Goodbye 1961, Hello 2025: How the New Income Tax Act Ensures a Smooth Transition
Transitional provisions act as a legal bridge, making sure past actions remain valid and ongoing processes continue without interruption. Section 536 of the new Act lays out this “safety net.”
For over six decades, the Income-tax Act, 1961 has been the backbone of India’s direct taxation. Countless amendments, circulars, and judicial interpretations have shaped its journey. But like every old framework, it became overburdened with complexity. To bring clarity and modern relevance, Parliament passed the Income Tax Act, 2025.
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This new law comes into effect from 1 April 2026, and with it, the 1961 Act will be formally repealed. But repeal doesn’t mean disruption. The drafters of the 2025 Act included transitional provisions to ensure that taxpayers, professionals, businesses, and courts face a smooth handover.
Think of it as a relay race: the baton of tax administration passes from the old law to the new one without dropping mid-way.
Why the Change Was Needed
The 1961 Act, after years of piecemeal amendments, had become complex and unwieldy. Taxpayers, administrators, and policymakers alike struggled with its patchwork of exemptions, ambiguous definitions, and compliance hurdles. As India’s economy digitized and diversified, the need for clarity, predictability, and global alignment became clearer. The new Act aims to eliminate outdated provisions and create a foundation for transparent, technology-driven tax administrationWhy Transitional Provisions Matter
Imagine if every pending assessment, exemption, or carry-forward loss under the 1961 Act simply vanished on 1 April 2026. That would be chaos. Transitional provisions act as a legal bridge, making sure past actions remain valid and ongoing processes continue without interruption.
Section 536 of the new Act lays out this “safety net.” Let’s break down its key features in plain language.
1. Repeal of the 1961 Act
- What it says: The 1961 Act is repealed from 1 April 2026.
- Why it matters: This is the official “goodbye.” After this date, all tax matters will be governed under the 2025 Act, unless specifically protected under transitional clauses.
2. Savings for Prior Actions
- What it says: Anything done, any right, privilege, obligation, or liability acquired under the old Act continues as if done under the new one.
- Example: If you claimed a deduction under Section 80C in FY 2025-26, it won’t suddenly disappear. The benefit carries forward seamlessly.
- What it says: Assessments, appeals, revisions, recovery actions, or penalties that started under the 1961 Act will continue under that Act, as if it had not been repealed.
- Why it’s crucial: Litigation in tax doesn’t end in one year. A dispute started in 2025 may run for several years. The law ensures such cases don’t collapse.
3. Pending Proceedings
● What it says: Assessments, appeals, revisions, recovery actions, or penalties that started under the 1961 Act will continue under that Act, as if it had not been repealed.
● Why it’s crucial: Litigation in tax doesn’t end in one year. A dispute started in 2025 may run for several years. The law ensures such cases don’t collapse.
4. Carry Forward of Losses and Allowances
- What it says: Losses (business, speculation, house property, capital gains, etc.), depreciation, or MAT credits determined under the 1961 Act will be deemed carried forward into the 2025 Act, subject to conditions.
- Example: A company with unabsorbed depreciation from FY 2024-25 can still use it against future profits, but now under the new Act’s framework.
5. References in Other Laws
- What it says: If another law mentions the Income-tax Act, 1961, it will be read as a reference to the corresponding provisions of the 2025 Act.
- Why it matters: Think of laws like the Companies Act, SEBI regulations, or FEMA that cross-reference the Income-tax Act. This clause avoids legal loopholes.
6. Approvals, Registrations, and Notifications
- What it says: Exemptions, registrations (like for charitable trusts under 12A/80G), and notifications issued under the 1961 Act remain valid unless specifically withdrawn or replaced.
- Example: A trust registered under Section 12AA in 2024 won’t need to re-apply on 1 April 2026. Its approval stands under the 2025 Act.
- What it says: Any tax, interest, or penalty due under the 1961 Act continues to be recoverable as if the repeal never happened.
- Example: If you had an arrear demand from AY 2023-24, the department can still recover it even after the new Act kicks in.
7. Recovery of Tax, Penalties, and Interest
● What it says: Any tax, interest, or penalty due under the 1961 Act continues to be recoverable as if the repeal never happened.
● Example: If you had an arrear demand from AY 2023-24, the department can still recover it even after the new Act kicks in.
Additional Highlights from Section 536
The law goes deeper than the broad strokes above. Some finer points include:
- Refunds: If a refund becomes due after 1 April 2026 but relates to years governed by the 1961 Act, interest on refunds will apply under the 2025 Act.
- Violation of conditions: If deductions claimed under the old Act are later violated in future years (say a lock-in condition is broken), the income will be taxed under the new Act.
- Amalgamations/demergers: Benefits like carry-forward of accumulated losses during mergers (Section 72A, old Act) continue under the new regime, with conditions carried forward.
- Capital gains neutrality: Exempt transfers under old Section 47 that later attract tax due to non-compliance (like in case of business restructuring) will be taxed under the new Act.
- Deferred deductions: Deductions like preliminary expenses (Section 35D) already allowed under the old Act will continue as deferred allowances under the new Act.
Why This Matters for Taxpayers
- No disruption for ongoing litigation – Taxpayers don’t need to restart appeals or reassessments under the new Act.
- Business continuity – Losses, depreciation, and MAT credits carry forward, protecting corporate balance sheets.
- Certainty for institutions – Trusts, funds, and societies keep their exemptions and registrations.
- Government’s assurance – Revenue collections, pending penalties, and recovery proceedings don’t lapse, safeguarding public finances.
Transitional Clauses in Perspective
The 2025 Act isn’t the first to use savings provisions. The General Clauses Act, 1897 (Section 6) already provides that repeal of a law does not affect prior rights, liabilities, or legal proceedings. Section 536 of the 2025 Act is essentially a specialised, detailed extension of that principle for tax law.
By codifying this in detail, Parliament ensures clarity. Taxation thrives on certainty; even a minor ambiguity can trigger litigation.
What Taxpayers Should Do Before April 1, 2026
- Review Updated Provisions: Carefully study how changed definitions and the reduced exemption regime will impact your finances and compliance responsibilities.
- Plan Investments Afresh: Adjust investment and tax-saving strategies to reflect the slimmer set of deductions and credits now available.
- Upgrade to Digital Compliance: Ensure all taxation processes—from filings to document management—are ready for a fully electronic and faceless regime.
Conclusion
The shift from the Income Tax Act, 1961 to the Income Tax Act, 2025 represents a major leap forward for India’s taxation system. Through legal safeguards, legislative clarity, and phased implementation measures, the government has built in mechanisms to ensure the transition is smooth, predictable, and beneficial to taxpayers and the economy as a whole. As India says goodbye to 1961 and welcomes 2025, those who prepare early will be best positioned to thrive in the new era of tax compliance.
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