India's New Income Tax Act 2025: Key Changes Effective April 2026

Why India Is Replacing a 63-Year-Old Tax Law

On April 1, 2026, India's direct tax landscape undergoes its most fundamental transformation in over six decades. The Income-tax Act, 2025 officially replaces the Income-tax Act, 1961—a law that had been amended so extensively over 63 years that it had grown from a manageable statute into an unwieldy framework of 819 sections across 47 chapters, laden with over 1,200 provisos and 900 explanatory clauses. The 2025 Act reduces this to 536 sections across 23 chapters with 16 schedules.

The Union Budget 2026-27, presented on February 1, 2026, confirmed that the Income Tax Act, 2025 would come into force on April 1, 2026, applicable for financial year 2026-27 onwards. The legislation was passed by Parliament in March 2025 and received Presidential assent in September 2025, giving taxpayers and their advisors a full year to prepare for the transition.

For foreign companies with Indian operations—whether through a wholly owned subsidiary, branch office, or liaison office—the new Act brings both simplification and substantive changes. Tax rates, deductions, and most compliance obligations remain broadly unchanged, but the structural reorganization, updated definitions, and modernized provisions affect how companies plan, report, and comply. This guide covers every change that matters.

The Tax Year Concept: Eliminating Assessment Year Confusion

One of the most visible changes in the 2025 Act is the elimination of the dual "Previous Year" and "Assessment Year" framework that has confused foreign businesses (and many domestic ones) for decades. Under the 1961 Act, income was earned in the "Previous Year" (e.g., April 2025 to March 2026) but assessed and taxed in the "Assessment Year" (April 2026 to March 2027). This created needless complexity in return filing, advance tax calculations, and penalty computations.

The 2025 Act replaces both concepts with a single unified "Tax Year" that corresponds directly to the financial year—April 1 to March 31. The first Tax Year under the new Act is April 1, 2026 to March 31, 2027. Income earned in this period is assessed in this period, not in a subsequent year.

Impact on Foreign Companies

For foreign companies, this change simplifies communication with Indian tax advisors, alignment with global reporting periods, and the computation of advance tax installments. Companies with a permanent establishment in India that have historically found the Previous Year/Assessment Year distinction confusing when reconciling Indian tax obligations with home-country reporting will benefit from a single, intuitive reference period.

All references to "Previous Year" or "Assessment Year" in existing tax documents, contracts, transfer pricing agreements, and compliance calendars should be updated to reflect the new "Tax Year" terminology from April 1, 2026.

Corporate Tax Rates: What Changes for Foreign Companies

The most impactful rate change for foreign companies is the reduction of the base corporate tax rate from 40% to 35%, effective from FY 2024-25 (AY 2025-26 under the old Act). This change was introduced by the Finance Act 2024 and carries forward into the 2025 Act.

*The 15% concessional rate under Section 115BAB was available only to new domestic manufacturing companies that commenced production on or before March 31, 2024; the window for fresh elections has since closed. The 22% rate under Section 115BAA remains available to domestic companies.

Surcharge Structure for Foreign Companies

The surcharge for non-resident companies is tiered based on total income:

• Total income up to INR 1 crore — No surcharge (0%)
• Total income INR 1-10 crore — 2% surcharge
• Total income above INR 10 crore — 5% surcharge

Health and education cess of 4% applies on the tax amount plus surcharge, regardless of income level. For a foreign company with taxable income of INR 50 crore, the effective tax rate would be approximately 38.22% (35% + 5% surcharge + 4% cess), compared to approximately 43.68% under the previous 40% regime. This reduction of roughly 5.46 percentage points translates to meaningful tax savings for large foreign operations in India.

Minimum Alternate Tax (MAT)

MAT provisions under the 2025 Act are generally not applicable to foreign companies that do not have a place of business or profession in India. Foreign companies operating through a permanent establishment or branch office should continue to compute MAT liability at 15% of book profits where applicable. Companies that have opted for the concessional tax regime under Section 115BAA (22%) or Section 115BAB (15% for new manufacturing) are exempt from MAT.

Structural Simplification: From 819 to 536 Sections

The reduction in sections is not merely cosmetic. The 2025 Act achieves meaningful simplification through several structural changes:

Elimination of Obsolete Provisions

• Fringe Benefit Tax — Removed entirely (had been levied and then abolished multiple times under the 1961 Act)
• Securities Transaction Tax procedural sections — Consolidated and simplified
• Wealth Tax cross-references — Cleaned up (Wealth Tax was abolished in 2015 but references persisted)
• Over 1,200 provisos and 900 explanatory clauses eliminated or consolidated

Chapter Consolidation

The 47 chapters of the 1961 Act are reduced to 23 chapters in the 2025 Act. Key chapter mappings that matter for foreign companies include:

TDS Provisions: From 60+ Sections to 3

Perhaps the most significant simplification for compliance teams is the consolidation of Tax Deducted at Source (TDS) provisions. Under the 1961 Act, TDS was governed by more than 60 separate sections (Section 192 through Section 194T), each with its own format, thresholds, rates, and exceptions. This made TDS compliance a perpetual challenge, particularly for foreign companies managing multiple payment types—salaries, professional fees, rent, contract payments, royalties, and fees for technical services.

The 2025 Act consolidates all TDS provisions under Chapter XVIII (Sections 380 to 400) with a dramatically simplified structure:

• Section 392 — Covers salary TDS (equivalent to old Section 192)
• Section 393 — Covers all other TDS in three structured tables: residents, non-residents, and any person, with rates, thresholds, and conditions in a single readable format
• Section 394 — Covers TCS (Tax Collected at Source) provisions

Key TDS Points for Foreign Companies

While the structure is simplified, the actual TDS rates and threshold limits remain unchanged. The rates for key payment types that affect foreign companies include:

• Royalties and fees for technical services to non-residents — 20% (previously under Section 195/194J of the 1961 Act)
• Interest payments to non-residents — 20% (or DTAA rate, whichever is lower)
• Dividend payments to non-residents — 20% (or DTAA rate, whichever is lower)
• Contract payments — 1% for individuals/HUFs, 2% for others
• Professional fees — 10%

Corrected Expense Disallowance Rule

A significant improvement for foreign companies: under the 1961 Act, if TDS was not deducted on time, the corresponding expense was permanently disallowed—30% for payments to residents and 100% for payments to non-residents. This was harsh, particularly for cross-border transactions where withholding tax compliance involves multiple jurisdictions and currency conversions.

The 2025 Act corrects this anomaly. If TDS is deducted and paid in a subsequent year, the expense can be claimed in that later year. This reduces the financial penalty for timing errors and aligns India's approach with international best practices. For foreign parent companies making payments to their Indian subsidiaries (or vice versa), this change provides meaningful relief by ensuring that delayed TDS compliance does not result in permanent loss of legitimate business deductions.

Transfer Pricing: Expanded Definitions and New Mechanisms

The 2025 Act brings important updates to India's transfer pricing framework, which governs how multinational companies price transactions between related entities:

Redefined International Transactions

Section 163 of the 2025 Act redefines "international transaction" to require dealings between associated enterprises with at least one non-resident. The redefined scope now explicitly enumerates:

• Tangible and intangible property transactions
• Services (including management fees, technical services, and shared services)
• Capital financing arrangements (including external commercial borrowings and corporate guarantees)
• Cost-sharing arrangements
• Business restructurings (including transfer of functions, assets, or risks)
• A residual clause covering any other transaction that affects profits

Deemed International Transactions

The 2025 Act introduces "deemed international transactions" to capture indirect arrangements determined by associated enterprises. This means that even if a transaction is between two seemingly unrelated parties, it can be treated as an international transaction subject to transfer pricing rules if an associated enterprise influenced its terms. Companies should review their supply chain arrangements and third-party contracts to identify any transactions that may now fall within this expanded scope.

Expanded Definition of Intangible Property

The statutory definition of intangible property has been expanded to include modern digital and contractual rights—including data, algorithms, software licenses, customer lists, and contractual relationships. This is directly relevant for technology companies and digital businesses where the value of intangible assets often exceeds tangible ones. Foreign companies licensing IP to Indian subsidiaries or sharing digital platforms should review their transfer pricing documentation to ensure compliance with these expanded definitions.

Repeat-Transaction Mechanism

The Finance Act 2025 introduced a new "repeat-transaction" mechanism under which taxpayers may opt to apply the arm's length price (ALP) determined for a particular year to similar international or specified domestic transactions for the two immediately succeeding years. This reduces the annual documentation burden for companies with stable, recurring intercompany transactions. Companies with Advance Pricing Agreements (APAs) should evaluate whether the repeat-transaction mechanism provides additional administrative simplification.

Significant Economic Presence: Digital Business Implications

The 2025 Act carries forward and codifies the concept of Significant Economic Presence (SEP), which determines when a non-resident has sufficient nexus with India to be taxed on business income. The SEP thresholds are:

• Transaction threshold: Aggregate payments exceeding INR 2 crore (approximately USD 240,000) in a year from transactions in goods, services, or property carried out by a non-resident in India
• User threshold: Systematically and continuously soliciting business or interacting with 300,000 or more users in India through digital means

Foreign digital businesses—including SaaS platforms, e-commerce marketplaces, advertising networks, and subscription services—should evaluate whether their Indian revenue or user base triggers SEP. If SEP is established, the non-resident entity would be deemed to have a business connection in India, potentially creating a tax liability on attributable profits.

It is worth noting that the equalisation levy on specified digital services (online advertisement and digital advertising space) was abolished effective April 1, 2025. This means foreign digital companies that were paying the 6% equalisation levy on advertising revenue will need to assess their Indian tax position under the SEP framework instead.

Return Filing: Extended Deadlines and Simplified Procedures

The 2025 Act introduces several changes to return filing procedures that benefit foreign companies:

Extended Revised Return Period

The time limit for filing a revised income tax return has been extended from 9 months to 12 months from the end of the Tax Year. For Tax Year 2026-27 (April 2026 to March 2027), a revised return can be filed until March 31, 2028, instead of the previous deadline of December 31, 2027 under the 1961 Act. This provides foreign companies with more time to correct errors, incorporate audit adjustments, and align with group reporting timelines.

Updated Return Filing

The concept of "updated returns" (introduced in 2022) continues under the 2025 Act, allowing taxpayers to file an updated return within 24 months from the end of the relevant Tax Year by paying additional tax. This is particularly useful for foreign companies that discover unreported Indian-source income after the original filing deadline.

Filing Deadlines

The key filing deadlines remain unchanged under the 2025 Act:

Foreign companies with Indian operations that involve transfer pricing reporting continue to file by November 30, giving them until November 30, 2027 for Tax Year 2026-27.

Income Deemed to Accrue in India: Section 9

Section 9 of the 2025 Act (corresponding to old Section 9 of the 1961 Act) ensures that income having a real or deemed link with India is taxable here, even if received abroad. For foreign companies, this section determines whether their income from Indian operations—including royalties, fees for technical services (FTS), interest, and dividends—creates a tax liability in India.

Categories of Deemed Income

• Business connection income — If a non-resident has a business connection in India, income attributable to that connection is deemed to accrue in India
• Capital gains — Income from transfer of assets situated in India, including shares of Indian companies
• Dividends — Dividends paid by Indian companies to non-resident shareholders
• Interest — Interest payable by Indian residents or the Indian government
• Royalties — Royalties payable by Indian residents for IP used in Indian business
• Fees for technical services — Fees for services utilized in India or paid by Indian residents

Foreign companies should review their Indian income streams against these categories and ensure they are claiming applicable DTAA benefits, filing Form 15CA/15CB for remittances, and maintaining proper documentation to support their tax positions. The Section 195 equivalent in the 2025 Act continues to require TDS on payments to non-residents.

Buyback Taxation: Capital Gains Instead of Dividends

A change with significant implications for foreign investors: buyback proceeds will now be taxed as capital gains instead of dividend income under the 2025 Act. Under the 1961 Act, share buybacks by Indian companies were subject to a 20% tax at the company level (Buyback Tax under old Section 115QA), with the proceeds being tax-free in the hands of shareholders.

The new framework shifts the tax incidence to the shareholder level, with proceeds taxed as capital gains. For foreign shareholders, the effective tax rate depends on the holding period and applicable DTAA provisions. Promoter-level shareholders may face higher effective rates—approximately 30% for individuals and 22% for promoter companies, plus surcharge and cess.

Foreign investors holding shares in Indian companies should reassess their exit strategies in light of this change. Where buyback was previously a tax-efficient method of returning capital to foreign shareholders, it may now be less advantageous compared to dividend distribution, depending on the specific DTAA rates available.

Simplified TCS Provisions

Tax Collected at Source (TCS) rates on several transaction categories have been simplified under the 2025 Act, with many categories moving to a uniform 2% rate. Key TCS changes include:

• Liberalized Remittance Scheme (LRS) — TCS on foreign remittances under LRS continues, with the threshold and rate structure preserved but the compliance format simplified
• Overseas tour packages — TCS provisions continue with clarified applicability
• Sale of goods exceeding INR 50 lakh — TCS at 0.1% continues

For companies with significant cross-border payment flows, the TCS simplification reduces the number of applicable rates and thresholds that need to be tracked, though the overall collection framework remains substantively unchanged.

What Stays the Same

Despite the structural overhaul, several key provisions remain unchanged, which provides continuity for foreign companies:

• Tax rates — Income tax slabs, corporate rates (other than the foreign company reduction to 35%), and special rates all remain the same
• Standard deduction — INR 75,000 for salaried employees (raised in Budget 2025)
• Section 80C equivalents — Investment deductions up to INR 1.5 lakh continue
• Residency rules — The 182/60-day residency tests continue unchanged
• DTAA application — All existing DTAAs continue to apply; the 2025 Act preserves the supremacy of treaty provisions over domestic law where the treaty rate is more beneficial
• FEMA compliance — The 2025 Act does not modify FEMA requirements; FC-GPR, FLA returns, and other RBI reporting obligations continue as before

Action Items for Foreign Companies Before April 1, 2026

1. Update Internal Tax Compliance Systems

Replace all references to "Previous Year" and "Assessment Year" with "Tax Year" in internal documentation, compliance calendars, and communication with Indian tax authorities. Update TDS computation templates to align with the consolidated Section 393 format.

2. Review Transfer Pricing Documentation

Assess whether existing transfer pricing policies and documentation adequately cover the expanded definition of international transactions, including deemed transactions and the broader intangible property definition. Consider whether the repeat-transaction mechanism can reduce ongoing documentation burden.

3. Reassess Digital Tax Exposure

With the equalisation levy abolished, foreign digital companies should evaluate their Indian nexus under the SEP framework. If aggregate Indian transactions exceed INR 2 crore or Indian users exceed 300,000, consult with tax advisors to determine the implications and potential tax liability.

4. Evaluate Buyback vs Dividend Strategy

Foreign shareholders planning capital repatriation from Indian subsidiaries should model the tax impact of buyback versus dividend distribution under the 2025 Act, factoring in applicable DTAA rates and the new capital gains treatment of buyback proceeds.

5. Engage Professional Advisors

The transition to the 2025 Act is not just about new section numbers—it requires a comprehensive review of existing compliance procedures, contracts, and tax positions. Our tax advisory and annual compliance teams can help foreign companies navigate the transition and ensure continued compliance from April 1, 2026.

Key Takeaways

• Effective date: April 1, 2026 — The Income Tax Act, 2025 replaces the 1961 Act from this date, applicable for Tax Year 2026-27 onwards
• Structural simplification: 819 sections reduced to 536, 47 chapters reduced to 23, with over 1,200 provisos and 900 explanatory clauses eliminated
• Foreign company tax cut: Base rate reduced from 40% to 35%, lowering the effective rate by approximately 5.46 percentage points for large foreign operations
• TDS consolidation: 60+ TDS sections consolidated into 3 sections (392-394) with uniform definitions and thresholds, though actual rates remain unchanged
• Transfer pricing updates: Expanded definitions of international transactions and intangible property, new repeat-transaction mechanism for stable intercompany dealings
• Tax Year replaces AY/PY: Single unified Tax Year concept eliminates decades of confusion between Previous Year and Assessment Year
• Buyback taxation shift: Proceeds now taxed as capital gains at shareholder level instead of dividend tax at company level, affecting exit strategies for foreign investors