The Income Tax Act, 1961 has governed direct taxation in India for over six decades. With effect from April 1, 2026, it will be replaced by the Income Tax Act, 2025 — a comprehensive rewrite aimed at simplifying the tax code, reducing compliance burdens, and minimising interpretational disputes.
The Central Board of Direct Taxes (CBDT) has released the draft Income Tax Rules, 2026 and associated forms for public consultation, with the feedback window closing on February 22, 2026.
This note outlines the key structural changes, specific provisions affecting businesses, and the timeline that business owners, directors, and professionals should be aware of.
Why the Overhaul
The 1961 Act had accumulated over 4,000 amendments across six decades. The result was a complex web of provisions, provisos, and explanations that increased compliance costs and fuelled litigation. The new Act aims to address this by:
- Reducing the total number of sections (from 298 to a streamlined structure)
- Replacing complex cross-references with clearer, self-contained provisions
- Eliminating outdated provisions and redundancies
- Adopting plain language drafting to reduce ambiguity
Key Structural Simplifications
The draft rules reflect a significant reduction in volume and complexity:
| Parameter | Existing (1961 Act) | New (2025 Act) |
|---|---|---|
| Rules | 511 | 333 |
| Forms | 399 | 190 |
| Compliance approach | Manual-heavy | Digital-first with pre-fill |
The new forms are designed as "smart forms" with automated data reconciliation capabilities, pre-filling from government databases (PAN, Aadhaar, GST, bank records), and built-in validation checks.
Changes Affecting Businesses
PAN Quoting Requirements
The thresholds for mandatory PAN quoting have been revised:
| Transaction Type | Previous Threshold | Revised Threshold |
|---|---|---|
| Cash deposits/withdrawals (aggregate) | ₹50,000 per transaction | ₹10 lakh per financial year |
| Immovable property transactions | ₹10 lakh | ₹20 lakh |
| Motor vehicle purchases | All purchases | Only above ₹5 lakh |
| Hotel/restaurant/event payments | ₹50,000 | ₹1 lakh |
The shift from per-transaction to annual aggregate limits for cash transactions is a notable change. Business owners handling regular cash receipts should review their processes accordingly.
ITR Form Eligibility
The familiar ITR structure (ITR-1 through ITR-7) continues, but eligibility conditions have been tightened. The most relevant changes for business owners:
ITR-4 (Sugam) — Presumptive Taxation:
Taxpayers will no longer be eligible for ITR-4 if they have:
- Foreign assets or foreign income
- Directorship in any company
- Holdings in unlisted equity shares
- Income exceeding ₹50 lakh
- Multiple house properties
- Carried-forward losses
- Agricultural income exceeding ₹5,000
This will impact proprietors and professionals who currently file under presumptive taxation (Sections 44AD/44ADA) but also hold directorships or unlisted shares.
Digital Asset Reporting
The draft rules introduce extended reporting and due diligence obligations for crypto-asset service providers. Businesses operating in the digital asset space should review the specific compliance requirements proposed in the draft.
Disclosure Requirements
Expanded disclosures are proposed for:
- Perquisites provided to employees (revised valuation norms for vehicles, meals, accommodation)
- Capital gains transactions (more granular reporting)
- Specific income categories requiring detailed breakdowns
What the New Tax Slabs Look Like
For the new tax regime (applicable to individuals and HUFs), the slabs announced in Budget 2026 are:
| Income Range | Tax Rate |
|---|---|
| Up to ₹4 lakh | Nil |
| ₹4 lakh – ₹8 lakh | 5% |
| ₹8 lakh – ₹12 lakh | 10% |
| ₹12 lakh – ₹16 lakh | 15% |
| ₹16 lakh – ₹20 lakh | 20% |
| ₹20 lakh – ₹24 lakh | 25% |
| Above ₹24 lakh | 30% |
The Section 87A rebate (up to ₹60,000) continues, making taxable income up to ₹12 lakh effectively tax-free for resident individuals under the new regime.
Other Provisions from Budget 2026
The Union Budget 2026-27, presented on February 1, 2026, introduced additional direct tax measures:
- Minimum Alternate Tax (MAT): Rate reduced from 15% to 14%
- Share Buyback: Taxation to shift from dividend treatment to capital gains treatment
- Transfer Pricing: Enhanced safe harbour provisions to reduce disputes
- IFSC Units: Extended tax holidays for offshore banking units and IFSC entities
Implementation Timeline
| Date | Event |
|---|---|
| February 22, 2026 | Public consultation deadline for draft rules |
| April 1, 2026 | Income Tax Act, 2025 comes into force |
| AY 2026-27 | Returns will still be filed under the existing 1961 Act and current forms |
| AY 2027-28 onwards | New Act, new rules, and new forms will apply |
This phased approach means there is no immediate disruption to current compliance cycles. However, the transition period is the right time to review internal processes and prepare for the changes.
What Business Owners Should Do Now
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Review the draft rules — Particularly if your business involves significant cash transactions, property dealings, or digital assets. The draft is available on the Income Tax Department website.
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Submit feedback — The consultation window closes on February 22, 2026. The CBDT has specifically invited suggestions on simplifying language, reducing litigation, lowering compliance burdens, and identifying redundant provisions.
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Assess ITR form eligibility — If you or your directors currently file under ITR-4 (presumptive taxation), check whether you meet the revised eligibility criteria.
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Prepare for digital-first filing — Ensure PAN-Aadhaar linkage is complete, GST data is reconciled, and bank statements are accessible for automated pre-filling.
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Consult your tax advisor — Discuss the implications of the new PAN thresholds, disclosure requirements, and any sector-specific provisions relevant to your business.
This note is prepared for general awareness and does not constitute professional advice specific to any individual or entity. For applicability to your business, reach out to us at pmnco.co.in.