Seamless Transition: Navigating the Income Tax Act, 2025 for AY 2026-27

The Income Tax Act, 2025 has come into effect from April 1, 2026, replacing the Income Tax Act, 1961. This new Act aims to streamline, simplify, and modernize India's tax code, reducing compliance burdens and improving clarity. While the 1961 Act is repealed, its provisions will continue to govern all tax years beginning before April 1, 2026.

Key Aspects of the Transition

• Assessment Year (AY) vs. Tax Year (TY): For income earned during Financial Year (FY) 2025-26, taxpayers will file their Income Tax Return (ITR) for AY 2026-27 using the forms prescribed under the Income Tax Act, 1961. This filing will typically occur after April 1, 2026, but the income period predates the new Act. The concept of 'Tax Year' replaces 'Previous Year' and is applicable from April 1, 2026, for income earned during FY 2026-27 onwards, which will be referred to as Tax Year 2026-27.
• ITR Forms: For AY 2026-27, the ITR forms (ITR-1 to ITR-7) under the 1961 Act will be notified and made available on the e-filing portal. For Tax Year 2026-27 onwards, new ITR forms under the Income Tax Rules, 2026, will be used. The e-filing portal will support compliance under both Acts simultaneously during the transition.
• Tax Audit Reports: For FY 2025-26 (AY 2026-27), tax audit reports must be filed using existing Forms 3CA/3CB/3CD under the 1961 Act. For Tax Year 2026-27, a new Form No. 26, merging the erstwhile 3CA, 3CB, and 3CD, will be applicable. The due date for filing the tax audit report for AY 2026-27 is September 30, 2026.
• TDS Credit: Tax deducted on income pertaining to FY 2025-26 will be reflected in the Annual Information Statement (AIS) for AY 2026-27. Separate AIS statements will be generated: one for AY 2026-27 under the old Act and another in Form No. 168 for Tax Year 2026-27 under the new Act. The e-filing system will automatically segregate credits based on the TDS return filed by the deductor.
• Residential Status: The basic conditions for determining individual residency remain unchanged in Section 6 of the Income Tax Act, 2025. Residential status for tax years prior to April 1, 2026, will continue to be determined under the 1961 Act, even if assessment occurs after the new Act's commencement.

Taxpayers should ensure correct selection of Assessment Year (AY 2026-27) for payments relating to FY 2025-26 and Tax Year 2026-27 for payments relating to FY 2026-27 to ensure proper tax credit.