New Income Tax Act: Complete Guide for Employers, HRs, CAs, and Employees

India's income tax framework is getting its biggest structural overhaul in over six decades. The Income Tax Act, 1961, which has governed every salary, every Form 16, every TDS filing is being replaced by the Income Tax Act, 2025. The new act was passed by Parliament in August, 2025, and takes effect from April 1, 2026 (Tax Year 2026-27 onward).

The scale of the overhaul is real, but the most important thing to understand before you read another word: tax slab rates have not changed. This is a structural and compliance overhaul and not a tax hike.

Whether you process payroll for 500 employees, manage HR for a mid-sized firm, or work a salaried job in Bengaluru, this guide is written for you. Navigate directly to your section below.

Why was the 1961 Act replaced?

The Income Tax Act was a well-intentioned piece of legislation. Over six decades, it was amended repeatedly and tax professionals like CAs, payroll managers, and corporate finance teams, spent enormous time navigating the law itself, before they could apply it.

The Income Tax Act 2025 was designed to fix exactly this. Its stated purpose is simplification, digitization, and a reduction in litigation. The Act is now shorter, cleaner, and more consistently organized.

Universal changes - What applies to every taxpayer in India

These changes apply regardless of whether you are an employer, employee, investor, or business owner. Familiarize yourself with them before reading your persona section.

For payroll admins, HR, and business owners in India

Payroll admins and HR professionals carry the full operational weight of this transition. You are responsible for TDS calculation, HRA exemption logic, investment declarations, salary structuring, perquisite valuation, form issuance, and quarterly returns. Everything the new Act changes in these areas lands on your desk first. This section covers all of it in one place.

For accountants and tax professionals

Your job is to translate the 2025 Act across a client portfolio, update your filing templates, and give accurate advice during the transition. The changes are structural, but they have real implications for how you file and how you advise employers and salaried individuals.

Mapping the old Income Tax Act to the new

The 2025 Act reorganises, not rewrites, tax law. Update every template, engagement letter, and client communication that references old terminology:

• "Previous Year" and "Assessment Year" become "Tax Year"

• Section 192 becomes Section 392

• Chapter VI A (Section 80A to 80U) becomes Chapter VIII (Section 122 to 154)

• Form 16 becomes Form 130; Form 12BB becomes Form 124; Form 24Q becomes Form 138

FY 2025-26 income is filed as AY 2026-27 under the 1961 Act. Tax Year 2026-27 begins April 1, 2026 under the new Act. Every filing must sit on the correct side of this line.

Advising employer clients

Perquisite valuation is now rule-prescribed. Review employer clients' declarations for cars, ESOPs, and accommodation against the Income Tax Rules 2026 before the first April payroll. Undervalued perquisites generate TDS shortfalls with 1.5% per month interest, and liability sits with the employer.

Advising salaried clients

HRA with family-member landlord: Rent paid to a parent, spouse, or sibling above ₹1 lakh annually must be disclosed in Form 124 with the landlord's PAN and relationship declared. Missing this disclosure invalidates the HRA claim. Advise clients to disclose proactively.

Metro city HRA upgrade: Clients employed in Bengaluru, Hyderabad, Pune, or Ahmedabad now qualify for 50% HRA exemption (up from 40%). Revise their HRA workings for Tax Year 2026-27 and confirm their employer has updated the city classification in payroll.

Revised return window: Extended from 9 to 12 months. For Tax Year 2026-27 (ending March 31, 2027), the revised return deadline is March 31, 2028.

For salaried individuals

Your tax rates have not changed. What has changed are the names of the forms you submit, some allowances that benefit you, and one disclosure requirement for HRA that matters if it applies to you.

New terms on your tax documents

Before: Income earned in FY 2024-25 was assessed in AY 2025-26. Your Form 16 showed a different year from the year you worked.

From April 1, 2026: Income earned in Tax Year 2026-27 is assessed in Tax Year 2026-27. Your Form 130 shows one year, the year you earned the income.

What to submit to your employer

Form 122: A new standardised declaration your employer will ask you to submit before the April 2026 payroll run. Use it to declare your tax regime choice (old or new), income and TDS from any previous employer in the same Tax Year, house property losses you want set off against salary, and prior TCS credits. Submit it before payroll is processed so your employer can factor in the correct figures from the start.

Form 124 (replaces Form 12BB): For HRA, home loan interest, and LTC claims. If you pay rent to a parent, spouse, or sibling and the annual amount exceeds ₹1 lakh, declare the relationship, their name, and their PAN in this form. Missing this disclosure invalidates your HRA claim. The arrangement itself is valid; it just needs to be on record.

Allowances worth claiming

If your employer offers any of the following, the revised limits make them worth claiming properly:

If you live in Bengaluru, Hyderabad, Pune, or Ahmedabad

Your HRA exemption moves from 40% to 50% of Basic Pay from Tax Year 2026-27. If your Basic Pay is ₹60,000/month, the maximum exempt HRA component rises from ₹24,000 to ₹30,000 per month, subject to actual rent paid and HRA received. Submit a revised HRA declaration in Form 124 to your employer for Tax Year 2026-27.

Your Form 130 (New Form 16) 

Form 130 has three parts instead of two, adds a senior citizen annexure for employees above 60, and is issued by your employer by June 15th after the Tax Year. Use it exactly as you used Form 16 when filing your return.

Extended deadline for revised returns 

You now have 12 months from the end of the Tax Year to file a revised return, up from 9 months. For Tax Year 2026-27 (ending March 31, 2027), your revised return deadline is March 31, 2028.

What non-compliance costs now

The penalty structure for TDS non-compliance is unchanged in its rates but enforceable with greater precision under a digital-first framework:

• Late TDS return filing: ₹200 per day per return until filed

• Failure to deduct TDS: Interest at 1% per month from the date tax was deductible

• Failure to deposit TDS: Interest at 1.5% per month from the date tax was deducted

• Under-reporting perquisites: Treated as a failure to deduct; same interest exposure, plus potential for penalty proceedings.

About Zoho Payroll - Compliance-ready payroll for the new tax era

The Income Tax Act 2025 raises the bar for payroll accuracy, form management, perquisite valuation, and audit readiness.

Zoho Payroll is built to meet that bar, with automated TDS calculations under Section 392, all essential forms generated from your payroll data, an updated HRA city eligibility engine, rule-based perquisite valuation, and a self-service portal for employee declarations. Every compliance requirement in this guide is a feature in Zoho Payroll. For payroll admins and HR professionals carrying the operational weight of this transition, that means one less thing to worry about.

See Zoho Payroll in action

Frequently asked questions

• Does the Income Tax Act 2025 introduce new taxes or higher rates?

  No. Tax slabs and rates are unchanged. This is a structural and compliance overhaul, not a tax policy change.

• What is a Tax Year? 

  A single unified year that replaces the old Previous Year and Assessment Year. Income earned in Tax Year 2026-27 is assessed in Tax Year 2026-27, not the following year.

• Are there any new exemptions under the new Income Tax Act?

No new exemptions, but several limits have been revised upward:

• Is Section 80C still valid?

  Yes, under a new reference: Schedule XV read with Section 123. The eligible instruments and ₹1.5 lakh limit are unchanged.