Budget 2026: Why Income Tax Amendments Will Be Made in the 2025 Act Instead of the Repealed 1961 Law

Introduction

India stands at the threshold of a landmark transformation in its direct tax regime. After serving for over six decades, the Income Tax Act, 1961 will be formally repealed and replaced by the Income Tax Act, 2025, effective from April 1, 2026. This transition marks a critical juncture in Indian taxation history, particularly concerning how future budgetary amendments, including those in Budget 2026, will be incorporated into the new legal framework rather than the repealed legislation.

The Income Tax Act, 2025 received Presidential assent on August 21, 2025, after Parliament passed the Income Tax (No. 2) Bill, 2025 during the monsoon session [1]. This new legislation consolidates India’s direct tax provisions into 536 sections across 23 chapters and 16 schedules, representing a substantial reduction from the previous structure that contained over 800 sections spread across 47 chapters. The reform addresses decades of complexity arising from more than 4,000 amendments that had transformed the original 1961 Act into an unwieldy patchwork of provisions, provisos, and explanations.

The Legal Framework: Understanding the Transition

Repeal and Replacement Mechanism

The Income Tax Act, 2025 operates as a complete replacement statute rather than an amendment to existing legislation. Section 536 of the new Act explicitly repeals the Income Tax Act, 1961 while ensuring continuity of all pending proceedings, assessments, appeals, and recovery actions [2]. This approach follows the principles established under the General Clauses Act, 1897, particularly Section 6, which provides that repeal of a law does not affect prior rights, liabilities, or legal proceedings.

The legislative intent behind this comprehensive replacement stems from the need to modernize India’s tax system to align with contemporary economic realities. When the 1961 Act was originally enacted, it was designed for an economy vastly different from today’s digital, globalized marketplace. The Supreme Court in Electronics Corporation of India Ltd. v. Commissioner of Income Tax [3] affirmed that residence and source constitute the twin pillars of Indian taxation, a principle that the new Act maintains while simplifying its expression and application.

Transitional Provisions and Continuity

The Income Tax Act, 2025 incorporates extensive transitional provisions to ensure seamless migration from the old regime to the new framework. Any proceedings initiated under the 1961 Act that remain pending on April 1, 2026 will continue to be governed by the provisions of the repealed Act as if it had never been repealed. This ensures that taxpayers engaged in ongoing litigation or assessment proceedings face no disruption in their cases.

Furthermore, losses, depreciation, and Minimum Alternate Tax credits determined under the 1961 Act will be deemed to be carried forward into the 2025 Act, subject to applicable conditions. This provision maintains the legitimate expectations of taxpayers while transitioning to the new legislative framework. Any tax, interest, or penalty due under the 1961 Act remains recoverable under the new Act, ensuring revenue continuity for the government.

Budget 2026 and the New Legislative Structure

Why Amendments Will Target the 2025 Act

Budget 2026, scheduled to be presented in February 2026, will be the first Union Budget following the commencement of the Income Tax Act, 2025 on April 1, 2026. All income tax amendments proposed in Budget 2026 will be incorporated into the new Act rather than the repealed 1961 legislation for several compelling reasons.

First, the legal principle of statutory construction dictates that amendments must be made to legislation that is in force. Since the 1961 Act will cease to exist from April 1, 2026, any amendments to it would be legally futile and without effect. The new Act explicitly states that tax rates and policy changes announced in future Finance Acts will be incorporated into its framework, establishing a clear mechanism for budgetary amendments.

Second, the Finance Act, 2025 already provides a precedent for how tax amendments function within this new structure. The Finance Act, 2025, which received Presidential assent on March 29, 2025, introduced several amendments to the Income Tax Act, 1961 that would apply until March 31, 2026 [4]. These included revised tax slabs, enhanced rebates under Section 87A, increased standard deduction limits, and modifications to TDS/TCS provisions. Budget 2026 will follow a similar approach, but its amendments will automatically flow into the 2025 Act rather than the repealed 1961 Act.

Revenue Neutrality and Rate Modifications

The Income Tax Act, 2025 is explicitly designed to be revenue-neutral, meaning it does not change existing tax rates or policies at the point of enactment. Any modifications to tax rates, slabs, exemptions, or deductions will continue to be made through annual Finance Acts, as has been the practice. This approach preserves parliamentary sovereignty over taxation matters while providing a stable, simplified legal framework.

The tax rates specified in the schedules to the Income Tax Act, 2025 will be modified through the Finance Act accompanying Budget 2026. For instance, if the government proposes changes to the tax slabs under the new tax regime, these will be enacted through amendments to the relevant provisions of the 2025 Act. The charging provision in Section 4 of the new Act provides that income tax shall be levied at the rates specified in the annual Finance Act, explicitly acknowledging this mechanism.

Regulatory Framework and Implementation

Role of the Central Board of Direct Taxes

The Central Board of Direct Taxes (CBDT), operating under the authority granted by the Income Tax Act, plays a crucial role in implementing budgetary amendments and clarifying their application. The CBDT issues circulars, notifications, and rules that give operational effect to legislative changes. Under the Income Tax Act, 2025, the CBDT’s powers are codified in Section 532, which empowers the Central Government to frame schemes for faceless assessment, collection, and appeals.

This digital-first approach to tax administration represents a significant departure from the traditional system. The Income Tax Act, 2025 provides statutory backing to electronic and faceless schemes that previously existed only under delegated authority. The Delhi High Court in Lakshya Budhiraja v. Union of India [5] provided constitutional support for such digitization, holding that faceless assessment schemes align with principles of transparency and accountability.

Legislative Process for Budget Implementation

The process of incorporating Budget 2026 amendments into the Income Tax Act, 2025 will follow established parliamentary procedures. The Finance Minister will present the Union Budget on February 1, 2026, followed by the introduction of the Finance Bill containing proposed amendments. The Finance Bill will then be debated in Parliament and, upon passage, will receive Presidential assent to become the Finance Act, 2026.

Critically, all amendments in the Finance Bill, 2026 will reference sections of the Income Tax Act, 2025 rather than the repealed 1961 Act. Parliamentary draftsmen will ensure that cross-references, definitions, and procedural provisions align with the new statutory framework. This approach maintains legislative coherence and prevents legal ambiguities that could arise from referencing a repealed statute.

Practical Implications for Taxpayers and Practitioners

Understanding the Tax Year Concept

One of the most significant changes in the Income Tax Act, 2025 is the introduction of the “Tax Year” concept, replacing the confusing distinction between “previous year” and “assessment year” that existed under the 1961 Act. Under the new framework, the Tax Year refers to the twelve-month period commencing on April 1 each year, during which income is earned and tax liability is computed.

This simplification eliminates interpretative ambiguities that frequently led to litigation under the old Act. For newly established businesses, the Tax Year extends from the date of commencement to the conclusion of that financial year. This modification aligns India with OECD member jurisdictions that observe a single accounting and tax period, enhancing international compatibility of Indian tax law.

Compliance and Return Filing

The Income Tax Act, 2025 introduces several compliance-related improvements that will affect how taxpayers interact with budgetary amendments. The Act allows taxpayers to claim refunds of tax deducted at source even if returns are filed after the deadline, without facing penal charges specific to refund claims. This provision, when combined with Budget 2026 amendments to TDS provisions, will significantly ease compliance burdens.

The extended timeline for filing updated returns represents another major change. Under the Finance Act, 2025, the period for filing updated returns was extended from 24 months to 48 months from the end of the relevant tax year. Additional income tax payable varies based on the timing of filing: 25% if filed within 12 months, 50% between 12 and 24 months, 60% between 24 and 36 months, and 70% between 36 and 48 months. Budget 2026 amendments will build upon this framework within the structure of the 2025 Act.

Case Law and Judicial Interpretation

Principles of Statutory Construction

Indian courts have developed robust principles for interpreting tax legislation and managing transitions between statutory regimes. These principles will guide how Budget 2026 amendments are understood and applied within the context of the Income Tax Act, 2025. The doctrine of harmonious construction, consistently applied by courts, requires that amendments be read in a manner that gives effect to the legislative intent while maintaining consistency with the broader statutory framework.

Courts have historically been cautious about applying new tax provisions retrospectively unless explicitly stated by Parliament. This principle will be particularly relevant as Budget 2026 amendments take effect partway through the Tax Year 2025-26. The Supreme Court has repeatedly held that tax legislation should be construed strictly, with any ambiguity resolved in favor of the taxpayer. These interpretative principles will shape how Budget 2026 amendments to the Income Tax Act, 2025 are understood and applied.
Transitional Justice and Legitimate Expectations

The principle of legitimate expectations, recognized in Indian administrative law, protects taxpayers who have organized their affairs based on existing legal provisions. The Income Tax Act, 2025 respects this principle through its transitional provisions, ensuring that rights accrued under the 1961 Act are not arbitrarily extinguished. Budget 2026 amendments will need to be similarly sensitive to taxpayer expectations, particularly regarding deductions, exemptions, and procedural rights that have existed for years.

Conclusion

The replacement of the Income Tax Act, 1961 with the Income Tax Act, 2025 represents a watershed moment in Indian tax legislation. Budget 2026 will mark the first major policy intervention under this new framework, with all amendments flowing into the new Act rather than the repealed legislation. This transition is not merely technical but represents a fundamental shift toward a simpler, clearer, and more taxpayer-friendly legal regime.

The legal mechanisms for incorporating Budget 2026 amendments into the Income Tax Act, 2025 are well-established, following constitutional and parliamentary procedures that have evolved over decades. The continuity provisions ensure that pending matters under the old Act proceed without disruption, while new matters are governed by the simplified framework of the new Act. As India moves toward this new era of direct taxation, taxpayers, practitioners, and administrators must familiarize themselves with the structure and terminology of the Income Tax Act, 2025 to effectively navigate the changes ahead.

References

[1] SCC Online. (2025). Income-tax Act 2025 notified repealing Income-tax Act 1961. https://www.scconline.com/blog/post/2025/08/23/income-tax-act-2025-notified-to-repeal-income-tax-act-1961/
[2] PRS Legislative Research. (2026). The Income-tax Bill, 2025. https://prsindia.org/billtrack/the-income-tax-bill-2025
[3] Electronics Corporation of India Ltd. v. Commissioner of Income Tax, (1989) 183 ITR 43 (SC)
[4] TaxTMI. (2025). Finance Act 2025 Brings Major Tax Reforms: Changes to Customs, Excise, GST and Income Tax Relief for Middle Class. https://www.taxtmi.com/news?id=32265
[5] Lakshya Budhiraja v. Union of India, 2021 Delhi HC
[6] ASV Legal LLP. (2025). The Income-tax Act 2025: A Codified, Digital, and Predictable Fiscal Regime. https://www.asvlawoffices.com/the-income-tax-act-2025-a-codified-digital-and-predictable-fiscal-regime/
[7] PwC Tax Summaries. (2025). India – Corporate – Significant developments. https://taxsummaries.pwc.com/india/corporate/significant-developments
[8] Business Standard. (2026). Income Tax Act, 2025 to replace the 1961 law from April 1: Explained. https://www.business-standard.com/finance/personal-finance/income-tax-act-2025-to-replace-the-1961-law-from-april-1-explained-126011200507_1.html
[9] TaxGuru. (2025). Key Income Tax Changes You Must Know Under the Finance Act 2025. https://taxguru.in/income-tax/key-income-tax-finance-act-2025.html

Posted on: January 19th, 2026