Income Tax Act 2025 — SME Owner's Primer (Effective 1 April 2026): What Changes + What to Do Now

The one-line summary

The Income-tax Act, 1961 stands repealed effective [Fact: it_act_2025_effective_date] per Section 536 of the Income-tax Act, 2025. For your business, that means:

• FY 2025-26 (your current year, AY 2026-27): nothing changes. File ITR + tax audit + TDS as usual under the 1961 Act.
• From [Fact: it_act_2025_effective_date] : new section numbers, new form numbers, new terminology (Tax Year vs Assessment Year). Substantive rates + thresholds + deductions: mostly unchanged.

This page is the SME-owner’s primer. For the canonical practitioner-level section-by-section mapping, see the IT Act 2025 transition reference.

The 5 biggest changes for your business

1. New “Tax Year” terminology replaces “Assessment Year”

The 1961 Act used a two-period framing:

• Previous Year (PY) — the year income was earned
• Assessment Year (AY) — the year income was assessed (PY + 1)

The 2025 Act simplifies to a single term:

• Tax Year (TY) — replaces both Previous Year and Assessment Year

In practice: what you currently call “FY 2026-27 / AY 2027-28” becomes “Tax Year 2026-27” under the 2025 Act framework. The ITR is filed in the year after the income is earned, same as before; only the label changes.

2. Section renumbering — the major SME-side ones

The 2025 Act consolidates and renumbers most provisions. The SME-side highlights:

Concept	1961 Act	2025 Act
Section 80C deductions (LIC, PPF, ELSS, etc.)	Section 80C	Section 123 + Schedule XV
Tax audit threshold (above ₹1cr / ₹10cr business; ₹50L / ₹75L professional)	Section 44AB	Section 63
Presumptive taxation (business + profession)	Sections 44AD + 44ADA	Section 58 (consolidated)
TDS on contractor payments	Section 194C	Section 393 (consolidated non-salary TDS)
TDS on professional fees	Section 194J	Section 393
TDS on partner remuneration	Section 194T	Section 393
TDS on rent	Section 194-I / 194-IB	Section 393
Salary TDS	Section 192	Section 392
Foreign-payment TDS (substantive non-resident TDS)	Section 195	Section 393(2)
Foreign-remittance reporting (the 15CA/15CB regime)	Section 195(6)	Section 397(3)(d)
Capital gains	Sections 45-55A	Consolidated into 2025 Act framework (specific section numbers in CBDT FAQs)

You don’t need to memorise this table. Your CA / tax practitioner will. The relevant point for you is: section numbers in TDS challans, ITR forms, vendor contracts, and employee investment declarations will all renumber from [Fact: it_act_2025_effective_date] onwards.

3. Form renumbering — for non-resident payment / foreign vendor work

If your business pays foreign vendors (software subscriptions, cloud services, foreign consultants), you’ve encountered:

Form (1961 framework)	New form (2025 framework)	Purpose
Form 27Q	Form 144	TDS quarterly return — non-salary foreign payments
Form 15CA	Form 145	Declarant’s declaration before foreign remittance
Form 15CB	Form 146	CA’s certificate before foreign remittance
(No prior form)	Form 105	Replaces older Form 10AB

These new forms apply from [Fact: it_act_2025_effective_date] onwards for transactions on or after that date. Use the existing forms for everything up to and including 31 March 2026 transactions.

4. Timely return-filing now mandatory for deductions (Section 122(5))

This is the one new substantive rule SMEs should know about:

Section 122(5) of the Income-tax Act, 2025 makes timely furnishing of return mandatory for claiming deductions under Chapter VIII Part C. Late returns may forfeit the deduction.

Translation: if you used to file ITR late (say, in December 2026 for AY 2026-27 against a July 2026 due date) and still claim 80C deductions, that doesn’t work under the 2025 Act framework. From TY 2026-27 onwards, file by the due date or risk losing the deduction.

This is a meaningful operational shift for many small-business owners who treat ITR filing as a “do it whenever” task. Build the discipline now — file on time for AY 2026-27 so the muscle memory is there when the rule binds from TY 2026-27.

5. Substantive policy is mostly UNCHANGED

The 2025 Act is primarily a structural rewrite, not a policy change:

Item	Status
Income tax slabs + rates (new regime)	Unchanged per Finance Act 2025 framework
Section 87A rebate (₹60,000 new regime; ₹12,500 old regime)	Unchanged
₹75,000 standard deduction (salaried, new regime)	Unchanged
Section 80C [Fact: section_80c_aggregate_limit] aggregate cap	Unchanged
Section 80D medical insurance sub-limits	Unchanged
Section 24(b) home loan interest ₹2 lakh cap	Unchanged
Section 44AB tax audit thresholds	Unchanged
Section 44AD / 44ADA presumptive thresholds + deemed-profit %	Unchanged
TDS rates (Section 194C 1%/2%, 194J 10%/2%, 194T 10%, 194-I 10%/2%, etc.)	Unchanged
Capital gains rates (Finance Act 2024 changes for listed equity)	Unchanged
Section 87A rebate ₹60,000 cap	Unchanged

Per CBDT’s stated objective: the 2025 Act is simplification + consolidation + removal of obsolete provisions. Not a policy reset.

The corollary: existing circulars and rulings under the 1961 Act continue to apply to corresponding provisions in the 2025 Act where intent remains unchanged. Per CBDT FAQ Q1.21: “A circular clarifying the term ‘work’ under section 194C of the old Act will continue to apply to section 393 of the ITA 2025, where the intent remains unchanged.” Your CA doesn’t need to re-learn 60 years of jurisprudence.

4 transitional risks SMEs must watch

These are the operational risks that will bite hardest in the first 90 days post-cutover. Plan around them now:

1. TDS validation risk on TRACES (CRITICAL — CBDT-confirmed)

When you file your first TDS return under the new Act — Q1 TY 2026-27, due 31 July 2026 — your accounting software must use the new Section 392 / 393 / 397 codes and the new table-item codes (e.g. Section 194C transactions are reported as Section 393(1) [Table: Sl. No. 6(i)], not as “Section 194C”).

This is CBDT-confirmed, not a soft warning. The CBDT FAQs on Interplay and Transition explicitly state that quoting the old section reference (“194C instead of Section 393(1) [Table: Sl. No. 6(i)]”) may lead to processing errors at the e-filing portal / TRACES processing. Coordinate with your ERP / accounting vendor’s release schedule; most major Indian vendors are mid-2026 update cycles.

2. The March / April straddle (earlier of credit or payment)

TDS applicability is governed by the “earlier of credit or payment” rule — that doesn’t change. But the cross-over period in late March / early April 2026 creates real ambiguity for vendor invoices that straddle the cutover:

• Invoice credited in March 2026, paid in April 2026 — TDS is governed by the 1961 Act (the credit-side trigger predates 1 April 2026)
• Invoice both credited and paid in April 2026 — TDS is governed by the 2025 Act (Section 393 + new section numbers)
• Year-end provisions (Mar 31 2026) for invoices not yet received — credit-side trigger; 1961 Act applies regardless of when the actual vendor invoice surfaces

Document the credit-date evidence for every cross-over transaction so an Assessing Officer query in 2028 can be answered without scrambling.

3. Form 145 needs the foreign vendor’s TIN

The new Form 145 (replacing Form 15CA for foreign-remittance declarations) requires additional mandatory fields beyond the legacy 15CA — most notably the foreign vendor’s Tax Identification Number (TIN) in their home country. If you remit to OpenAI / Anthropic / AWS / Google / Microsoft for software or cloud services, start requesting their home-country TINs now, not after 1 April 2026. A missing TIN field on Form 145 will halt the remittance at the authorised dealer (bank) stage.

4. The presumptive 5-year lock-out is unchanged

Section 44AD / 44ADA’s presumptive scheme moved to Section 58 of the 2025 Act, but the 5-year opt-out lock-out is unchanged. If you opt out of the presumptive scheme in any year, you are locked out of it for the next 5 years. The 2025 Act consolidates + simplifies the section, but does NOT relax this provision. Plan the opt-in / opt-out timing carefully — same as under the 1961 framework.

What you should do RIGHT NOW (5-step checklist)

1. Brief your CA / tax practitioner

Confirm your CA has an IT Act 2025 transition plan. Ask them:

• “How are you handling Q4 FY 2025-26 TDS returns vs Q1 TY 2026-27 TDS returns differently?”
• “Will my Form 16 / 16A look different from [Fact: it_act_2025_effective_date] ?”
• “When will you start citing new section numbers on TDS challans?”

If they don’t have crisp answers, that’s a yellow flag — the cut-over is 10 months away.

2. For FY 2025-26, file normally

No action needed beyond standard year-end discipline. ITR-1 / ITR-2 / ITR-3 / ITR-4 forms for AY 2026-27 are unchanged. Tax audit report due 30 September 2026 under Form 3CA/3CB + 3CD as usual.

3. Update employee investment declarations (mid-FY)

For Q4 FY 2025-26 declarations + especially Q1 TY 2026-27 declarations:

Old language: ” [Fact: section_80c_aggregate_limit] invested under Section 80C” Bridge language: ” [Fact: section_80c_aggregate_limit] invested under Section 80C (Section 123 read with Schedule XV from [Fact: it_act_2025_effective_date] )”

This avoids re-papering when the new regime kicks in.

4. Coordinate with your accounting software vendor

• Tally Solutions — verify your Tally Prime version supports Section 393 nature-of-payment codes (most vendors are releasing mid-2026 updates)
• Zoho Books / Zoho Payroll — same check
• In-house ERP — flag with your IT team; they need to update the TDS-section dropdown master + the Form 26Q template

Coordinate well before the Q1 TY 2026-27 deadline (31 July 2026) so the first new-regime TDS return doesn’t fail validation.

5. Check vendor / customer contracts being signed after 1 April 2026

Contracts signed before [Fact: it_act_2025_effective_date] don’t need to be re-signed — the law operates by its own force, not by contract reference. But for new agreements signed after [Fact: it_act_2025_effective_date] , the TDS clause should reference the new section number:

Old language: “TDS will be deducted under Section 194C of the Income-tax Act, 1961” New language: “TDS will be deducted under Section 393 of the Income-tax Act, 2025”

For dual-period agreements straddling the cut-over, dual reference is the safest pattern.

What this means for the next 12 months

A quick timeline for the year ahead:

Period	What’s happening
FY 2025-26 Q3-Q4 (Oct 2025 - Mar 2026)	Last quarters under 1961 Act. Business as usual.
April 2026	IT Act 2025 effective. Q4 FY 2025-26 TDS return (due 31 May 2026) is the LAST 1961-Act return.
May-October 2026	AY 2026-27 ITR filing window. Last full ITR cycle under 1961 Act.
September 2026	AY 2026-27 tax audit deadline (30 Sep). Last under 1961 Act.
Q1 TY 2026-27 (Apr-Jun 2026)	FIRST TDS quarter under IT Act 2025. New section numbers on challans + returns. Due 31 July 2026.
TY 2026-27 onwards	Fully under IT Act 2025. New section numbers in all returns + forms + declarations.

Common SME questions answered

Q: Will my tax liability change? No. Rates + slabs + deductions are unchanged. The 2025 Act renumbers + reorganises but doesn’t reprice.

Q: Do I need a new TAN / PAN? No. TAN + PAN are unchanged. Existing registrations remain valid.

Q: My current ERP shows “Section 194C” as a TDS option — will that break in April 2026? Not on Day 1. Existing transactions (those reported under 1961 Act sections) continue to validate. From [Fact: it_act_2025_effective_date] onwards, new transactions need to use Section 393 references — coordinate the ERP update with your vendor.

Q: I file ITR myself using the income tax portal — will the portal change? Yes. The e-Filing portal already shows new ITR forms under “Forms as per Income-tax Act, 2025” in addition to the existing “Forms as per Income-tax Act, 1961” section. For AY 2026-27 (your last 1961-Act ITR), use the Income-tax Act, 1961 forms.

Q: What if I miss a TDS deduction because of the section-number confusion? The default consequences are the same: Section 201(1A) interest on the short-deduction (1% per month) + Section 40(a)(ia) disallowance of 30% of the expense + potential Section 234E late-filing fee. The 2025 Act consolidates these but the substantive penalty regime is unchanged. Practical advice: default to over-citing during the transition — citing both old and new section numbers on internal documents is safer than missing one.

Where to go for more depth

This page is the SME-owner’s primer. For deeper practitioner-level material:

• IT Act 2025 transition reference — canonical section-by-section mapping with CBDT FAQ references, form mapping table, and quarter-by-quarter compliance calendar.
• Income Tax overview India — FY 2025-26 framework + slab rates + key deduction summary.
• ITR form selector — which ITR for your income profile.
• TDS rate chart FY 2025-26 — current rates with the new Section 393 mapping cross-referenced.

Where Batchwise fits

For SME owners + finance teams that want operational support coordinating their CA on the IT Act 2025 transition: BatchWise’s coordinated SME bookkeeping service includes the transition workflow — your existing books continue under the 1961 framework for FY 2025-26, and the partner CA firm handles the section-renumbering operational details for TY 2026-27 onwards.