Expert decodes new I-T Act, explains what changes for ordinary taxpayers

We have lived with the Income Tax Act of 1961 for over six decades. In terms of daily compliance, what is the single biggest pain point that the 2025 Act removes for an ordinary citizen?

As people have been portraying it, this is principally the same provisions and the same Act that were earlier guiding us, but put into a new law. What the government has really done is reduce a lot of cross-referencing. They have simplified the language and included all relevant provisions in one place instead of forcing taxpayers to flip through multiple sections and amendments.

Earlier, one had to read one section, then go to another section for an amendment, and then perhaps refer to yet another provision. That has now been condensed. The law has been made more user-friendly.

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The biggest benefit here is clarity and interpretational guidance, which was earlier lacking. It took many years of litigation and court rulings to reach the current settled position on several issues. That entire experience has now been incorporated into one law.

Principally, there is not much that changes, especially for common people. Of course, professionals will have to relearn many things, but there is nothing to be worried about for taxpayers.

Indians have long struggled with the concept of earning in the previous year and filing in the assessment year. Why was this distinction kept for so long, and how does moving to a single tax year help?

The confusion between assessment year and previous year led to many practical issues — people paid challans for the wrong year, filed returns for the wrong year, or paid taxes under incorrect headings.

Converging these two concepts into a single tax year is a progressive step. That said, it will take time for people to adjust because many have followed the old system their entire lives. They will need to unlearn that framework and adopt a new one.

Globally, many countries already follow this system, where income is earned, assessed, and taxed in the same year. Initially, there may be some confusion, but the end goal is clear and positive — you only need to remember one relevant period instead of multiple overlapping years.

Does this shift to a tax year change how advance tax, capital gains tax, or TDS is paid? Does it align India with global standards like the US or UK?

Yes, this is the global standard, and India is aligning itself with it. However, in terms of actual compliance — advance tax, capital gains tax, or TDS — there is no fundamental change.

You will continue to pay advance tax quarterly, and capital gains tax will be paid in the year in which the income is earned. The TDS provisions also largely remain the same.

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What the government has done is try to consolidate the numerous TDS rates under the old law. Instead of many different rates, there will now be fewer, simpler rates. This makes compliance easier, but in principle, nothing changes in terms of obligations.

How will the tax department manage the transition from the old assessment year system to the new tax year? Is there a risk of double taxation or missed reporting?

Hopefully not. India now has a robust online tax infrastructure. Everything is system-driven through the income tax portal and the central processing centre.

This is not a manual or paper-based system where outcomes depend on individual officers’ interpretations. All changes will be built into the system automatically.

Till 31 March 2026, tax returns will continue under the old Act. From 1 April 2026 onwards, income earned will fall under the new law. This was clarified by the Finance Minister as well.

Although the law exists today, the rules — which are a substantive part of the law — are yet to be notified. Many provisions depend on these rules. Over the next two months, rules will be introduced, public consultations will be held, and forms will be finalised. Only then will the full framework be in place.

Earlier, share buybacks were treated like dividends, which was expensive for investors in higher tax slabs. How does the new capital gains model help retail investors?

To understand this, it helps if I first explain what a buyback is. When a company has excess funds, it may choose to buy back its own shares at a premium to reward shareholders. These shares are then cancelled.

Earlier, buybacks were taxed in different ways over time. At one stage, tax was levied on the company. Later, buybacks were treated as dividend income in the hands of investors.

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Under that regime, investors in the highest tax slab paid 35–36% tax on the entire buyback amount, without being allowed to deduct the cost of acquiring the shares. That cost was treated as a capital loss, which could only be set off separately in future years.

This created tax leakage because investors paid tax on gross proceeds without immediate relief. The new system moves buybacks back into a capital gains framework, taxing only real income.

The budget also introduces a higher buyback tax for promoters. Is this effective?

Yes, the intent is clear. Promoters now face a higher tax — around 22% for corporate promoters and 30% for others — making it less attractive to use buybacks as a tax-efficient exit route.

This creates a differentiation between small investors and promoters. Compared to the immediately previous regime, where the entire buyback amount was taxed as dividend, this may still be better, but the real impact will become clear once promoters respond to the change.

Should investors now prefer buyback-heavy companies like IT firms over dividend-paying companies?

Investment decisions should not be based solely on buybacks versus dividends. Many other factors matter.

That said, individual circumstances play a role. If an investor already has capital losses from earlier buybacks, future buybacks may help offset those losses more efficiently. It ultimately depends on income composition and tax position.

The Finance Minister spoke about redesigned tax forms. Are we moving toward a future where salaried individuals can file returns in under 10 minutes without professional help?

For some people, yes. Someone opting for the new tax regime, with no deductions, no complex investments, and no capital gains, may be able to file returns without professional help.

However, this will not apply to everyone. If you have capital gains, overseas assets, cryptocurrencies, or complex investments, professional advice will still be required.

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The objective is clear — to simplify filing and make it more accessible. But complete removal of professional assistance is still some time away.

So, is this ultimately old wine in a new bottle?

Yes, that is a fair description. The law was introduced earlier, not just in this budget. In principle, it is the same framework, but simplified and reorganised.

There may be confusion in the initial years, with some grey areas and adjustments. But over time, this law should settle down and be administered and interpreted more smoothly than the old one.

(The content above has been transcribed from video using a fine-tuned AI model. To ensure accuracy, quality, and editorial integrity, we employ a Human-In-The-Loop (HITL) process. While AI assists in creating the initial draft, our experienced editorial team carefully reviews, edits, and refines the content before publication. At The Federal, we combine the efficiency of AI with the expertise of human editors to deliver reliable and insightful journalism.)