What the new and simpler Income Tax Act means for individual taxpayers

Sixty-five years after India enacted its last law on income taxes, the country’s direct tax landscape is in for a 180-degree change as the new Income Tax (I-T) Act, 2025, comes into effect from April 1, replacing the Act of 1961.

The main objective of the exercise, announced in July 2024 by Union Finance Minister Nirmala Sitharaman, was to overhaul and simplify the I-T Act as it had gone through several changes over the years, making it difficult for common taxpayers to understand it.

After all, the I-Tax Act of 1961 had been amended nearly 65 times with more than 4,000 changes over six decades through annual Finance Acts and 19 separate Taxation Laws Amendment Bills, making it difficult for even experts to keep a tab on its minutiae.

The new Act aims to simplify and modernise the language, enable digital integration for faceless assessments and digital compliance to reduce human interface and corruption, help taxpayers, reduce litigation, and ensure that India’s tax law is on a par with global standards. Accordingly, while it does not bring major changes to the direct tax regime and the tax rates, it has a more streamlined structure—536 sections versus 819 in the previous Act, 23 chapters as against 47 earlier, and 16 schedules as against 14.

The new Act has also introduced simpler terms like Tax Year, which will replace the confusing Financial Year and Assessment Year, and has for the first time defined the virtual digital space to include emails, cloud storage and smartphones for search and seizure provisions, though that has sparked considerable debate.

In a post-Budget interaction with Business Today, Central Board of Direct Taxes (CBDT) Chairperson Ravi Agarwal underlined that after April 1, I-T administration and tax regulation would become simpler. “There could be some teething issues. We are trying to minimise them,” he said, stressing that the tax administration is gearing up to implement the new law.

Assessing the Impact

While the new Act was being seen as a fait accompli with not much change anticipated, what has piqued interest is the release of the draft forms and rules by the CBDT which reveal several tweaks that could raise individuals’ tax liability in some cases and require employers to review salary structures.

For individual taxpayers, the most important changes are those relating to the realignment of PAN (permanent account number) thresholds and rationalisation of the perquisite limits that have been brought in line with the cost of living. House rent exemption has been extended to more cities and conditions to avail of leave travel allowance have been relaxed (see table).

Should salaried taxpayers review their tax options after these changes? That will depend on a case-to-case basis. Further, while some key changes proposed in the draft rules would impact only those using the old income tax regime, others relating to transport allowances could impact those in the exemption-free new tax regime as well.

Sandeepp Jhunjhunwala, Partner at professional services firm Nangia Global, says the upward revision of perquisite valuation, which had remained unchanged for decades, represents a substantive recalibration of the taxation framework for salaried employees. “Consequently, for salaried individuals with structured compensation and significant eligible deductions, the old regime may now present a more compelling and potentially advantageous option, warranting a careful evaluation,” he says.

Importantly, while the number of cities eligible for the higher 50% HRA exemption under the old tax regime has been expanded to eight now, the taxpayer will have to disclose the relationship between the tenant-assessee and landlord under new draft Form 124. “This could act as a meaningful deterrent against fictitious and inflated rental claims, as it introduces transparency at the first point of reporting,” says Jhunjhunwala. In fact, a huge number of HRA claims have in the past become a point of investigation by the CBDT.

Sumit Singhania, Partner at Deloitte India, says there are some areas that are new and aim to simplify compliances. “Generally speaking, employees should benefit, because limits for the non-taxable part of the perquisites have been increased,” he says.

However, one perquisite, on the deemed value of car benefit, has been increased, and that could cost taxpayers a bit more because their compensation will reflect a higher tax liability on this account. “The transition to the new set of rules will require resources from the employer to organise a restructuring of the employee compensation plan,” says Singhania.

In the case of HRA exemptions, Vivek Jalan, Partner at Tax Connect Advisory Services, says the choice between the old and the new tax regime depends upon the tax-saving deductions an individual can avail.

“One must, thus, calculate the ‘break-even deduction’ for different income levels. If the taxpayer has deductions above the break-even level, the old regime will be beneficial. Otherwise, the new regime will be the most desirable choice,” he says. Break-even deduction is the limit at which tax liability under new and old IT regimes is equal.

For example, in case deductions above Rs 5.44 lakh are availed by a taxpayer earning Rs 15 lakh per annum, the old regime is beneficial. Similarly, in case deductions above Rs 7.08 lakh are availed by a taxpayer earning Rs 20 lakh, the old regime is beneficial.

Compliances

Taxpayers must note that the Act comes into effect from FY27 and will impact their tax liability from April 1. This means that income tax returns (ITR) based on the new Act will be filed in 2027. However, certain compliances would have to be made in the coming months.

While taxpayers will benefit from the reduction in the number of forms, they must keep in mind that many forms have changed. Common information fields in forms have been standardised, and they have been redesigned to support the pre-fill functionality and automated reconciliations that will ease compliance.

Another key change relates to PAN. Forms for application of PAN and the required documentation have also been changed. Further, thresholds for quoting PAN have been tweaked. More transactions, including purchase or sale of cars, will require taxpyers to quote their PAN. This will lead to better reporting and disclosures.

“By increasing the thresholds, the measure narrows the reporting universe to transactions of greater materiality, reducing low-value data capture,” says Jhunjhunwala of Nangia Global.

Changes have also been made in the ITR forms and eligibility criteria for filing ITR-1 and ITR-4, which pertain to resident individual taxpayers, HUFs and LLPs. A Deloitte report says eligible individuals can use these forms even if they own up to two houses, subject to prescribed conditions. “This marks a change from the current framework, which limits eligibility to persons owning only one house,” it says.

Besides, the draft rules have provided a single unified rule for opting in or out of the new tax regime. Unlike the framework under the 1962 Rules, which requires filing separate prescribed forms electronically on or before the due date to opt for the new tax regime, the new rule says the option shall be exercised in the return of income. This eliminates the need for standalone filings, simplifying procedures and reducing the compliance burden, says Deloitte.

The Transition

With less than a month to go, everyone—taxpayers, tax practitioners, and the department—is getting ready for the rollout. Based on stakeholder comments, the draft rules may be tweaked before notification by the CBDT.

Some have expressed concerns over the short window between the publishing of the draft rules and their notification. Experts say that after April, taxpayers would require two-three months to review the changes and make the required tweaks.

The Institute of Chartered Accountants of India has already held capacity building programmes on the new I-T Act, its new President Prasanna Kumar D said recently, adding that it will hold more such sessions for chartered accountants once the rules are notified.

Additionally, there are worries over whether the I-T portal, which is prone to snags, will be up and running on April 1. CBDT Chairperson Ravi Agarwal underlines that the department is working on it. But since it’s a huge shift, all the changes may not be available from the beginning. The department has identified the dates when these utilities would be required, and those would be rolled out accordingly.

“Everything will not be there on April 1, but wherever it is required, it will be done. For example, ITR will be required in July, it will be done. TDS statements for the first quarter of FY27 will be required subsequently, and that will also be done,” he says.

Salaried workers, apart from the new I-T rules, will also have to assess the impact of the Labour Codes in the new fiscal. Experts warn that some employees’ take-home salaries could be hit. However, they add that most companies are working on restructuring salaries to minimise such problems.

Preeti Sharma, Partner for Global Mobility Services, Tax & Regulatory Advisory at BDO India, likens the Labour Codes to a new tax when it comes to taking a decision about the compensation structure.

“Traditionally, employee compensation structures were largely influenced by tax exemptions and deductions, but now you can’t create a structure without taking care of the impact of the Labour Codes,” she says, adding that a key factor is the uniform definition of ‘wages’ in all the four Codes and the provision that it should not be less than 50% of the total remuneration.

Companies are reviewing the provisions in their payroll and compliance management. While some are planning to implement the provisions immediately, others may choose to do so with their appraisal cycle.

However, be mindful that the Codes are effective November 21, 2025, and hence the compliances which are not linked with the rules to be notified have to be adhered to on an immediate basis, says Sharma.

For individual taxpayers and the salaried, the new fiscal year will bring in a fresh round changes that could impact their remuneration. Understanding those changes is essential for efficient tax management.  

@surabhi_prasad