Six decades. That’s how long the Income Tax Act, 1961 governed every rupee of business income in India — and on April 1, 2026, it got replaced. If you’re running a startup, this isn’t a “read it later” compliance update. Your ESOP grant letters, TDS filings, and advance tax workings are already operating under a different rulebook.
Here’s the part that trips up most founders: you’re currently filing your FY 2025-26 return under the old 1961 Act, even though your business has been operating under the new 2025 Act since April 1. Two legal frameworks, running in parallel, for at least one filing cycle. Let’s break this down.
📌 TL;DR: The Income Tax Act, 2025 replaced the Income Tax Act, 1961 with effect from April 1, 2026, cutting the law down from roughly 819 sections to 536 and introducing a single “Tax Year” concept that replaces the old Financial Year/Assessment Year split. For startups, the core benefits — the Section 80-IAC tax holiday, angel tax exemption, and loss carry-forward protection — continue under renumbered sections, but ESOP deferral windows, TDS section numbers, and compliance documentation all need updating.
What You’ll Learn
- Why the government replaced a 64-year-old tax law and what actually changed
- What “Tax Year” means and why it replaces Financial Year and Assessment Year
- How your startup’s 80-IAC tax holiday, angel tax exemption, and ESOP terms carry over
- What TDS and compliance changes to prepare for right now
Why the Old Act Got Replaced
The Income-tax Act, 1961 was built for a paper-based economy with face-to-face assessments. Over six decades, patchwork amendments pushed it past 800 sections spread across 47 chapters. That overgrowth raised compliance costs and fuelled disputes with multi-year case backlogs. It also never sat comfortably with e-commerce, platform income, or cross-border digital transactions — problems that simply didn’t exist when the law was written.
The government’s response was structural, not cosmetic. The new Act reduces provisions from 819 sections to 536, received Presidential assent in 2025, and came into force on April 1, 2026, applicable from Tax Year 2026-27 onwards. The reassuring part for founders: the core scheme and fundamental principles of the old Act largely remain intact. This is a rewrite for clarity, not a redesign of how tax is calculated.
“Tax Year” Replaces Financial Year and Assessment Year
This is the single change every founder will notice on every form, notice, and Form 16 going forward.
Under the old system, income earned in one year — called the Previous Year or Financial Year — was assessed in the following year, called the Assessment Year. So income from FY 2024-25 was taxed in AY 2025-26. This dual-reference system was unique to India and created confusion that persisted for 64 years. Tax professionals estimated that selecting the wrong Assessment Year was among the top five reasons for defective return notices across the country.
The new Act scraps both terms. A single “Tax Year” now covers both the earning and assessing of income under one label — defined simply as the 12-month period from April 1 to March 31. No more one-year lag, no more juggling two different year labels for the same income.
What most founders miss: this change doesn’t alter when you file or how much you owe. It only removes the confusion. If you incorporate mid-year, your first Tax Year runs from your incorporation date to the following March 31, exactly as the old Previous Year rules worked for new businesses.
The short answer for your filing this July: you’re still submitting an AY 2026-27 return under the old 1961 Act for income earned in FY 2025-26. The new Act only governs income earned from April 1, 2026 onwards. Your first Tax Year 2026-27 return under the new law isn’t due until mid-2027.
What Happens to Section 80-IAC, Angel Tax, and Your Startup Benefits
If your company has DPIIT (Department for Promotion of Industry and Internal Trade) recognition, the benefits you’ve been counting on don’t disappear — they move.
The 100% profit deduction for any three consecutive years out of your first ten, formerly under Section 80-IAC, now sits under Section 140 of the new Act. Angel tax — the provision that once taxed share premiums above fair market value as “income from other sources” — was already abolished with effect from April 1, 2025 under Finance Act 2024, and that relief carries forward cleanly into the new framework. Section 79’s protection of carried-forward losses through funding rounds also continues, so a fresh priced round won’t wipe out your accumulated losses, as long as original promoters retain control.
Here’s the thing founders keep getting wrong: DPIIT recognition alone still doesn’t activate the tax holiday. You need a separate Inter-Ministerial Board (IMB) certificate obtained by filing Form 1 with the Income Tax Department. As of early 2026, only around 3,700 startups had received IMB approval out of over 2.07 lakh DPIIT-recognised companies. Most founders hold the DPIIT certificate, assume they’re covered, and quietly miss out on a benefit worth lakhs in saved tax.
On ESOPs, pay close attention. The eligible-startup ESOP tax deferral mechanism moves to Section 392 of the new Act. Allotments made from April 1, 2026 onwards now carry a 60-month deferral window — up from the earlier 48 months — before perquisite tax becomes due. But this extended window only applies if your company holds the IMB certificate, not just DPIIT recognition. Every grant letter, ESOP scheme document, and board resolution still citing 1961-Act section numbers needs to be re-papered for allotments dated April 1, 2026 onwards. It’s a paperwork task, not a legal overhaul, but skipping it creates filing inaccuracies your company is responsible for correcting.
TDS Compliance: Fewer Sections, But a Documentation Overhaul
TDS (Tax Deducted at Source) is where founders feel the new Act most directly, because it touches every vendor payment, contractor invoice, rent cheque, and salary run.
Under the old Act, businesses navigated roughly 37 separate TDS sections — Section 194A through 194T — each with different thresholds, rates, and filing requirements. The new Act consolidates these into around 20 sections. Section 393 is now the primary TDS provision, with related payment categories grouped as subsections rather than standalone sections.
Fewer sections should mean fewer thresholds to memorise. But the documentation overhaul that comes with this is non-trivial. Here’s what your team needs to update before your Tax Year 2026-27 compliance work begins:
Chart of accounts: Remap all entries from old section numbers to new equivalents
TDS rate schedules: Update internal rate cards and accounting software configs
Payroll configurations: Reflect the current standard deduction under the new Act
Vendor contracts and SOPs: Any reference to old section numbers in payment terms or vendor agreements needs updating
ESOP documentation: As noted above — grant letters, board resolutions, and scheme documents
A quick example: if your Bengaluru startup pays a Razorpay or Meesho integration partner, the TDS deduction on that payment now references a different section number. Your accountant may already know this, but your internal finance team’s SOP likely doesn’t. The correction obligation sits with your company, not your CA firm.
Frequently Asked Questions
Q: Does the Income Tax Act 2025 apply to my ITR filing this year?
No, not yet. If you’re filing your return in July 2026 for income earned in FY 2025-26, you’re still governed by the Income Tax Act, 1961. The new Act only applies to income earned from April 1, 2026 onwards. Your first return under it isn’t due until mid-2027.
Q: Will my startup’s tax holiday under Section 80-IAC still apply?
Yes. The three-year, 100% profit deduction benefit continues under the new Act, now positioned under Section 140. Eligibility rules remain the same — you need both DPIIT recognition and a separate IMB certificate obtained by filing Form 1 with the Income Tax Department.
Q: What is a “Tax Year” and how is it different from Financial Year?
Tax Year is a single 12-month period from April 1 to March 31 that replaces both the old Financial Year (when income was earned) and Assessment Year (when it was taxed and filed). Under the new Act, the year you earn income and the year you report it share the same label, removing the one-year offset that caused decades of confusion.
Q: Do I need to update my ESOP grant letters?
Yes, if they reference 1961-Act section numbers and cover allotments dated April 1, 2026 or later. Those allotments fall under Section 392 of the new Act. If your company holds an IMB certificate, the perquisite tax deferral window on new allotments also extends from 48 months to 60 months.
Q: Is angel tax really gone for good?
The provision taxing share premiums above fair market value was abolished from April 1, 2025 and doesn’t reappear anywhere in the new Act. If you raised funding before that date, it’s worth checking with your CA whether any prior assessments remain open.
Q: How many TDS sections do we need to track now?
Roughly 20, down from about 37 under the old Act. Section 393 is now the primary TDS provision, with payment categories grouped as subsections rather than separate standalone sections.
Ready to get your startup compliant under the new Act?
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