Income Tax Act 1961: Complete 2026 Compliance Guide
Table of Contents
The Income Tax Act, 1961 governed direct taxation of income in India for over six decades, covering individuals and corporate entities alike. Effective 1 April 2026, the law was repealed and replaced by the Income Tax Act, 2025 as the operative statute. However, payroll and tax professionals must understand both frameworks: legacy assessments and appeals continue under the 1961 Act, while current deductions and filings are governed by renumbered sections and updated forms.
Key Takeaways
- Understand the Transition: Review how the 1961 Act was repealed and replaced effective 1 April 2026.
- Contextualize the Rewrite: Examine why six decades of amendments necessitated a structural overhaul.
- Master the Tax-Year Concept: Learn how a unified “Tax Year” replaces the separate Previous Year (PY) and Assessment Year (AY) framework.
- Identify Renumbered Sections: Locate key payroll-related statutory sections for withholding and deductions.
- Update Compliance Forms: Transition to the new form numbers replacing Form 16 and Form 24Q.
- Manage Transition Provisions: Review the savings clause for pending assessments alongside the compliance checklist.
What is the Income Tax Act, 1961?
The Income-tax Act, 1961 is India’s principal law governing the taxation and administration of income. It lays down the rules for determining taxable income, exemptions, deductions, tax liability, TDS, return filing, assessments, appeals, penalties, and other tax compliance requirements.
The Act applies to various categories of taxpayers, including individuals, companies, firms, and other entities, and is administered by the Income Tax Department under the Ministry of Finance. There are detailed rules and procedures supported by the Income-tax Rules and related notifications, circulars, and legislative amendments.
Why the Old Law Needed Replacing?
Over the years, repeated amendments made the Income-tax Act, 1961 increasingly complex and difficult to navigate.
- Decades of amendments: Over six decades, several amendments added provisions, provisos, explanations, and cross-references to the Act.
- Complex structure: Related provisions were often placed in different chapters, making the law difficult to understand and navigate.
- Need for simplification: The government’s objective in rewriting the law was to make it clearer and easier to interpret and to reduce unnecessary litigation.
- Easier compliance: A simpler and better-organized law was intended to help taxpayers understand their obligations and comply with tax requirements more easily.
Has the Income Tax Act, 1961 been Repealed?
The Income Tax Act, 2025 received presidential assent on 21 August 2025 after Parliament passed a revised Income Tax (No. 2) Bill, and it took effect on 1 April 2026, formally repealing the earlier law.
This recodification does not alter statutory tax liabilities. Tax rates and slabs still come from the annual Finance Act, exactly as they did before, and official guidance clarifies that the reform alters structure and drafting clarity, rather than core fiscal policy.
A savings clause protects work already in progress. Proceedings, assessments, and appeals pertaining to income earned prior to the effective transition date, including matters pending before the CIT(A), ITAT, and judicial courts, remain governed by the provisions of the repealed 1961 Act.
How the Income Tax Act 2025 Restructured the Law
| Aspect | The 1961 Act | New Law (2026 Onward) |
|---|---|---|
| Sections (approx.) | Over 800, built up through decades of amendments | 536 |
| Schedules | 14 | 16 |
| Core time concept | Previous year and assessment year, kept separate | A single tax year |
| Chapter structure | Provisions added chronologically over time | 23 chapters, grouped by subject |
The reorganization groups related provisions together instead of scattering them across decades of insertions. Charging provisions, heads of income, deductions and exemptions, assessment procedure, appeals, penalties, and TDS or TCS rules each now sit in their own dedicated part of the statute, thereby streamlining statutory cross-referencing compared to the former structure.
The New Tax Year Replaces Previous Year and Assessment Year
The new Act simplifies the tax-year structure by replacing the separate Previous Year and Assessment Year terminology with a single Tax Year.
- Under the old law: Income earned during the Previous Year was assessed and taxed in the following Assessment Year.
- Under the new Act: A single Tax Year, running from 1 April to 31 March, covers both the earning and assessment of income.
- Example: Financial Year 2026–27, previously assessed as Assessment Year 2027–28, will be referred to as Tax Year 2026–27.
- What changes: The change is mainly terminological and does not alter when tax is actually paid or returns are filed.
- Action required: Internal documents, payroll records, forms, and notices referring to the Assessment Year should be updated to reflect the new terminology.
TDS on Salary under the Income Tax Act 2025
Section 192 of the 1961 Act, the standard provision for TDS on salary, along with Section 192A for lump-sum provident fund withdrawals, has been merged into a single section covering salary income, non-monetary perquisites, startup ESOPs, and provident or superannuation fund withdrawals.
Several of the forms built around this deduction have also been renumbered.
| Old Form (1961 Act) | New Form | Purpose |
|---|---|---|
| Form 16 | Form 130 | TDS certificate for salary |
| Form 16A | Form 131 | TDS certificate for non-salary payments |
| Form 24Q | Form 138 | Quarterly TDS statement for salary |
| Form 26AS | Form 168 | Consolidated tax credit statement |
Employers preparing salary tax certificates or filing quarterly salary TDS returns must update their payroll software and document templates to reflect the new form numbers prior to the next filing cycle. A certificate issued under an old form number after the transition date can raise unnecessary queries from employees and from the department, even where the underlying figures are correct.
Does this Change What Employers Actually Deduct?
The change is terminological, not substantive. TDS on salary will continue to be deducted at the time of payment, based on the employee’s estimated annual income-tax liability, as under the earlier Section 192. Employers must still account for non-monetary perquisites, support an employee’s declared tax-saving claims, and adjust for any excess or deficiency in deductions during the year.
The new tax regime also remains the default framework under which employees are assessed unless they actively opt out, a framework carried over from the previous tax structure rather than introduced as a new policy. What changed is which section and form capture the outcome, not the underlying arithmetic behind the deduction itself. Employers evaluating the old-versus-new tax regime should use an income tax calculator to compare tax liability based on declared income, eligible deductions, and exemptions.
What Still Runs under the Income Tax Act, 1961?
Rights, benefits, obligations, and liabilities that had already arisen under the earlier law also continue to exist, and the General Clauses Act, 1897 fills any procedural gap the transition itself does not address. Employers with an open dispute, a pending rectification request, or an ongoing appeal from a prior year should continue to cite the old section numbers for that specific matter rather than retroactively switching to the new numbering.
Rights, benefits, obligations, and liabilities that had already arisen under the earlier law also continue to exist, and the General Clauses Act, 1897 fills any procedural gap the transition itself does not address. Employers should treat closed years as closed under the old framework and each new tax year as governed by the new framework, rather than applying a single set of rules to both.
Key Numbers at a Glance
| Item | The 1961 Act | Position From 1 April 2026 |
|---|---|---|
| Effective period | 1962 to 31 March 2026 | 1 April 2026 onward |
| TDS on salary | Section 192 (plus 192A for PF withdrawals) | A single merged section |
| Form 16 equivalent | Form 16 | Form 130 |
| Form 24Q equivalent | Form 24Q | Form 138 |
| Time period concept | Previous year and assessment year | Single tax year |
| Pending disputes | Governs matters from before 1 April 2026 | New tax years fall under the new law |
| Total sections (approx.) | Over 800 | 536 |
A Payroll Compliance Checklist for Employers
- Update payroll software references: Replace references to old TDS sections with the new consolidated section across payslips, appointment letters, and policy manuals.
- Reissue TDS certificates under new form numbers: Ensure payroll systems generate Form 130 instead of Form 16 starting from Tax Year 2026–27.
- File quarterly returns as Form 138: Verify that your software vendor mapped filings to Form 138 (replacing Form 24Q) prior to the first quarter deadline.
- Retain records for open assessments: Maintain documentation for income earned prior to 1 April 2026 under the section numbers of the 1961 Act.
- Train finance and payroll teams on the ‘Tax Year’ concept: Transition internal templates from “Previous Year / Assessment Year” terminology to “Tax Year”.
- Review income tax declaration workflows: Update employee tax declaration portals to reference the renumbered statutory sections.
- Recheck advance tax obligations: Confirm advance tax computation workflows and schedules remain aligned ahead of upcoming installment dates.
Conclusion
The transition to the Income-tax Act, 2025 marks a move towards a simpler, more structured, and modern tax framework. While the new Act changes terminology, section numbering, forms, and the concept of the Tax Year, transitional provisions ensure continuity for earlier tax years and pending matters.
Going forward, businesses will need to keep their payroll, tax documentation, and compliance processes aligned with the new framework. Digital and automated tax systems will play an increasingly important role in helping organizations manage these changes accurately and efficiently. factoHR helps HR and payroll teams adapt to changes in TDS sections, forms, and Tax Year terminology, supporting smoother compliance as the new framework evolves. Schedule a demo to learn more.
Frequently Asked Questions
Has the Income-Tax Act, 1961 been Repealed?
Yes. The Income-tax Act, 1961 was repealed on 1 April 2026, when the new consolidated direct tax law came into effect.
What Replaced the Income-Tax Act, 1961?
The Income-tax Act, 2025, which received Presidential assent on 21 August 2025, came into effect on 1 April 2026. It reorganized the tax law into 536 sections across 23 chapters.
Does TDS on Salary Work Differently under the New Act?
No. The TDS computation method remains unchanged. The relevant provision has been renumbered from Section 192 of the old Act to its corresponding provision in the new Act.
What is Form 16 Called under the New Law?
Form 130 replaces Form 16. Similarly, Form 138 replaces Form 24Q, the quarterly TDS return for salary.
What Happens to Income-Tax Appeals Filed before the Transition?
They continue to be governed by the Income-tax Act, 1961, subject to the applicable transitional provisions. Pending assessments and appeals relating to earlier years continue under the old Act.
What is a Tax Year?
A Tax Year is a single 12-month period from 1 April to 31 March. It replaces the earlier distinction between the Previous Year and the Assessment Year.
Did Tax Slabs or Deduction Limits Change because of the New Act?
No. Tax rates and slabs continue to be determined through the annual Finance Act. The new Act primarily reorganizes and renumbers the existing tax provisions and does not, by itself, change the tax liability.
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