The Income-tax Act, 2025 will come into force from April 1, 2026, bringing a new structure, simplified language, and the concept of a “tax year” for taxpayers.
But here’s the key point many taxpayers are missing: income earned in FY 2025–26 will still be assessed under the old Income-tax Act, 1961, even though the new law starts from April 1.
This has raised questions and confusion, especially because assessment for FY 2025–26 happens in 2026–27, the same year the new law begins. To clear this, the government has issued detailed FAQs explaining how the transition will work.
Why FY 2025–26 assessment will remain under the old law
One of the most important questions answered by the government is whether the new “tax year” concept will clash with the existing “assessment year” during the transition.
The government’s reply is clear: “The Assessment Year 2026–27 of the Income-tax Act, 1961 will pertain to the income of a taxpayer for the previous year 2025–26 and not to the income of the financial year 2026–27.”
In simple terms, what matters is when the income was earned, not when the assessment happens.
The FAQ further clarifies:
“The tax year 2026–27 of the new Act will pertain to the income of a taxpayer for the financial year 2026–27.”
This means there is no overlap or conflict between the two laws.
How the transition will actually work
The government has laid out the transition in a step-by-step manner:
“The assessment for income of the previous year (financial year) 2025–26 of a taxpayer shall be done as per the provisions of the Income-tax Act, 1961 for the assessment year 2026–27.”
At the same time: “The assessment for income of tax year (financial year) 2026–27 of a taxpayer shall be done as per the provisions of the Bill for tax year 2026–27.”
So, even though both assessments happen in the same calendar year, they apply to different income periods, and each will follow its own law.
What exactly is a ‘tax year’ under the new law?
The new Income Tax law replaces the term “previous year” with “tax year”.
A tax year is defined as a 12-month period contained within a financial year, and it will now be used for income earned, tax rates, and assessment of income.
The government explained that using both “previous year” and “assessment year” earlier created confusion, since they referred to two different financial years. With the new system, income, tax rates and assessment are all linked to one clearly named year — the tax year.
However, the term “financial year” has not been removed.
This is because many compliance timelines — such as return filing deadlines, rectification windows and procedural actions — still work better when defined with reference to a financial year.
Can a tax year be shorter than a financial year?
Yes, and this is another important clarification.
According to the FAQ, a tax year can be less than a full financial year in certain cases. This typically happens when a new business is set up during the year, or a new source of income comes into existence mid-year.
In such cases, the tax year starts from the date the business or income begins and ends on March 31 of that financial year.
Why taxpayers should not worry about the change
Despite the new terminology, the practical process remains familiar:
-Income earned before March 31, 2026 will be assessed under the old law
-Income earned from April 1, 2026 will be assessed under the new law
The government’s clarification makes it clear that there is no double taxation, no overlap, and no change in liability for FY 2025–26 income.
Summing up…
The new Income-tax Act, 2025 will apply only to income earned from April 1, 2026 onwards. Any income earned in FY 2025–26 will continue to be assessed under the Income-tax Act, 1961, even though the assessment happens in 2026–27. The change is about simplifying tax language, not changing the tax timeline overnight.