On August 11, 2025, the Lok Sabha passed the Income Tax Act 2025 — replacing the Income Tax Act of 1961 that had governed India's direct tax system for over six decades. The new Act takes effect from April 1, 2026. For most salaried employees, the core tax rates do not change. But the compliance landscape, form names, and several allowance structures are being overhauled.
The new Income Tax Act 2025 does NOT change income tax slab rates or the Old vs New Regime choice for FY 2026-27. Tax slabs remain exactly the same. What changes is the structure of the law, compliance procedures, and some allowance limits.
Why Was the 1961 Act Replaced?
The Income Tax Act 1961 had grown to over 800 sections through 64 years of amendments, court orders and Finance Act changes. It had become extremely difficult to navigate — even for qualified tax professionals. The new Act compresses this to 536 sections across 23 chapters, removing decades of contradictions, outdated provisions and unnecessary complexity.
The three main problems the new Act solves:
- Over-complexity: 800+ sections with contradictory provisions were confusing taxpayers and fuelling litigation
- Paper-era language: The 1961 Act was written for physical offices and manual filing — incompatible with digital India
- High litigation: Ambiguous drafting created disputes that took years to resolve in courts
What Actually Changes for Salaried Employees from April 2026
1. Form Names Are Changing — Same Purpose, New Numbers
This is the most immediately visible change for salaried employees. Familiar forms are being renumbered under the new rules:
| Old Form Name | New Form Name | Purpose |
|---|---|---|
| Form 16 | Form 130 | Salary TDS Certificate from employer |
| Form 26AS | Form 168 | Annual tax statement |
| Form 16A | Renumbered | TDS certificate for non-salary income |
| Form 12BB | Form 124 | Investment declaration to employer |
The content and purpose of these forms stays the same — only the numbers change. Your employer's HR and payroll team will handle this transition. You do not need to do anything different.
2. "Assessment Year" Replaced by "Tax Year"
The confusing terminology of "Previous Year" and "Assessment Year" is being replaced with a single term: Tax Year. For example, income earned in Tax Year 2026-27 will be filed and assessed in the same Tax Year 2026-27 framework — instead of being called "Previous Year 2026-27 assessed in Assessment Year 2027-28." This simplification removes one of the most common sources of confusion for taxpayers.
3. Faceless Assessment Extended Further
The new Act extends faceless assessment — where your tax scrutiny happens entirely online without you ever visiting an income tax office — to more processes including appeals and reassessments. All official communications will now come via mandatory e-notices to your registered email and mobile. This is a significant improvement for salaried employees who previously had to take leave to attend in-person hearings.
4. Allowance Limits Updated to Reflect 2026 Costs
Many perquisite and allowance thresholds had not been updated since the 1990s and 2000s. The new Income Tax Rules 2026 (companion rules to the new Act) revise these to reflect current costs:
| Allowance / Perk | Old Limit | New Limit |
|---|---|---|
| Employer vehicle perk (two-wheeler) | ₹900/month deduction | ₹3,000/month deduction |
| Employer loan perk threshold | ₹20,000 | ₹2,00,000 |
| Gift vouchers from employer | ₹5,000/year tax-free | Revised upward |
| Transport allowance (specially-abled) | ₹10,000/month | ₹25,000/month (70% of allowance) |
5. Virtual Digital Assets (Crypto) Formally Recognised
Cryptocurrency and other virtual digital assets are now formally recognised as taxable capital assets under the new Act, removing the ambiguity that existed under the 1961 framework. The tax treatment (30% flat rate with no set-off of losses) remains unchanged.
What Does NOT Change
- Tax slab rates — identical to FY 2025-26
- Section 80C limit — still ₹1.5 lakh (Old Regime only)
- New Regime vs Old Regime choice — salaried employees can still switch every year
- Standard deduction — ₹75,000 (New Regime), ₹50,000 (Old Regime)
- Section 87A rebate — up to ₹12 lakh tax-free under New Regime
- HRA, home loan interest deductions — available under Old Regime as before
The Income Tax Rules 2026 are still in draft stage as of March 2026. The government collected public feedback until February 22, 2026. Final rules will be notified before April 1, 2026. Some provisions may change from the draft. Consult your CA or employer's payroll team for the finalised position.
Action Checklist for Salaried Employees Before April 2026
- Submit your investment declaration (Form 124 / old Form 12BB) to your employer for FY 2026-27 — note the new form number
- Update your email and mobile on the IT portal — e-notices will now be the primary communication method
- Recalculate Old vs New Regime — the revised HRA limits for 8 cities and updated allowance thresholds may shift the math in favour of the Old Regime for you
- Ensure your HRA claims are genuine and documented — new Form 124 requires landlord relationship disclosure (see our HRA article)
- No panic needed — the core tax structure is unchanged. This is a compliance and terminology update, not a tax rate change
🧾 Check Your Tax Under the New Rules
Use our Income Tax Calculator for FY 2025-26 and FY 2026-27 — compare Old vs New Regime and see exactly what you owe.
Calculate My Tax →Timeline Summary
| Date | Event |
|---|---|
| Feb 2025 | Original Income Tax Bill 2025 introduced in Parliament |
| Aug 11, 2025 | Income Tax (No. 2) Bill 2025 passed by Lok Sabha |
| Jan 2026 | Draft Income Tax Rules 2026 released for public feedback |
| Feb 22, 2026 | Public feedback deadline closed |
| Before Apr 1, 2026 | Final rules to be notified by government |
| April 1, 2026 | New Income Tax Act 2025 and Rules 2026 take effect |