The Biggest Direct-Tax Event in a Generation

On 1 April 2026, the Income-tax Act, 2025 comes into force and the Income-tax Act, 1961 stands repealed. For anyone who has spent a professional lifetime navigating the 1961 Act, this is not a routine amendment cycle. It is a structural reset. The Central Board of Direct Taxes has recognised that the transition will raise more practical questions than theoretical ones, and has released "Kar Setu — FAQs on Interplay and Transition", a roughly 99-page guidance document that attempts to answer those questions before they land in assessment proceedings. CBDT Chairman Ravi Agrawal has described the document as a bridge between what has been and what lies ahead, and the framing is apt: the Kar Setu FAQs are less a commentary on the new law and more a map of how the old and new Acts will hand over the baton.

This piece is a practitioner-oriented walkthrough of the themes Kar Setu addresses. It is not a substitute for reading the document itself, and for any specific client situation the controlling authority remains the text of the Income-tax Act, 2025, the saving provision in the new Act, the Income-tax Rules, 2026 as notified, and — for pre-1 April 2026 tax years and saved proceedings — the corresponding provisions of the Income-tax Act, 1961.

No Missing Year, No Overlap

The single most important message in the Kar Setu FAQs is also the simplest: there is no missing year and no overlap. Income earned up to 31 March 2026 — that is, financial year 2025-26 — remains governed by the Income-tax Act, 1961 and will be assessed as assessment year 2026-27 under the old law. Income earned from 1 April 2026 onwards is governed by the Income-tax Act, 2025 and falls within the new Tax Year concept under that Act.

Two concrete examples make the point:

  • A salaried taxpayer earning income in FY 2025-26 files a return for AY 2026-27 under the Income-tax Act, 1961, using the slabs, deductions, exemptions and return forms prescribed under the old regime. Nothing about that filing shifts to the 2025 Act merely because the return is filed after 1 April 2026.
  • A business whose financial year begins on 1 April 2026 steps into the Tax Year framework of the Income-tax Act, 2025 for that year onwards. Its TDS obligations, advance-tax liability, return filing and assessment on income from that point run under the new Act.

The cleanest way to hold this in your head, as a general rule, is that the law applicable to an item of income depends on when that income arose, not on when the return is filed or the assessment is completed. Filing dates and assessment dates may cross the commencement line; the substantive law normally does not. Section 536 itself, however, carries specific transition and deemed-income cases where a post-1 April 2026 event can trigger tax under the 2025 Act for something rooted in the old Act, so the general rule should be read alongside the exact language of the saving clause for any borderline fact pattern.

Saving Provisions and Pending Proceedings

The Kar Setu FAQs lean heavily on the saving provision in the new Act — the repeal-and-savings clause, which practitioners will commonly refer to as Section 536 of the Income-tax Act, 2025. The core idea is that rights, benefits, obligations and liabilities that arose under the 1961 Act do not vanish on 1 April 2026. They continue to exist, and where necessary, they continue to be governed by the provisions of the old Act even after the new Act has come into force.

In practice that means:

  • A refund claim relating to an assessment year under the 1961 Act remains a valid entitlement under that Act and is not extinguished by the repeal.
  • Losses brought forward from tax years beginning before 1 April 2026 continue to be available for set-off and carry forward, in the manner read together with the corresponding provisions of the new Act.
  • Assessment, reassessment, rectification, penalty, reference, revision and appellate proceedings in respect of any tax year beginning before 1 April 2026 continue under the provisions of the 1961 Act, even if the relevant notice is issued, or the order is passed, after 1 April 2026.

A notice under the old Act issued in, say, March 2026 for an earlier assessment year does not become a 2025-Act notice just because the assessment order is eventually signed in August 2026. The saving clause preserves the procedural track it was launched on. The Kar Setu FAQs also confirm that established administrative infrastructure — PAN, TAN, faceless assessment schemes and similar plumbing — continues to operate across the transition rather than being rebuilt from scratch.

One caveat that practitioners should note: the saving clause is a detailed provision with sub-sections, and the Finance Bill, 2026 has itself proposed adjustments to parts of it. Where a specific situation turns on the precise wording — for example, on how a past deduction interacts with post-1 April 2026 events — read the clause as it stands on the date you are advising, not as it was first enacted.

What Actually Changes in the Shape of the Law

The change is not merely one of section numbers. The Income-tax Act, 2025 is built differently from the 1961 Act:

  • A tighter section count. The new Act is organised into 536 sections, 23 chapters and 16 schedules, compared with the 819 sections and 14 schedules of the 1961 Act. The reduction comes partly from consolidation and partly from the removal of obsolete provisions.
  • Leaner subordinate legislation. The Income-tax Rules, 2026 reduce the rule count to roughly 333 rules and about 190 forms, a significant trimming from the rule-book practitioners have grown up with.
  • Tables in place of paragraphs. Long prose provisions in the 1961 Act — particularly around rate schedules, conditions and eligibility lists — have been re-expressed as tables. The drafting choice is deliberate: a table is easier to read, easier to cite and harder to misquote.
  • Explanations inside the main text. Where the 1961 Act often carried explanations and provisos as appendages, the new Act tends to fold the substantive content into the main body of the section itself, reducing the reliance on Explanation 1, Explanation 2 style footnotes.
  • "Tax Year" replaces "Previous Year" and "Assessment Year". The new Act collapses the dual-year structure into a single Tax Year concept. That is a change large enough to deserve its own piece, but it is worth flagging here because almost every Kar Setu answer that mentions a period post 1 April 2026 uses the Tax Year language.

None of this changes the basic charge to tax or the fundamental design of the income heads, but it does change how a practitioner reads, cites and teaches the law. Drafting a ground of appeal or a written submission under the new Act will feel different on day one, and relying on muscle memory from the 1961 section numbers is a reliable way to file something incorrect.

A Practical Checklist for the Transition

  1. Mark the boundary in your working papers. For every ongoing engagement, identify which portions relate to income up to 31 March 2026 (1961 Act) and which relate to income from 1 April 2026 onwards (2025 Act). Treat them as two distinct regimes inside the same file.
  2. Close out FY 2025-26 filings under the old Act. Returns for AY 2026-27, TDS statements, audit reports and ongoing assessments that relate to income up to 31 March 2026 continue under the Income-tax Act, 1961. Do not let the new Act bleed into those filings.
  3. Map pending proceedings to the saving clause. For every open assessment, reassessment, rectification, penalty or appeal, confirm that it is recognised as a saved proceeding under the repeal-and-savings provision and document which sub-clause you are relying on.
  4. Re-read the sections you quote most often. TDS, capital gains, business income, Section 54-series exemptions, set-off of losses — anything you cite weekly needs to be re-located in the new Act and re-verified. The substance may be preserved; the numbering, wording and placement very often will not be.
  5. Rebuild template letters and engagement paragraphs. Standard client communications that quote 1961-Act sections will start to look dated from 1 April 2026 onwards. Update the ones that are visible to clients first, then the internal checklists.
  6. Refresh in-house training. Articles, paralegals and junior staff who have been trained exclusively on the 1961 Act need a structured walk-through of the new Act before they handle live files. A one-hour session is not enough.
  7. Watch for corresponding changes in the Rules and forms. The Income-tax Rules, 2026 and the reduced form set will change how day-to-day compliance is executed. A return form that looks familiar may carry a changed schedule or a renumbered field.
  8. Keep the Kar Setu FAQs bookmarked. They are a useful current reference and carry their own disclaimer that the FAQs are guidance and not a substitute for the statutory text; watch for any updated FAQ versions, circulars or notifications, and a practitioner who checks the document before answering a borderline transition question will make fewer avoidable mistakes.

What to Watch Over the Next Year

The Kar Setu FAQs are an important opening move, but they are only the opening move. Over the coming months, three things are worth watching closely. First, any supplementary CBDT circulars or press releases clarifying specific transition questions that Kar Setu leaves open. Second, the final text of the Income-tax Rules, 2026 and the notified forms, because the rule-level detail is where most operational problems will actually surface. Third, the early judicial and tribunal guidance on the saving clause — the first few orders that interpret how the 1961 Act and the 2025 Act interact on a live dispute will shape the working practice for years. For now, the safest posture is the one Kar Setu itself encourages: treat the transition as a handover, not a replacement, and make sure every file knows which side of the 1 April 2026 line it belongs on.