A Comprehensive Blueprint of the Income Tax Act 2025: Transitioning from the 1961 Regime

The legislative landscape of Indian taxation is undergoing a monumental transformation with the introduction of the proposed Income Tax Act 2025. Designed to replace the legacy Income Tax Act 1961, this new framework focuses primarily on structural reorganization, simplification, and the consolidation of scattered provisions rather than a complete substantive overhaul of tax principles. For tax professionals and every assessee, understanding this transition is crucial for ensuring seamless compliance.

This detailed guide maps the critical transitions from the old regime to the new legislation, exploring how major heads of income, deductions, tax audits, and compliance forms have been reimagined.

Restructuring the Heads of Income

The new legislation reorganizes the traditional five heads of income into a more streamlined numerical sequence, shifting numerous exemptions and complex computations into dedicated schedules.

1. Income from Salaries

Under the Income Tax Act 1961, salary provisions were governed by Section 15 to Section 17. The Income Tax Act 2025 expands this framework from Section 15 to Section 19, while relocating various exemptions to Schedule III.

Key Transitions in Salary Income:

  • Charging Section: Remains conceptually similar, moving from the old Section 15 to the new Section 15.
  • Deductions: Standard deductions previously under Section 16 are now governed by Section 19.
  • Perquisites and Profits in Lieu of Salary: Previously housed in Section 17(2) and Section 17(3), these are now detailed under Section 17 and Section 18 respectively.
  • Leave Travel Concession (LTC): The exemption under Section 10(5) has been shifted to Schedule III (8).
  • Gratuity: The familiar Section 10(10) transitions to Section 19 read with Schedule III (38).
  • Leave Encashment & Retrenchment: Formerly under Section 10(10AA) and Section 10(10B), these are now integrated into the deduction tables of Section 19.
  • Provident Funds: Statutory and Recognized Provident Funds (Section 10(11) and Section 10(12)) are now governed by Schedule II (3) and Schedule II (4), read alongside Section 11.
  • TDS on Salary: The foundational Section 192 is now renumbered as Section 392, which must be read with Section 402 for interpretational clarity.

Important Note on House Rent Allowance (HRA):
The HRA exemption, previously under Section 10(13A), is now mapped to Schedule III (Table: Sl.No 11). The computation mechanics are governed by Rule 279 of the Draft Income-tax Rules 2026.

Understanding Rule 279 for HRA:
The exempt amount for an assessee will be the least of the following:

  1. The actual allowance received.
  2. Actual rent paid minus 10% of the salary.
  3. A specified percentage of the salary based on location:
    • 50% of salary for accommodations in Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Pune, Ahmedabad, and Bengaluru.
    • 40% of salary for any other location.