Income Tax Department Publishes Detailed FAQ on Transition to Income Tax Act, 2025: Tax Year, Old Proceedings and Existing Choices Explained

The Income Tax Department has published a detailed set of frequently asked questions explaining how the Income Tax Act, 2025 operates after replacing the Income Tax Act, 1961 from 1 April 2026. The guidance is particularly relevant for taxpayers, chartered accountants and tax teams managing a transition period in which current-year compliances are governed by the new law while many earlier-year proceedings continue under the repealed Act.

What the Department says changed

The Department says the 2025 Act was enacted to simplify and modernise the direct-tax law rather than to introduce a new tax burden. According to the FAQ, the new law contains 536 sections and 16 schedules, compared with 819 sections and 14 schedules under the 1961 Act. It also states that the Income Tax Rules have been reduced from 511 rules and 399 forms to 333 rules and 190 forms. The stated design approach includes incorporating explanations and provisos into the main text, using tables and formulas in place of lengthy narrative provisions and removing redundant provisions.

Tax Year replaces the old year terminology

One of the most visible changes is the use of the term Tax Year. The Department explains that a Tax Year is normally the twelve-month period contained in a financial year and applies from 1 April 2026. Income earned during financial year 2026-27 is therefore referred to as Tax Year 2026-27 under the new Act. The concepts of previous year and assessment year are no longer used for the new-law period.

The Department also clarifies that businesses do not need to change their accounting period merely because the new terminology has been introduced. Where a business is newly set up or a new source of income begins during a financial year, the Tax Year can be shorter and will run from the date the business or source begins until the end of that financial year.

Old proceedings do not disappear

The repeal of the 1961 Act does not invalidate assessments, notices, appeals or other proceedings relating to earlier years. The FAQ points to section 536 of the Income Tax Act, 2025 as the principal repeal-and-savings provision. Proceedings concerning a tax year beginning before 1 April 2026 can continue under the old law, including assessment, reassessment, recomputation, rectification, penalty, revision and appeal proceedings.

The Department gives the practical example that an assessment concerning an earlier assessment year can continue under the 1961 Act even after the new law has commenced. It also states that a later rectification relating to an earlier-year assessment can still be initiated and concluded under the old Act where the relevant period remains governed by that law.

Existing approvals, options and schemes generally continue

The FAQ confirms that existing PAN and TAN frameworks, faceless assessment and faceless appellate arrangements continue under the 2025 Act. Approvals, registrations and recognitions granted under the old law are generally treated as continuing under corresponding provisions of the new law where they are not inconsistent with it.

The same continuity principle applies to tax options. The Department states that an option validly exercised under the old Act immediately before commencement is treated as exercised under the equivalent provision of the new Act. For example, the default new tax regime continues under the new law, now provided in section 202, and taxpayers who had already made a valid option under the earlier framework do not need to repeat that choice merely because the statute changed.

Old circulars and instructions may remain relevant

Tax professionals should not assume that every circular or instruction issued under the 1961 Act became irrelevant on 1 April 2026. The Department says section 536(2)(j) preserves circulars, notifications, instructions, approvals and similar instruments issued under the old Act to the extent they are not inconsistent with the new law.

This matters for day-to-day advisory work because the transition is not simply a clean break between two statutes. Professionals may need to identify both the period involved and the corresponding provision under the new law before deciding whether an older clarification continues to apply.

Old and new laws will operate side by side during transition

The Department expressly recognises that both legal frameworks will coexist operationally for some time. Returns for periods governed by the old Act continue to follow that framework, while current-period obligations arising from Tax Year 2026-27 are governed by the 2025 Act. The e-filing system must therefore support compliances under both laws during the transition.

The FAQ also confirms that pending applications relating to periods before 1 April 2026 do not have to be re-filed merely because the new Act has commenced. Existing rights, benefits, obligations and liabilities are preserved, subject to the savings provisions.

What CAs and tax teams should do now

- Identify the relevant period first: determine whether the issue relates to a period beginning before or after 1 April 2026.

- Map old and new provisions carefully: do not assume section numbers or terminology remain the same even where the policy intent is unchanged.

- Preserve old-law records: assessments, appeals, approvals and correspondence for earlier periods may continue to be governed by the 1961 Act for years.

- Review existing options and registrations: many continue automatically, but their treatment should be checked against the corresponding new-law provision.

- Use current official guidance: transition questions should be checked against the Department's latest FAQs and the text of section 536 where the position affects a filing, proceeding or material tax exposure.

Key takeaway

The Department's FAQ makes clear that the Income Tax Act, 2025 is a structural replacement of the old law, but not a reset of earlier tax history. The practical transition depends heavily on the tax period involved. Current obligations move to the new Act, while earlier-year proceedings and many existing rights, options, approvals and clarifications continue through the repeal-and-savings framework.