New Income Tax Act - Changes in Provisions and Impact on Employer and Employee
This note highlights key changes introduced under the Income Tax Act, 2025 and the Income Tax Rules, 2026, particularly those impacting employers, employees, payroll compliance, tax deduction at source (TDS), perquisites, and employee declarations.
The changes discussed below include restructuring of tax administration terminology, revised forms, updated deduction provisions, expanded digital investigation powers, and revised limits for allowances and perquisites.
Key Structural Changes
Section titled “Key Structural Changes”Unified “Tax Year”
Section titled “Unified “Tax Year””The terms “Previous Year” and “Assessment Year” have now been unified into the single concept of “Tax Year”.
Accordingly:
- The earlier “Previous Year” is now referred to as the “Tax Year”.
- The concept of “Assessment Year” has been removed.
ITR Filing Deadline
Section titled “ITR Filing Deadline”Section 263 of the Income Tax Act, 2025 (corresponding to old Section 139) provides that the ITR deadline is now 12 months after the end of the Tax Year.
Continuity of Circulars and Notifications
Section titled “Continuity of Circulars and Notifications”Section 536(2)(j) of the Income Tax Act, 2025 provides that circulars, notifications, instructions, approvals, and similar instruments issued under the earlier Income Tax Act shall continue to remain valid so long as they do not conflict with the provisions of the new Act.
Example
Section titled “Example”Under the earlier law, Section 194C dealt with TDS on payments to contractors.
Under the new Act:
- Section 393 corresponds to the earlier Section 194C.
Therefore, circulars clarifying the meaning of “work” under old Section 194C would continue to apply to Section 393 where legislative intent remains unchanged.
TDS and TCS Framework
Section titled “TDS and TCS Framework”Section 392 — TDS on Salary
Section titled “Section 392 — TDS on Salary”Section 392 lays down provisions relating to deduction of tax at source on payments under the head “Salaries”.
Section 393 — Non-Salary TDS
Section titled “Section 393 — Non-Salary TDS”Section 393 consolidates TDS provisions relating to:
- Commission or brokerage;
- Rent;
- Transfer of certain immovable property (other than agricultural land);
- Other specified payments.
The section consolidates non-salary TDS into separate tables applicable to:
- Residents;
- Non-residents;
- Any person.
The section also prescribes applicable thresholds and rates.
Section 394 — TCS
Section titled “Section 394 — TCS”Section 394 deals with tax collected at source (TCS).
Accordingly, the new Act consolidates TDS and TCS provisions within Sections 392 to 394, whereas under the earlier law these provisions were scattered across multiple sections.
Employer Compliance Obligations
Section titled “Employer Compliance Obligations”Form 130 and Form 138
Section titled “Form 130 and Form 138”Employers are now required to:
- Issue Form 130 (replacing Form 16) by 15 June following the relevant Tax Year;
- File quarterly Form 138 (replacing Form 24Q).
Late deposit of TDS attracts interest at 1.5% per month.
Non-compliance may also expose employers to higher penalties under faceless assessment mechanisms.
Form 122
Section titled “Form 122”Form 122 replaces ad-hoc employee declarations relating to:
- Choice of tax regime;
- Prior TDS credits;
- Carry-forward losses.
The form is required to be submitted by April for payroll adjustment purposes.
Form 124
Section titled “Form 124”Form 124 replaces Form 12BB.
The form relates to declarations for:
- House Rent Allowance (HRA);
- Leave Travel Concession (LTC);
- Home loan interest.
The form now mandatorily requires disclosure of landlord PAN and relationship with landlord where annual rent exceeds ₹1,00,000.
Failure to submit Form 124 may invalidate employee claims, and employers may reject unverified deductions to avoid liability.
Deductions and Employee Benefits
Section titled “Deductions and Employee Benefits”Section 123
Section titled “Section 123”Investments such as:
- Public Provident Fund (PPF);
- ELSS;
- Home loan principal repayment,
have been shifted to Schedule XV read with Section 123 (corresponding to old Section 80C).
These deductions remain available only under the old tax regime.
Employees are required to declare such deductions through Form 122.
Employers remain responsible for verification for TDS purposes.
Section 126
Section titled “Section 126”Medical insurance deductions have been shifted to Section 126 (corresponding to old Section 80D).
Home Loan Interest
Section titled “Home Loan Interest”Home loan interest deduction for let-out property continues under Section 22 corresponding to old Section 24(b).
Digital Access During Investigation
Section titled “Digital Access During Investigation”Chapter XIV — Section 261
Section titled “Chapter XIV — Section 261”The powers relating to investigation and digital access have been expanded.
Earlier Position
Section titled “Earlier Position”Authorities were primarily limited to:
- Physical records;
- Specified digital assets.
Present Position
Section titled “Present Position”Authorities may now access:
- Emails;
- Cloud storage;
- Social media accounts;
- Digital trading accounts.
Virtual Digital Assets
Section titled “Virtual Digital Assets”The new Act specifically defines:
- Virtual Digital Assets (VDAs);
- Crypto assets;
- NFTs.
Standard Deduction and Tax Rebate
Section titled “Standard Deduction and Tax Rebate”Section 19 — Standard Deduction
Section titled “Section 19 — Standard Deduction”The standard deduction has been increased to ₹75,000 from the earlier ₹50,000 available under old Section 16(ia).
Section 156 — Tax Rebate
Section titled “Section 156 — Tax Rebate”Section 156 (corresponding to old Section 87A) provides enhanced rebate benefits.
Under the new regime, resident taxpayers having income up to ₹12 lakh incur zero tax liability.
NPS Contributions
Section titled “NPS Contributions”Section 124
Section titled “Section 124”Employers can now claim deduction up to 14% of salary for contributions made to an employee’s NPS account under the new regime.
Under the earlier law, deduction under Section 80CCD was limited to 10%.
Perquisites
Section titled “Perquisites”The following are treated as taxable perquisites under the new framework:
- Employer-provided housing and vehicles;
- Interest-free or concessional loans;
- Employee Stock Option Plans (ESOPs) and equity-linked compensation;
- Club memberships, utilities, and personal expense reimbursements;
- Gifts and non-cash benefits beyond prescribed thresholds.
Revised Limits Under the Income Tax Rules, 2026
Section titled “Revised Limits Under the Income Tax Rules, 2026”| Allowance / Perquisite | Old Limit (1962 Rules) | New Limit (2026 Rules) |
|---|---|---|
| Children’s Education – Rule 280 | ₹100/month/child | ₹3,000/month/child |
| Hostel Expenditure – Rule 280 | ₹300/month/child | ₹9,000/month/child |
| Free Meals – Rule 15, Table IV | ₹50/meal | ₹200/meal |
| Festival Gifts/Vouchers – Rule 15, Table IV | ₹5,000/year | ₹15,000/year |
| Interest-Free Loans – Rule 15, Table IV | ₹20,000 aggregate | ₹2,00,000 aggregate |
Reference may also be made to Section 11 of the Income Tax Act, 2025 dealing with incomes not included in total income read with Schedules II to VII.
House Rent Allowance (HRA) Exemption
Section titled “House Rent Allowance (HRA) Exemption”Rule 279 — Income Tax Rules, 2026
Section titled “Rule 279 — Income Tax Rules, 2026”Metro Cities Expanded
Section titled “Metro Cities Expanded”The 50% HRA exemption now applies to the following eight cities:
- Delhi;
- Mumbai;
- Kolkata;
- Chennai;
- Bengaluru;
- Hyderabad;
- Pune;
- Ahmedabad.
For all other cities and towns, 40% exemption applies.
Form 124 Requirement
Section titled “Form 124 Requirement”Form 12BB has been replaced by Form 124.
The new form requires employees to disclose their relationship with the landlord where annual rent exceeds ₹1,00,000.
Rule 205 — Income Tax Rules, 2026
Section titled “Rule 205 — Income Tax Rules, 2026”Rule 205 relates to furnishing of evidence of claims by employees under Section 392(5)(b) for deduction of tax from income under the head “Salaries”.
References
Section titled “References”- Income Tax Department – Objective and Scope of New Act
- Employees Benefits Allowable
- ClearTax – Income Tax Act 2025
- India Briefing – Income Tax Rules 2026 and Employer Payroll Compliance
- Zoho Payroll – New Income Tax Act 2025
- KPMG – Income Tax Overhaul and Key Changes from April 1, 2026
Conclusion
Section titled “Conclusion”The Income Tax Act, 2025 introduces significant structural and compliance-related changes affecting both employers and employees.
Key developments include consolidation of TDS provisions, replacement of forms, enhanced digital investigation powers, revised deduction structures, expansion of taxable perquisites, and increased reporting obligations. Employers are required to adapt payroll systems and verification processes in line with the revised compliance framework, while employees must ensure timely and accurate submission of declarations and supporting documentation.
References
Section titled “References”https://www.incometaxindia.gov.in/w/employees-benefits-allowable
https://cleartax.in/s/income-tax-act-2025
https://www.zoho.com/in/payroll/academy/taxes-and-compliance/new-income-tax-act-2025.html