New Delhi: As India approaches the new fiscal year FY27, the country’s direct tax system is set for a major overhaul from April 1, 2026, with the new Income Tax Act, 2025, coming into force — replacing the six-decade-old 1961 legislation and introducing changes in compliance, terminology and taxation.
Major reform under the new framework is the replacement of the ‘Financial Year’ (FY) and ‘Assessment Year’ (AY) with a single ‘tax year’, which could simplify the filing process and improve clarity for taxpayers.
Moreover, the timelines for filing income tax returns have also been revised, while July 31 deadline remains unchanged for salaried individuals, non-audit cases such as self-employed taxpayers and professionals will now have time until August 31 to file their returns.
The cost of trading in derivatives will rise as the Securities Transaction Tax (STT) has been increased across futures and options — which was announced by Finance Minister Nirmala Sitharaman.
At the same time, rules for claiming House Rent Allowance (HRA) have been tightened, requiring disclosure of landlord details, including PAN, in specified cases. The scope of cities eligible for the higher HRA exemption has also been widened, with Bengaluru, Hyderabad, Pune and Ahmedabad now joining the existing list of metros.
In addition, employee-related tax benefits have been enhanced, with the exemption on meal benefits raised and the annual limit on tax-free gifts increased.
Meanwhile, allowances for children, including education and hostel expenses, have also increased under the old tax regime.
In a major shift, stock buybacks will now be taxed as capital gains instead of deemed dividends, impacting both promoters and retail investors.
The government has also modified tax treatment of Sovereign Gold Bonds, with exemption on redemption limited to bonds acquired during original issuance.
The new rules further disallow the deduction of interest expenses against dividend and mutual fund income, even if such investments are funded through borrowings.
To simplify procedures, taxpayers will be able to submit a single declaration to avoid TDS across multiple income streams. In addition, buyers purchasing property from non-resident Indians can now deduct TDS using their PAN, eliminating the earlier requirement of obtaining a TAN.
Relief has been provided on overseas spending, with Tax Collected at Source (TCS) on foreign tours reduced to a flat 2 per cent. TCS on remittances for education and medical purposes abroad has also been lowered.
Taxpayers will also get a longer window to revise returns, with the deadline extended to March 31, though additional charges will apply for delayed submissions beyond December.
Among other measures, interest received on compensation awarded by the Motor Accident Claims Tribunal has been made fully tax-exempt.
Notably, the government has notified income tax return forms (ITR-1 to ITR-7) for the assessment year 2026-27, enabling individuals, pensioners, and other taxpayers to begin filing their returns within the stipulated timelines.
Experts said the updated forms include some notable changes. They said that ITR-1 (Sahaj) can now be used to report income from up to two house properties, compared to the earlier limit of one, which is expected to simplify filing for many taxpayers.
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