Budget 2026: Why income tax amendments will be made in the 2025 Act instead of the repealed 1961 law

As Budget 2026 approaches, taxpayers face an unusual legislative conundrum. The familiar Income Tax Act, 1961 is set to be repealed with effect from 1 April, and make way for the Income Tax Act, 2025. This creates a rare interregnum: the Finance Bill, 2026 cannot meaningfully amend a statute that is about to disappear, while the new law, though already enacted and having received Presidential assent in August 2025, is not yet operational.

If any tax policy changes are announced in Budget 2026, legislative logic dictates they will have to be made directly in the 2025 Act, rather than retrofitted into a repealed framework. The new Act already exists on the statute book; only its enforcement is deferred. That makes it essential to understand where the popular, Budget-sensitive provisions of the old Act now reside. In short, the upcoming Budget may speak the language of 1961, but it will legislate in the grammar of 2025.

Section numbers to structural codes

For years, tax planning revolved around a familiar constellation: Section 80C for savings, Section 80D for health insurance, Section 10 for exemptions like HRA and LTA, Section 24(b) for housing loan interest, and Section 115BAC for the new tax regime. The 2025 Act doesn’t scrap these benefits, but dismantles the section-centric mindset and recasts them into heads, schedules, and consolidated tables. Understanding this structural migration helps decode future Budget relaxations.

Salary income

Under the 1961 Act, salary-related reliefs were scattered across Sections 10, 16, and 17.

The 2025 Act recasts these in Section 19 under a comprehensive table consolidating almost all deductions and exemptions relevant to salaried taxpayers—i.e. standard deduction, gratuity, commuted pension, leave encashment, retrenchment compensation, voluntary retirement benefits, and employer contributions to retirement funds—often with embedded computational formulae. Any Budget enhancement in limits or thresholds will therefore operate within this table rather than through piecemeal amendments.

HRA, LTA and salary allowances

A notable structural shift is the treatment of popular salary exemptions like house rent allowance (HRA), leave travel allowance (LTA), and certain special allowances. Under the 1961 Act, these benefits were firmly embedded within the core statute—HRA under Section 10(13A), LTA under Section 10(5), and special allowances under Section 10(14)—each backed by detailed and settled computational rules.

The 2025 Act lists these exemptions into Schedule III—LTA at Serial No. 8, HRA at Serial No. 11, and special allowances at Serial Nos. 12 and 13—supported by an enabling provision authorising the government to prescribe rules. While the substantive relief continues, the shift marks a move from codified certainty to schedule-based, rule-dependent flexibility, with computation mechanics now contingent on future notifications.

Old sections, new addresses: a quick crosswalk

Sections 80C, 80D and 80CCD

A similar migration is evident with respect to Chapter VI-A deductions, specifically Section 80C and allied provisions, health insurance deductions under Section 80D, and contributions to the National Pension System under Section 80CCD. Under the 1961 Act, these formed a self-contained statutory chapter, anchored in the parent legislation and supported by decades of judicial interpretation.

The 2025 Act shifts these deductions to Schedule XV, with their legal footing now resting on enabling Sections 123, 124, and 126. While there is no dilution in substance—eligible instruments, policy intent, and broad limits continue—the change in form is significant. What was once a Parliament-anchored deduction framework is now a schedule-based entitlement, with future contours shaped largely through delegated legislation.

House property

Housing-related tax concessions have been long-time Budget favourites. Under the 2025 Act, these are no longer recurring “concessions” but codified design choices. Interest deduction on housing loans, earlier available under Section 24(b), now appears in Section 22, with the familiar `2 lakh cap, completion criteria, and certificate requirements clearly embedded. Reliefs such as nil annual value for up to two self-occupied houses are now written directly into the statute. A notable drafting refinement is the explicit linkage of the 30% standard deduction to net annual value.

Gifts and ‘other sources’

Budget debates often take up gift taxation under Section 56(2)(x). The new Act recasts this regime under Section 92, clearly separating the charging provision, exemptions, and definitions. All familiar carve-outs—gifts from relatives, on marriage, by inheritance, or from specified institutions—are retained, but elevated from provisos to substantive law. The express inclusion of both matrilineal and patrilineal relatives closes a long-standing interpretational gap, while the upfront inclusion of virtual digital assets reflects foresight.

Old regime vs new regime

For individual taxpayers, the choice between the old tax regime and the concessional new regime under Section 115BAC of the old Act continues unchanged under Section 202 of the 2025 Act, which is almost identically worded.

Lower slab rates are offered in exchange for surrendering most deductions and exemptions, including HRA, LTA, and Chapter VI-A deductions now housed in Schedules III and XV. The new regime, in return, offers a simplified rate structure and the increased rebate up to an income of Rs.12 lakh under Section 87A of the old Act (Section 156 of the new Act).

The Author is Founder, Taxaaram India and Partner, SM Mohanka & Assocites