available under the old tax regime. The fact that the government has raised these figures by a factor of 30 reflects an implicit acknowledgement that the earlier limits had become entirely disconnected from economic reality.
The exemption on employer-provided meals has been increased from ₹50 per meal to ₹200 per meal, and the exemption limit on gifts received from employers has been raised threefold—from ₹5,000 to ₹15,000 annually—with this benefit available across both tax regimes.
What Pensioners Need To Note
Pensioners have historically been among the most anxious categories of taxpayers, their anxiety compounded by the complexity of a statute that was not always easy to read. The new Act consolidates all relevant provisions in one accessible place. All salary provisions—HRA, gratuity, leave encashment, and perquisites—are now consolidated rather than scattered across the statute. The ₹75,000 standard deduction is expressly in the Act. Non-employees, that is, pensioners not drawing a salary, can claim the full commuted pension deduction without restriction.
For senior citizens who keep fixed deposits as their primary savings instrument, the deduction on interest income—allowing a deduction on interest from bank and post office deposits—is carried forward into the new statute with a significant enhancement. The deduction limit has been increased from ₹50,000 to ₹1 lakh, offering meaningful additional relief to elderly taxpayers living on fixed incomes. This is the single-most consequential change for the retired community.
The Transition: Old Law Lives On for Past Years
A point of critical importance that must not be lost in the general noise surrounding the new Act is this: the 1961 Act will still apply to earlier years, while the 2025 Act will apply from 1 April 2026 onwards. This means that for some time, both laws will operate together. Old cases, appeals, and reassessments will continue under the earlier law, while new income will be governed by the new Act. Returns for the financial year 2025–26, which are due by 31 July 2026, will be filed under the old 1961 Act. Only income from Tax Year 2026–27 onwards will be governed by the new statute.
Form 16 Is Dead; Long Live Form 130
On the compliance front, a significant procedural change affects every salaried employee. The familiar Form 16 — the certificate of tax deducted at source issued by employers — is being replaced by a new system-generated Form 130, aimed at improving accuracy and standardisation in tax reporting. Expanded use of PAN and tighter reporting norms will require taxpayers to disclose financial information more comprehensively. Employers will need to adapt their payroll systems accordingly, and employees would do well to ensure that their PAN is correctly seeded with all income sources before the filing season opens.
The Long Arm of Scrutiny: How Far Back Can the Department Reach?
A question that exercises many a salaried taxpayer and pensioner—particularly those who have been less than meticulous about disclosures in earlier years—is how far back the Income Tax department can reach for scrutiny under the new dispensation. The answer requires a distinction between two different mechanisms.
For routine scrutiny assessments, the time limit is three months from the end of the financial year in which the return was filed. A return filed for Assessment Year 2025–26, for instance, can be picked up for scrutiny only up to 30 June 2026. Failure to issue the notice within this window renders any subsequent scrutiny legally invalid. 30 June 2026 is therefore a date of considerable practical significance: it is the last day on which the department can lawfully serve a scrutiny notice on any taxpayer who filed a return for AY25–26. After that date, those returns are, for most practical purposes, beyond the reach of routine examination.
For reopening of assessments—the deeper power of reassessment where income is alleged to have escaped taxation—the position is more nuanced. Even after 1 April 2026, the department can initiate fresh reassessment proceedings for earlier assessment years under the old Act, provided the conditions prescribed in the Income Tax Act, 1961 are met. The new Act does not foreclose this power; it merely governs Tax Year 2026–27 onwards through its own reassessment framework under Sections 279 to 286.
The ordinary salaried taxpayer or pensioner with a clean record of filing need not lose sleep over this. What the 30 June 2026 deadline does is close a specific and significant window — the window for routine scrutiny of last year’s return. For those who filed honestly and on time, the closing of that window is cause for quiet relief, not anxiety.
The Bottom Line
The Income Tax Act, 2025, is not a tax revolution. It is a tax renovation — an exercise in clearing 60 years of legislative clutter so that the underlying structure is visible and usable. For the salaried employee and the pensioner, the practical takeaways are these: both the old and new regimes survive, with the new regime as the default and the old available on request; tax rates and slabs are unchanged; the zero-tax threshold of ₹12.75 lakh for salaried individuals and ₹12 lakh for others under the new regime continues; the interest deduction limit for senior citizens has been raised to ₹1 lakh; several long-frozen allowances have been unfrozen; and the 31st July filing deadline remains. 30 June 2026 closes the scrutiny window on last year’s returns — a quiet but meaningful milestone for compliant taxpayers. What has changed is not what the taxpayer owes — it is the clarity with which the law now tells him so.
(Karan Bir Singh (KBS) Sidhu is a retired IAS officer and former special chief secretary of the government of Punjab. He holds a Master’s degree in Economics from the University of Manchester, UK. He writes at the intersection of global trade negotiations, Trump-era tariff shocks, and contemporary geopolitics.)
