1. Introduction.
The Income-tax Act, 2025 marks a fundamental shift in India’s direct tax framework by formally replacing the Income-tax Act, 1961. Recognising the scale and complexity of the transition, Parliament has incorporated an extensive repeal and savings provision under Section 536, aimed at preserving accrued rights, obligations, and ongoing proceedings under the erstwhile law.

Clause 107 seeks to amend Section 536 to clarify certain aspects of repeal and savings clause

2. Existing Provision.
Section 536 of the IT Act, 2025 provides that the IT Act, 1961 shall stand repealed. Section 536(2) presently provides that the repeal of the Income-tax Act, 1961 shall not affect past operations and that all rights, liabilities and proceedings relating to tax years up to 31 March 2026 shall continue under the repealed Act, subject to sub-section (3). Clause (h) of subsection (2) currently covers situations where a deduction was allowed or income was not taxed for a pre-1 April 2026 tax year subject to fulfilment of specified conditions, and upon violation of such conditions in a later year, the amount becomes taxable in the year of violation under the same head of income.

Further Clause (l) of section 536(2), currently provides that the tax credit carried forward under sections 115JAA or 115JD of the 1961 Act shall be deemed to be credit under the corresponding provision of the new Act and shall be allowed for the balance period subject to satisfaction of the prescribed conditions.

3. Proposed Amendment.

The Finance Bill, 2026 proposes three changes in section 536(2):
1. The opening portion will now make the saving clause subject to sub-section (4) instead of sub-section (3).

2. Clause (h) is to be substituted to provide that where any sum was allowed as a deduction or not included in total income for any tax year prior to 1 April 2026—whether due to fulfilment of conditions or for any other reason—and such sum would have become taxable in a subsequent year under the repealed Act, it shall be deemed to be the income of that subsequent year and taxed under the same head of income.

3. Clause (l) is to be amended to provide that the brought forward tax credit shall be deemed to be credit under the corresponding provisions or under section 206(3) or 206(4) of the new Act, and shall be allowed for the same remaining period subject to fulfilment of the applicable conditions.
These amendments will take effect from 1 April 2026, i.e., from the date on which the new Income-tax Act comes into force.

4. Reasons for Amendment.
The amendments are transitional and clarificatory in nature to ensure a seamless shift from the repealed Act to the new Act.

1. The substitution of the reference to sub-section (4) seems to rectify the error and is a drafting alignment so that the saving provision operates in harmony with the application of section 6 of the General Clauses Act.

2. The widening of clause (h) is intended to cover all cases of deferred taxation and not merely those involving breach of conditions. The Memorandum explaining the Finance Bill, 2026 acknowledges a legislative gap clarifying that under several provisions of the IT Act, 1961, income or deductions allowed in earlier years were required to be included in a subsequent year even without breach of conditions. Section 536(2)(h), as originally enacted, did not cover such cases and in absence of an explicit saving could have led to disputes regarding taxability post repeal. To address this, amendments were introduced vide Clause 107 of the Finance Bill, 2026. Hence the said amendment expanded scope of section 536(2)(h) of the IT Act, 2025. The amendment ensures substantive continuity of deferred taxability, preventing taxpayers from escaping inclusion of income merely because the charging provision was contained in the repealed Act.

3. The modification of clause (l) is to integrate the carried forward tax credit mechanism with the framework of the new Act, by expressly linking it to the relevant credit provisions therein. The amendment is introduced to align MAT and AMT credits with the new framework under Section 206(3) and 206(4) of the IT Act, 2025. Clause (l) has been amended so that credits accumulated under the repealed Act are deemed to be eligible under the corresponding provisions of the new Act and allowed for the balance period originally permissible, subject to continued satisfaction of conditions. This ensures that repeal does not extinguish vested tax credits.

5. Effective Date and Applicability.
The amendments to Section 536 take effect from 1 April 2026 and apply to Tax Year 2026–27 and subsequent tax years. Importantly, although prospective in operation, they govern the tax treatment of amounts originating under the repealed Act but maturing for taxation in later years.

6. Conclusion.
Section 536 represents the legislative backbone of the transition from the IT Act, 1961 to the IT Act, 2025. The amendments introduced by the Finance Bill, 2026 significantly strengthen the saving clause by:

• Eliminating interpretational gaps;
• Preserving deferred tax consequences; and
• Ensuring continuity of MAT/AMT credits.

From a constitutional and administrative perspective, the substituted clause (h) is significant as it removes the earlier interpretational scope to argue that only conditional deductions were covered; it now ensures that all timing differences leading to future taxability under the old law survive the repeal, thereby protecting the revenue in respect of deferred income. At the same time, the explicit reference to section 206(3) and (4) in clause (l) provides statutory continuity for credit
utilisation and avoids litigation on the manner and period of set-off under the new regime. The amendment to the opening words is largely technical but reinforces the overriding application of the General Clauses Act in matters of repeal and savings. Overall, the changes strengthen the transition framework and minimise disputes on the taxability of carry-forward items and deferred income post 1 April 2026.

Note: Clause 50- Section 206 – Exclusion of specified business of non -reesodents from MAT – Not discussed in this article or article of Mr. Paresh Shah. It may be desirable to have discussion. One may refer BCAS publication on Budget P 19
[Source : AIFTP Journal February 2026 Volume 28 No. 11]