Why Budget 2026 Will Amend the New Income-tax Act, 2025 (Not the Old 1961 Law)

A Detailed Explanation for Taxpayers, Professionals & Business Owners

The Union Budget 2026, presented through the Finance Bill, 2026, marks a historic moment in India’s taxation system. For the first time in more than sixty years, the country’s long-standing direct tax legislation, the Income-tax Act, 1961 is set to be repealed and replaced by a completely new Income-tax Act, 2025. This comprehensive overhaul has been introduced to simplify tax laws, remove outdated provisions, and create a more modern and transparent tax framework for the future.

As India transitions from the 1961 Act to the 2025 Act, the Budget process enters a unique legal and administrative phase. This shift has significant implications for how income-tax amendments are framed in the Budget, which law they are incorporated into, and how such changes should be interpreted. It also affects how taxpayers plan their finances, how professionals advise clients, and how business owners assess compliance and future tax exposure under the evolving tax regime.

1. What Is the Legislative Position Right Now?

Income-tax Act, 1961

The Income-tax Act, 1961, enacted over six decades ago, has been the backbone of India’s direct tax system. Since its introduction, it has undergone numerous amendments and has governed all aspects of income taxation including tax rates, slabs, exemptions, deductions, assessments, and return filing procedures.

However, this long-standing legislation is now nearing the end of its life cycle. The Act is scheduled to be repealed with effect from 1 April 2026, marking the beginning of Financial Year 2026–27 (Assessment Year 2027–28).

Income-tax Act, 2025

To replace the outgoing law, Parliament has enacted the Income-tax Act, 2025, which received Presidential assent in August 2025. This new legislation has already become part of India’s statute book, but its operational date has been fixed as 1 April 2026.

The new Act is designed to simplify tax provisions, reorganize existing rules, and provide a clearer and more modern structure for income tax compliance.

Position on Budget Day 2026

On the day the Union Budget 2026 and the Finance Bill, 2026 are presented, India will be in a transitional legal phase:

         i.            The Income-tax Act, 1961 will technically remain in force, even though it is just months away from being repealed.

        ii.            The Income-tax Act, 2025 will already be a valid law, but it will not yet be implemented until the next financial year.

This overlap creates a unique legislative challenge. The government cannot logically introduce fresh amendments to a law that is about to be repealed, nor can it delay policy changes until after the new Act comes into force. As a result, tax amendments announced in Budget 2026 must be carefully aligned with and legislated under the Income-tax Act, 2025, even before it becomes operational

2. What Does This Mean for Amendments in Budget 2026?

Under India’s established constitutional and legislative framework, all changes to income tax laws are traditionally introduced through the Finance Bill presented along with the Union Budget. This is the mechanism through which the government revises tax rates, income slabs, deductions, exemptions, rebates, and compliance requirements each year.

However, in the current transition phase, a practical limitation arises. A law that is on the verge of repeal, such as the Income-tax Act, 1961, cannot be meaningfully amended, as any changes made to it would become redundant within a very short period. Parliament, therefore, avoids modifying statutes that are about to be replaced.

The Key Outcome

As a result, all income-tax policy changes announced in Budget 2026 will be legislated directly under the Income-tax Act, 2025, even though the new Act will officially come into force only from 1 April 2026.

How This Will Work in Practice

1. The Budget speech and explanatory notes may continue to use familiar terminology and concepts from the 1961 Act, since most taxpayers are accustomed to provisions such as Section 80C, Section 80D, HRA exemptions, and house property deductions.
2. Legally, however, these changes will be embedded into the framework, language, and structure of the Income-tax Act, 2025, by amending the corresponding sections, schedules, and tables of the new law.

This approach ensures continuity for taxpayers, while simultaneously enabling a smooth legislative transition to the new income-tax regime without disrupting annual Budget reforms.

3. How Are Familiar Provisions Being Mapped into the New Act?

The Income-tax Act, 2025 introduces a significant structural change in the way tax provisions are organized. Unlike the 1961 Act, which relied heavily on a scattered section-based approach (such as Section 10, Section 80C, Section 24, and others), the new law adopts a systematic framework using consolidated sections, detailed schedules, and structured tables.

This reorganization is intended to reduce complexity, eliminate repetition, and group similar provisions together, making the law easier to understand and apply.

Examples of How Key Provisions Are Being Re-Structured

I.            Salary-Related Tax Reliefs

Under the Income-tax Act, 1961:
Salary-related exemptions and deductions such as:

1. Standard deduction
2. House Rent Allowance (HRA)
3. Leave Travel Allowance (LTA)

were spread across multiple sections, often requiring cross-references to compute taxable salary correctly.

Under the Income-tax Act, 2025:
These provisions have been consolidated under Section 19 and Schedule III, where structured computation tables clearly outline eligibility, limits, and calculation methods. This consolidation simplifies salary income calculations and reduces interpretational disputes.

II.            Chapter VI-A Deductions (e.g., 80C, 80D, 80CCD)

Earlier Framework:
Deductions for investments, insurance, and retirement savings were grouped under Chapter VI-A, forming a separate and extensive part of the law.

New Framework:
In the 2025 Act, these deductions have been relocated to Schedule XV, supported by new enabling provisions. While the format and location have changed, the substantive benefits available to taxpayers largely continue, ensuring continuity in tax planning.

III.            Income from House Property

Under the old law, provisions relating to annual value, interest on housing loans, and standard deductions were spread across multiple sections and explanations.

In the new Act, these rules are explicitly written into the statute with clearer definitions, logical sequencing, and standardized computation mechanisms, making house property income calculations more transparent and consistent.

IV.            Gifts and Income from Other Sources

The taxation of gifts, which earlier involved multiple cross-references and exceptions, has now been streamlined into a single comprehensive provision (Section 92).

This provision offers clearer definitions, updated interpretations, and modern inclusions such as explicit references to virtual digital assets and refined definitions of relatives and exempt transfers reducing ambiguity and litigation risks.

4. What This Means for Taxpayers and Professionals

Tax Benefits Are Not Being Removed

Although the Income-tax Act, 1961 is being repealed, commonly used exemptions and deductions have not disappeared. Instead, they have been reorganized and repositioned within the Income-tax Act, 2025. The underlying tax benefits remain largely intact; only their location, structure, and presentation within the law have changed.

Budget 2026 May Continue Using Familiar Terminology

For ease of understanding, the Budget 2026 speech and explanatory documents may continue to refer to familiar concepts such as HRA exemption, Section 80C investment limits, or house property deductions. However, from a legal standpoint, these provisions will be formally incorporated and amended under the framework of the Income-tax Act, 2025, using its new sections, schedules, and tables.

A New Learning Curve for Tax Professionals

For chartered accountants, tax consultants, and finance professionals, this transition requires a deeper understanding of how old sections map into the new law. This “crosswalk” between the 1961 Act and the 2025 Act is critical for:

1. Accurate return filing under the new framework
2. Advising clients correctly on available deductions and exemptions
3. Assessing the real impact of Budget announcements on tax liability and compliance

Those who quickly adapt to the new structure and terminology will be better positioned to manage compliance efficiently and minimize errors during this transitional phase.

5. Why India Chose This Approach

·        Ensuring a Smooth Legislative Transition

By introducing Budget amendments directly into the Income-tax Act, 2025, the government avoids creating confusion within a legal framework that is on the verge of being repealed. This approach ensures continuity, clarity, and legal certainty, preventing last-minute changes to an outdated law that would soon become irrelevant.

·        Building a Modern and Simplified Tax Framework

The Income-tax Act, 2025 has been designed with a focus on simplicity, readability, and digital compatibility. By reducing complex cross-references and reorganizing provisions into a logical structure, the new law minimizes interpretational disputes and provides a clean foundation for a more transparent and taxpayer-friendly system.

·        Greater Flexibility for Future Amendments

With key provisions consolidated into schedules and structured tables, the new Act allows future policy changes such as revisions to deduction limits, exemptions, or definitions to be implemented efficiently and systematically. This flexible design makes it easier to update the law without disrupting its overall structure, supporting consistent and scalable tax reforms in the years ahead.

FAQs

Q1. Why is Budget 2026 considered historic for India’s income tax system?

Answer:
Budget 2026 is historic because it comes at a time when India is transitioning from the Income-tax Act, 1961, which has governed taxation for over six decades, to a completely new Income-tax Act, 2025. This marks the first comprehensive rewrite of India’s direct tax law in more than 60 years, aimed at simplifying compliance, modernising the legal framework, and improving transparency.

Q2. What is the current legal status of the Income-tax Act, 1961?

Answer:
The Income-tax Act, 1961 is still legally in force and continues to govern income tax assessments, return filing, and compliance. However, it is scheduled to be repealed with effect from 1 April 2026, which corresponds to Financial Year 2026–27 (Assessment Year 2027–28). After this date, it will no longer apply to future tax years.

Q3. What is the status of the Income-tax Act, 2025?

Answer:
The Income-tax Act, 2025 has already been passed by Parliament and received Presidential assent in August 2025, making it a valid law on the statute book. However, it is not yet operational. The Act will come into force from 1 April 2026, replacing the 1961 Act.

Q4. What is the legal situation on Budget Day 2026?

Answer:
On Budget Day 2026, India will be in a transitional phase:

1. The Income-tax Act, 1961 will still be applicable but is close to repeal.
2. The Income-tax Act, 2025 will already exist as law but will not yet be implemented.

This overlap creates a unique legislative challenge for framing tax amendments.

Q5. Why can’t the government amend the Income-tax Act, 1961 in Budget 2026?

Answer:
Amending a law that is about to be repealed is neither practical nor meaningful. Any changes made to the 1961 Act would become irrelevant within months. Therefore, Parliament avoids introducing amendments to statutes that are nearing the end of their legal life.

Q6. Why will Budget 2026 amendments be made in the Income-tax Act, 2025 instead?

Answer:
Since the Income-tax Act, 2025 will govern taxation from the very next financial year, all policy changes announced in Budget 2026 must be legislated under this new law. Even though the Act is not yet operational, it provides the correct legal foundation for future tax administration.

Q7. How will Budget 2026 changes be communicated to taxpayers?

Answer:
For ease of understanding, the Budget speech and explanatory notes may still use familiar terminology such as:

1. Section 80C
2. Section 80D
3. HRA exemption
4. House property deductions

However, from a legal perspective, these changes will be incorporated into the structure of the Income-tax Act, 2025, using its sections, schedules, and tables.

Q8. How is the structure of the Income-tax Act, 2025 different from the 1961 Act?

Answer:
The 1961 Act relied on a section-heavy and scattered structure, requiring frequent cross-referencing. In contrast, the 2025 Act uses consolidated sections, detailed schedules, and structured tables, which:

1. Reduce complexity
2. Eliminate repetition
3. Group similar provisions together
4. Improve readability and interpretation

Q9. How are salary-related tax benefits treated under the new Act?

Answer:
Under the 1961 Act, benefits such as standard deduction, HRA, and LTA were spread across multiple sections.
Under the Income-tax Act, 2025, these have been consolidated under Section 19 and Schedule III, with clear computation tables outlining eligibility, limits, and calculation methods.

Q10. What happens to popular deductions like 80C, 80D, and 80CCD?

Answer:
These deductions, earlier grouped under Chapter VI-A, have been relocated to Schedule XV in the 2025 Act. While their location and format have changed, the core tax benefits largely continue, ensuring continuity in tax planning.

Q11. How is income from house property treated under the new law?

Answer:
Provisions relating to annual value, interest on housing loans, and standard deductions have been rewritten with:

1. Clearer definitions
2. Logical sequencing
3. Standardised computation rules

This makes house property income calculations more transparent and consistent.

Q12. What changes have been made to the taxation of gifts and other income?

Answer:
Gift taxation has been streamlined into a single provision (Section 92). The new framework includes:

1. Clearer definitions
2. Updated interpretations
3. Explicit references to virtual digital assets
4. Refined definitions of relatives and exempt transfers

This reduces ambiguity and litigation risk.

Q13. Are tax exemptions and deductions being removed under the new Act?

Answer:
No. Tax benefits are not being eliminated. They are being restructured and relocated within the Income-tax Act, 2025. The substance of the benefits remains largely unchanged; only the presentation and organisation have been improved.

Q14. What does this transition mean for tax professionals?

Answer:
Tax professionals must understand the mapping (“crosswalk”) between old sections and new schedules to ensure:

1. Accurate return filing
2. Correct client advice
3. Proper evaluation of Budget changes on tax liability

Those who adapt quickly to the new framework will be better positioned to manage compliance efficiently.

Q15. Why did India adopt this approach for tax reform?

Answer:
India adopted this approach to:

1. Ensure a smooth legislative transition
2. Avoid confusion caused by last-minute amendments to a repealed law
3. Build a modern, simplified, and digitally compatible tax framework
4. Enable flexible and systematic future amendments through schedules and tables.