Income Tax Act 2025: What Businesses Need to Know for Tax Year 2026-27

The Income Tax Act, 2025 introduces a new framework for income-tax law in India from Tax Year 2026-27. For businesses, the change is particularly important because tax records, payments, TDS compliance and internal accounting processes need to be aligned with the new terminology and provisions.

The new Act applies to income earned during Tax Year 2026-27, beginning 1 April 2026. The Income Tax Department has also clarified that the concept of the Assessment Year is discontinued under the new Act, while matters relating to earlier periods continue under the Income Tax Act, 1961.

For businesses, understanding this transition can help avoid incorrect tax-period selection, payment errors and confusion between old and new tax records.

What Is the Income Tax Act, 2025?

The Income Tax Act, 2025 is the new legislation governing income tax from Tax Year 2026-27 onwards.

One of the major structural changes is the introduction of the term “Tax Year.”

Under the earlier Income Tax Act, 1961:

Previous Year → Income earned → Assessment Year

Under the new framework:

Tax Year → Income earned during that tax year

The Income Tax Department explains that a Tax Year is generally a twelve-month period beginning on 1 April. Therefore, income earned from 1 April 2026 to 31 March 2027 falls under Tax Year 2026-27.

Why Businesses Need to Understand the New Act

Businesses deal with multiple tax-related activities throughout the year, including:

• Advance tax payments
• TDS and TCS
• Business income reporting
• Tax deductions and expenses
• Tax accounting
• Tax notices and proceedings
• Financial statements
• Tax return preparation
• Reconciliation of tax records

The transition to the Income Tax Act, 2025 means businesses should ensure that their accounting and tax processes correctly identify the applicable tax period and legislation.

1. Tax Year 2026-27 Replaces the Previous Year Terminology

For income earned from 1 April 2026 onwards, businesses will generally refer to the period as Tax Year 2026-27.

This replaces the use of “Previous Year 2026-27” under the old terminology.

For example:

Business income earned: 1 April 2026 to 31 March 2027
Applicable period: Tax Year 2026-27
Applicable legislation: Income Tax Act, 2025

The new terminology is intended to align the tax period more closely with the financial year and reduce confusion caused by having separate “previous year” and “assessment year” references.

2. Assessment Year Terminology Is Discontinued Under the New Act

One of the most important changes businesses should understand is that Assessment Year is no longer the terminology used under the Income Tax Act, 2025.

However, businesses should not assume that all existing tax records have shifted to the new Act.

For example, matters relating to AY 2026-27, which relate to income of FY 2025-26, continue under the Income Tax Act, 1961.

The Income Tax Department specifically states that:

• Tax Year 2026-27 onwards → Income Tax Act, 2025
• AY 2026-27 and earlier periods → Income Tax Act, 1961

This distinction is important when making tax payments and maintaining historical tax records.

3. Businesses Need to Select the Correct Tax Period for Payments

During the transition period, businesses may deal with payments relating to different tax periods.

For example:

Self-assessment tax relating to AY 2026-27:
Applicable Act – Income Tax Act, 1961

Advance tax relating to Tax Year 2026-27:
Applicable Act – Income Tax Act, 2025

The Income Tax Department advises taxpayers to select the correct year and applicable Act so that tax payments are credited to the appropriate period.

Businesses should therefore carefully check tax-period details before generating challans.

4. TDS Provisions Have Been Reorganised

TDS continues to be an important business compliance requirement under the new Act.

The Income Tax Department states that the basic TDS framework continues, but the provisions have been presented in a more consolidated and tabular structure.

Under the Income Tax Act, 2025:

• Section 392 deals with TDS on salaries.
• Section 393 covers TDS on other specified payments.
• The provisions include tables covering different categories of payees and applicable conditions.

The Department also states that TDS rates and thresholds are broadly similar to those under the earlier framework, subject to the applicable provisions and Finance Act.

Businesses should therefore update their internal TDS references and accounting systems rather than relying only on old section-number references.

5. Advance Tax Continues Under the New Act

The fundamental requirement to pay income tax through advance tax continues under the Income Tax Act, 2025.

Businesses should regularly estimate their taxable income and review:

• Expected business profits
• TDS/TCS credits
• Tax already paid
• Changes in turnover
• Significant one-time income
• Capital gains, where applicable
• Eligible deductions and adjustments

The objective is to keep the advance-tax position aligned with the expected tax liability.

For businesses using presumptive taxation, the Income Tax Department states that the advance-tax requirement continues with payment of the entire liability in a single instalment by 15 March, subject to the applicable provisions.

6. Accounting and Tax Records Should Be Updated

Businesses should review their accounting and tax-record systems for the new Tax Year framework.

Important records include:

Income Records

• Sales and service income
• Other business income
• Interest income
• Capital gains, where applicable
• Other taxable receipts

Expense Records

• Purchases
• Employee expenses
• Professional fees
• Rent
• Repairs and maintenance
• Finance costs
• Other business expenses

Tax Records

• TDS/TCS records
• Advance tax payments
• Tax challans
• Tax deductions
• Tax notices
• Tax payment confirmations

Maintaining accurate records can make year-end tax reporting and reconciliation easier.

7. Review TDS and Tax Credits Regularly

Businesses should not wait until the end of the Tax Year to review tax credits.

Regular reconciliation can help identify:

• Incorrect PAN details
• Missing TDS credits
• Incorrect deduction amounts
• TDS reporting differences
• Tax payment mismatches
• Errors in accounting records

TDS/TCS and advance-tax records should be matched with the books and available tax information periodically.

8. Businesses Should Review Their Accounting Software

The transition to the Income Tax Act, 2025 also provides a good opportunity to review accounting and tax-compliance software.

Businesses should check whether their systems have been updated for:

• Tax Year 2026-27 terminology
• New Act section references
• TDS provisions
• Tax calculations
• Challan/payment references
• Tax reporting requirements

Where accounting software or ERP systems use old section references, businesses should confirm that the relevant updates have been implemented.

9. Do Not Mix Old-Year and New-Year Tax Records

One of the practical risks during the transition is mixing records belonging to different tax periods.

For example, a business may simultaneously have:

AY 2026-27 records
relating to income of FY 2025-26

and

Tax Year 2026-27 records
relating to income from 1 April 2026 to 31 March 2027.

These should be maintained separately wherever required.

The Income Tax Department has specifically clarified that the applicable Act depends on the relevant income period, not simply on the date on which a payment is made.

10. What Businesses Should Do Now

Businesses can take the following practical steps:

Tax Year 2026-27 Checklist

☑ Update accounting and tax software

☑ Review the new Tax Year terminology

☑ Keep FY 2025-26/AY 2026-27 records separate from Tax Year 2026-27 records

☑ Check applicable TDS provisions

☑ Reconcile TDS/TCS credits

☑ Review advance-tax liability

☑ Verify tax challans before payment

☑ Maintain proper income and expense documentation

☑ Review tax deductions and business expenses

☑ Keep previous tax notices and proceedings properly documented

☑ Coordinate with your tax professional for new Act-related compliance

Income Tax Act 2025: What Has Not Fundamentally Changed?

Businesses should also understand that the new Act does not mean every tax-compliance concept has completely changed.

The Income Tax Department states that the fundamental framework for discharging income tax through TDS/TCS, advance tax, self-assessment tax and regular assessment continues under the new Act.

Therefore, businesses should focus on understanding the new structure and terminology rather than assuming that all existing compliance practices have been replaced.

New Tax Year for Newly Started Businesses

The Tax Year can be shorter than twelve months in certain situations.

For example, if a business is established on 1 December 2026, its Tax Year can run from 1 December 2026 to 31 March 2027.

This is particularly relevant for newly incorporated or newly established businesses starting operations during a financial year.

What About MAT/AMT Credits?

Businesses with eligible unutilised MAT/AMT credits carried forward under the earlier law should also review how those credits are treated under the new framework.

The Income Tax Department states that eligible unutilised MAT/AMT credits carried forward under the Income Tax Act, 1961 are treated as eligible credits under the Income Tax Act, 2025, subject to applicable conditions.

Businesses with significant tax-credit balances should maintain proper supporting records.

Common Mistakes Businesses Should Avoid

1. Using the Wrong Tax Period

Selecting AY 2026-27 for a payment relating to Tax Year 2026-27 can result in an incorrect tax-period selection.

2. Using Old Section References Without Checking

TDS and other provisions have been reorganised under the new Act.

3. Mixing Historical and Current Records

Records relating to FY 2025-26 and Tax Year 2026-27 should not be confused.

4. Ignoring Software Updates

Accounting and payroll systems should be reviewed for compatibility with the new framework.

5. Delaying Tax Reconciliation

TDS, advance tax and accounting records should be reviewed periodically.

6. Assuming Every Rule Has Changed

The new Act introduces structural and language changes, but several core tax-compliance mechanisms continue.

Final Checklist for Businesses

Before proceeding with Tax Year 2026-27 compliance, businesses should ask:

• Are our records correctly classified under Tax Year 2026-27?
• Are our accounting systems updated?
• Are TDS provisions being applied correctly?
• Have we reconciled TDS/TCS credits?
• Have we reviewed advance-tax requirements?
• Are tax payments being made under the correct tax period?
• Are business income and expenses properly documented?
• Are old AY 2026-27 records kept separate?
• Have we reviewed applicable MAT/AMT credits?
• Are our tax professionals and accounting teams working with the updated framework?

Conclusion

The Income Tax Act, 2025 represents a significant structural change in India's income-tax framework for Tax Year 2026-27 onwards. For businesses, the most important practical step is to understand the new Tax Year terminology, correctly distinguish earlier-year matters from current-year compliance, and update accounting and tax processes accordingly.

TDS, advance tax, tax payments, accounting records and tax reconciliations remain important parts of business tax compliance. The Income Tax Department's guidance confirms that the core mechanisms continue under the new Act, while the legal structure and terminology have been streamlined.

Businesses should review their systems and records now rather than waiting until the end of the Tax Year.