India’s direct tax system is set for a major overhaul. While presenting the Union Budget 2026-27, Finance Minister Nirmala Sitharaman announced that the Income Tax Act, 2025 will come into effect from 1 April 2026. The move is aimed at simplifying tax laws, improving compliance, and reducing disputes. Alongside this, the Budget introduced several important changes in TCS rates, share buyback taxation, securities transaction tax, and MAT rules, marking one of the most comprehensive direct tax reform packages in recent years.
New Income Tax Act, 2025: What Changes from April 2026
- The Income Tax Act, 2025 is designed as a simplified and citizen-friendly law.
- According to the Budget, new Income Tax Rules and Forms will be notified well in advance to give taxpayers adequate time to adjust.
- The forms have been redesigned for clarity, making compliance easier for ordinary citizens and small taxpayers.
- This reform reflects the government’s focus on transparency, ease of understanding, and reducing the complexity that has long characterised India’s tax framework.
Tax Administration Reforms and Accounting Changes
- To streamline tax administration, the Budget proposes forming a Joint Committee of the Ministry of Corporate Affairs and the Central Board of Direct Taxes.
- This committee will integrate Income Computation and Disclosure Standards (ICDS) into Indian Accounting Standards (IndAS).
- As a result, separate accounting requirements under ICDS will be removed from the tax year 2027-28.
- This step reduces duplication, lowers compliance costs, and aligns taxation more closely with accounting standards used by companies.
Share Buyback Taxation: Major Shift in Rules
- A key reform targets the misuse of share buybacks for tax arbitrage.
- The Budget proposes that share buybacks will now be taxed as capital gains for all shareholders, regardless of category.
- To discourage promoter misuse, additional buyback tax will apply.
- This will result in an effective tax rate of 22% for corporate promoters and 30% for non-corporate promoters.
- This change aims to ensure fairness and prevent promoters from avoiding dividend taxation through buybacks.
TCS Rationalisation: Relief for Key Transactions
- The Budget rationalized Tax Collected at Source (TCS) rates to ease cash flow pressures.
- The TCS rate on scrap, minerals, and alcoholic liquor has been fixed at 2%, while tendu leaves TCS has been reduced from 5% to 2%.
- Importantly, TCS on remittances under the Liberalised Remittance Scheme (LRS) exceeding ₹10 lakh has been reduced to 2% for education and medical treatment, while remaining 20% for other purposes.
- This provides relief for families spending on essential needs abroad.
STT Hike on Futures and Options
- To moderate excessive speculation in derivatives markets, the Budget proposed an increase in Securities Transaction Tax (STT).
- STT on futures will rise from 0.02% to 0.05%.
- For options, STT on premium and exercise has been increased to 0.15%, up from earlier rates.
- This move is aimed at improving market stability while maintaining investor confidence.
MAT Reform: Final Tax from April 2026
- The Budget introduced a significant change in Minimum Alternate Tax (MAT). From 1 April 2026, MAT will become a final tax, ending further accumulation of MAT credit.
- In line with this, the MAT rate will be reduced from 15% to 14%.
- Existing MAT credit accumulated until 31 March 2026 will continue to be available for set-off, but only under the new tax regime, and limited to one-fourth of tax liability, encouraging companies to shift to the simplified regime.
Key Definitions
- Minimum Alternate Tax (MAT): A provision under the Income Tax Act ensuring companies with high book profits pay a minimum tax.
- Securities Transaction Tax: A direct tax on purchase and sale of securities listed on recognized stock exchanges in India.
- Tax Collected at Source: Tax collected by the seller from the buyer at the time of sale of specified goods or transactions.
Question
Q. The Income Tax Act, 2025 will come into force from:
A. April 1, 2025
B. January 1, 2026
C. April 1, 2026
D. July 1, 2026