Direct Tax Reforms
in India:
Simpler, Wider, Fairer
India’s direct-tax system is being rewritten for simplicity and compliance. Personal income tax collections have surged 27.3%, a generous new regime makes income up to ₹12 lakh tax-free, and the brand-new Income-Tax Act, 2025 replaces the 65-year-old 1961 law from April 2026.
India’s direct-tax landscape is undergoing its biggest overhaul in decades — driven by three goals: simplification, higher compliance, and supporting growth. From a buoyant rise in collections to a friendlier personal income-tax regime and an entirely new Income-Tax Act, this is one of the most exam-relevant reform stories of the year.
A good tax reform is invisible to the honest taxpayer and inescapable to the evader. India’s recent push — faceless assessment, a simpler Act, a rebate-rich regime — is an attempt to widen the base by making compliance the path of least resistance. — Legacy IAS Faculty
Direct Tax Collections & Fiscal Health
First, a quick refresher: a direct tax is paid directly by the person or company that bears it (income tax, corporate tax) and cannot be passed on — unlike an indirect tax (like GST), which is added to the price of goods and ultimately paid by the consumer.
Within direct taxes, there is a striking growth gap:
Personal income tax surging more than twice as fast as corporate tax reflects a widening tax base — more individuals filing and paying, helped by digitisation and better compliance. For the first time in years, personal income tax has overtaken corporate tax as the larger contributor to direct-tax revenue.
For the full FY 2025-26, net direct tax collections reached about ₹23.40 lakh crore (+5.12%), against a target of ₹25.2 lakh crore. Interestingly, the growth mix flipped this year: corporate tax led with ~10.7% growth, while personal/non-corporate growth moderated. The reason is a deliberate one — Budget 2025’s generous rebate (income up to ₹12 lakh tax-free) was a personal income-tax cut of roughly ₹1 lakh crore, designed to put money back in consumers’ hands and boost demand. Lower refund outgo (down 13–19%) helped cushion net collections.
The New Income-Tax Act, 2025 — A Landmark Reform
The headline reform: the Income-Tax Act, 2025 replaces the 65-year-old Income-Tax Act, 1961, decluttering a law that had been patched by hundreds of amendments into something hard to read.
Confirmed by Budget 2026-27, the Income-Tax Act, 2025 comes into force on 1 April 2026 (applicable from FY 2026-27; the 1961 Act governs earlier years). Key features: it cuts the law from ~819 to 536 sections across 23 simplified chapters; replaces the confusing “Previous Year” and “Assessment Year” with a single “Tax Year”; uses plainer language and removes obsolete provisions; and — crucially — does not change tax rates or core policy (rates are still set by the annual Finance Act). The aim is tax certainty, easier compliance, and less litigation.
Other compliance-boosting measures running alongside it include extending the time limit to file updated returns to four years, new compliance rules for crypto assets, harmonised Significant Economic Presence (SEP) provisions, and rationalised arm’s-length price determination to cut transfer-pricing disputes.
Alongside the new Act, several practical changes ease life for ordinary taxpayers: the 50% HRA exemption was extended to four more metros — Bengaluru, Pune, Hyderabad and Ahmedabad — taking the list to eight cities; a one-time Foreign Assets of Small Taxpayers Disclosure Scheme (FAST DS) 2026 lets students and relocated NRIs disclose modest overseas assets and gain immunity from prosecution; and an expanded presumptive taxation scheme (turnover under ₹10 crore with cash receipts below 5%) frees more small businesses from maintaining books and tax audits. Reassessment is also tightened to a 4-year limit (10 years only for concealed assets above ₹50 lakh), reducing the fear of old cases being reopened.
The Shift to the New Personal Income Tax Regime
Introduced in Budget 2020 as an exemption-free, lower-rate option, the new personal income tax regime has been sweetened in every budget since — and Budget 2025 made it decisively attractive.
The old regime has higher rates but lets you claim many deductions (80C, HRA, home loan). The new regime has lower rates and a big rebate but few exemptions. Roughly: the old regime suits those with heavy investments/deductions; the new regime suits those who prefer simplicity and don’t claim much.
Budget 2025 changes (from FY26): a full tax rebate for income up to ₹12 lakh a year (up from ₹7 lakh); the 20% rate now applies only above ₹16 lakh, and 30% only above ₹24 lakh.
| Annual Income (New Regime, FY26) | Tax Rate |
|---|---|
| Up to ₹4 lakh | Nil |
| ₹4–8 lakh | 5% |
| ₹8–12 lakh | 10% |
| ₹12–16 lakh | 15% |
| ₹16–20 lakh | 20% |
| ₹20–24 lakh | 25% |
| Above ₹24 lakh | 30% |
A rebate under Section 87A makes income up to ₹12 lakh effectively tax-free. By contrast, the old regime’s rebate threshold stays at ₹5 lakh (with 20% from ₹5 lakh and 30% from ₹10 lakh).
By August 2024, 72% (5.27 crore) of the 7.28 crore tax filers had already opted for the new regime — a share expected to grow so much that the old regime may eventually become a “relic.”
Reforms to Boost Compliance
Faceless Assessment & Taxpayers’ Charter
Assessments done without physical interface (curbing harassment & corruption), faster processing of returns, and a charter of taxpayer rights.
Vivad se Vishwas
A dispute-settlement scheme letting taxpayers close pending litigation by paying the disputed tax — clearing the backlog.
TDS/TCS Rationalisation
Budget 2025 simplified Tax Deducted/Collected at Source — including the levy on overseas spends — with scope to lower rates while retaining data intelligence.
Updated Returns & Digital Push
Time limit to file updated returns extended to four years, plus crypto-asset compliance and harmonised SEP provisions.
Support for IFSC & Startups
- IFSC (GIFT City): the deadline to set up operations in International Financial Services Centres for sectors like ship and aircraft leasing has been extended to 2030, giving investors a long-term horizon.
- Startups: the sunset date for startup tax benefits has been extended by another five years, sustaining the ecosystem.
Probable Prelims MCQs (Application-Based)
UPSC-standard practice on direct-tax reforms. Tap to reveal the answer and reasoning.
Q1. With reference to the Income-Tax Act, 2025, consider the following statements:
2. It replaces the separate “Previous Year” and “Assessment Year” with a single “Tax Year.”
3. It significantly raises income-tax slab rates.
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
Show Answer
Q2. Which of the following is a direct tax?
2. Goods and Services Tax (GST)
3. Personal income tax
(b) 2 and 3 only
(c) 1 and 2 only
(d) 1, 2 and 3
Show Answer
Q3. Under the new personal income tax regime (FY26), income up to which level is effectively tax-free due to the rebate?
(b) ₹7 lakh
(c) ₹12 lakh
(d) ₹16 lakh
Show Answer
Q4. The “Vivad se Vishwas” scheme in direct taxation is associated with:
(b) Settlement of pending tax disputes
(c) Filing of updated returns
(d) Taxation of crypto assets
Show Answer
Frequently Asked Questions
Q1. What is the New Income-Tax Act, 2025, and does it raise taxes?
It is a complete rewrite of India’s direct-tax law, replacing the 1961 Act from 1 April 2026. It trims the law from ~819 to 536 sections, introduces a single “Tax Year,” and uses simpler language — but it does not raise taxes or change rates, which remain set by the annual Finance Act. The goal is clarity, easier compliance, and less litigation.
Q2. New tax regime vs old — which should one choose?
The new regime offers lower rates and a large rebate (income up to ₹12 lakh tax-free) but few deductions — ideal for those who don’t claim many exemptions. The old regime has higher rates but allows deductions (80C, HRA, home loan) — better for those with significant eligible investments. By August 2024, 72% of filers had already chosen the new regime.
Q3. What is faceless assessment?
It is income-tax assessment conducted electronically, with no physical interface between the taxpayer and a specific officer. Cases are allotted randomly across the country, reducing the scope for harassment, discretion, and corruption — part of the broader move to a transparent, digital tax administration.
Q4. What is the difference between a direct and an indirect tax?
A direct tax (income tax, corporate tax) is paid directly by the person or firm on whom it is levied and cannot be shifted to someone else. An indirect tax (like GST) is levied on goods and services and passed along the chain until the final consumer bears it.
Key Takeaways
- Buoyant collections: personal income tax grew 27.3% vs corporate tax’s 12.4% — a widening base. In FY26, net direct tax reached ~₹23.4 lakh crore (+5.12%), with corporate tax now leading (~10.7%) after a ~₹1 lakh crore personal-tax cut.
- Landmark law: the Income-Tax Act, 2025 replaces the 1961 Act from 1 April 2026 — ~819→536 sections, a single “Tax Year,” simpler language, same rates.
- New regime sweetened: income up to ₹12 lakh tax-free (FY26); 20% only above ₹16 lakh, 30% above ₹24 lakh; 72% of filers already on it.
- Compliance push: faceless assessment, Taxpayers’ Charter, Vivad se Vishwas, TDS/TCS rationalisation, 4-year updated returns, crypto & SEP rules, arm’s-length rationalisation.
- Sector support: IFSC ship/aircraft leasing extended to 2030; startup tax benefits extended by five years.
