Income Tax Act, 1961: Structure and the New Income Tax Act

Search for “income tax act” today and you’ll get two different Acts, both live, and almost nobody tells you which one governs the return sitting on your desk. The Income-tax Act, 1961 was repealed on 1 April 2026. The Income-tax Act, 2025 replaced it the same day. And yet the 1961 Act still decides your tax on every rupee you earned before that date, which means it will keep working for years after its own funeral. That overlap is the first thing to get straight, because the rest of the topic makes no sense until you see that these two Acts aren’t a before-and-after. They’re two machines running side by side, on different years of income.

What the Income-tax Act, 1961 actually is

The Income-tax Act, 1961 is the single central law that says who pays income tax in India, on what income, how that income is computed, how the money is collected, and who settles the fights. It’s Act No. 43 of 1961, it came into force on 1 April 1962, and it replaced the Income-tax Act, 1922, which had been patched so many times that it had become unreadable. As enacted, it ran to 23 chapters, 298 sections and 14 schedules.

Notice what that list doesn’t include. The Act never tells you the tax rate. Not one slab appears in it. That sounds like an oversight and it’s actually the most deliberate piece of design in the whole statute.

Think of it as a mill with an empty hopper. The Act is all the machinery: the belts that sort your income into categories, the grinders that compute it, the sacks that collect it. Every year, Parliament walks in and pours the rates into the hopper. The machinery runs the same way regardless. Only the numbers change.

The one thing the Act refuses to do: fix your rate

The charging provision is Section 4, and its wording is the whole trick: income tax “shall be charged for that year at the rate or rates” prescribed by a Central Act. Not by this Act. By whatever Act Parliament passes that year. That Act is the Finance Act, and the slabs live in its First Schedule.

This is the part that trips up almost everyone reading the statute for the first time. You go hunting through 800-odd sections for the slab table and it isn’t there, because the drafters put it somewhere Parliament has to revisit every twelve months.

Why build it that way? Because of Article 265: no tax shall be levied or collected except by authority of law. If the rate lived inside the permanent Act, the executive would collect at that rate forever without Parliament ever voting again. By pushing the rate into an annual Finance Act, which is a Money Bill and therefore the elected House’s exclusive turf, the Constitution forces the government to come back and ask, every single year. It’s a leash, not a filing convenience. The mechanics of that annual vote sit inside the Union Budget process, and the reason the Finance Bill takes the route it does is worth reading alongside the Money Bill vs Finance Bill distinction.

How the Act is built: chapters, sections, schedules

The 1961 Act reads in the order a tax actually happens, which is the single most useful thing to know about its layout. Chapter I is definitions. Chapter II is the charge. Chapter III is what escapes the charge entirely (Section 10 exemptions). Chapter IV computes income under the five heads. Chapter V pulls in other people’s income (clubbing). Chapter VI handles set-off and carry-forward of losses. Chapter VI-A gives deductions. Chapter XVII collects the money through TDS and advance tax. The appeal chapters sit at the far end.

Now the section-count confusion, because you’ll see wildly different numbers quoted and they’re all defensible. 298 sections is the 1961 Act as enacted. 819 sections is what it became after six decades of insertions, and that’s the figure the Income Tax Department uses in its own comparison with the new Act. Nobody repealed and renumbered along the way. When Parliament wanted a new deduction, it wedged 80C in between 80 and 81. When it wanted a new regime, it wedged in 115BAC, sitting between 115BAB and 115BAD. Those letters aren’t decoration. They’re scar tissue from sixty years of amendment.

The same happened to the chapters, which is why you’ll see “47 chapters” quoted for an Act that plainly has 23. Both counts are honest. There are 23 numbered chapters, but lettered insertions like VI-A and XII-A through XII-H are chapters in every practical sense, and counting those gets you to roughly 47. That’s the count behind “47 chapters down to 23.” I’d treat the 47 as a working figure, not a hard one.

The schedules are the annexures the sections point to: rates in the First Schedule of the Finance Act, provident fund rules in the Fourth Schedule of the 1961 Act, and so on. Fourteen of them originally.

The five heads of income

Section 14 is the sorting gate. Before anything gets taxed, every rupee has to be dropped into exactly one of five buckets, because each bucket has its own computation rules, its own deductions, and its own quirks. Rent doesn’t get taxed the way salary does, and capital gains don’t get taxed like either.

The last row is the one to hold onto. “Income from other sources” exists so nothing falls through the floor. Anything taxable that doesn’t fit the first four gets caught here by default, which is why lottery winnings and that interest on your savings account end up in the same bucket as each other and nothing else.

These five heads survived into the Income-tax Act, 2025 untouched, now sitting in its Section 13. Sixty-four years of tax reform and nobody found a sixth bucket worth adding.

Previous year and assessment year: the split that confuses everyone

You earn in one year and you’re assessed in the next. That’s the whole idea, and it carries two names because the 1961 Act labels each year separately. The previous year (Section 3) is the financial year in which you earn. The assessment year (Section 2(9)) is the financial year that follows, in which that income is assessed and taxed.

Let me put a real date on it. You earn a salary between 1 April 2025 and 31 March 2026. That stretch is previous year 2025-26. The government can’t tax it until it’s finished, because your total isn’t knowable until the year ends. So assessment year 2026-27 is when you file that return and pay. Same money, two year-labels, always consecutive.

If you’ve ever picked the wrong dropdown while filing, this is why. It’s a labelling problem, not a conceptual one, and it’s exactly what the new Act killed off.

Residential status decides how much of your income India can tax

Before the rate matters, one question decides the size of the net: are you a resident? Section 6 runs the test, and Section 5 applies the result. A resident and ordinarily resident is taxed on global income. A non-resident is taxed only on income that accrues in India or is received in India. Same person, same earnings, radically different bill.

The basic test in Section 6(1) is arithmetic. You’re a resident if you were in India for 182 days or more in the previous year, or for 60 days or more in that year plus 365 days or more across the four preceding years. That second limb catches the frequent flier who never crosses 182 in any one year but effectively lives here.

Then the Finance Act, 2020 added two riders. An Indian citizen or person of Indian origin who visits India and has Indian income above Rs 15 lakh faces a tightened 120-day threshold instead of 60. And Section 6(1A) created the deemed resident: an Indian citizen with Indian income above Rs 15 lakh who isn’t liable to tax in any other country by reason of domicile or residence is treated as a resident here. That one exists to catch the stateless-for-tax-purposes problem, where someone arranged the year so no country could claim them.

Clear the resident test and there’s a second gate. Section 6(6) asks whether you were resident in at least 2 of the 10 preceding years and present for 730 days or more in the preceding 7. Fail either and you’re a resident but not ordinarily resident, taxed like a resident on Indian income but shielded on most foreign income. That’s the halfway house for someone who just moved back.

From gross total income to the cheque you write

Compute each of the five heads, add whatever gets clubbed in under Chapter V, knock off losses under Chapter VI, and the total is your gross total income. Then Chapter VI-A deductions come off, and what remains is total income, the figure the rate actually hits.

Chapter VI-A is the 80-series: 80C (up to Rs 1.5 lakh for provident fund, life insurance premium, home loan principal and more), 80D for health insurance premium, 80CCD(1B) for an extra Rs 50,000 into the National Pension System, 80G for donations, 80TTA or 80TTB for interest income. Every one is an insertion into a sixty-year-old Act, which is why they’re all lettered. After total income, the rebate under Section 87A can wipe out the liability entirely for small incomes, the Finance Act slab applies to what’s left, and health and education cess sits on top.

The collection doesn’t wait for any of this. TDS under Chapter XVII-B makes the payer cut tax before the money reaches you, which is why your employer deducts under Section 192 every month. And if your tax after TDS still exceeds Rs 10,000 for the year, Section 208 puts you on advance tax: 15% by 15 June, 45% by 15 September, 75% by 15 December, 100% by 15 March. Miss the schedule and interest runs under Sections 234B and 234C. The state gets its money as you earn it, not fourteen months later.

Who runs it: CBDT and the Income Tax Department

The Central Board of Direct Taxes is the apex body, and it’s not a mere department wing. The CBDT is a statutory authority under the Central Boards of Revenue Act, 1963, functioning within the Department of Revenue in the Ministry of Finance, with a Chairman and six Members. It frames policy for direct taxes and controls the Income Tax Department. Its mirror on the other side of the house is the CBIC, which does the same job for indirect taxes like GST and customs.

Below it sits the field, from Principal Chief Commissioners down to the Assessing Officer, the individual actually holding your file. Under faceless assessment that officer no longer sits across a desk from you: the case is routed by automated allocation to an officer you’ll never meet, in a city you may never visit. That was the point.

Old regime versus new regime

Section 115BAC arrived with the Finance Act, 2020 and offered a bargain: lower slab rates, but you give up most exemptions and Chapter VI-A deductions. For four years it was optional and most people ignored it. Then the Finance Act, 2023 flipped the default from assessment year 2024-25, and that changed everything. You’re now in the new regime unless you actively opt out, and a taxpayer with business or professional income has to file Form 10-IEA by the Section 139(1) due date to do so.

This isn’t a question of which regime is better, and treating it as one is the error. It’s arithmetic. Add up what you actually claim, not what you could theoretically claim. If your genuine 80C plus 80D plus home loan interest plus HRA clears the breakeven, the old regime wins. If you claim almost nothing, the new regime wins and the paperwork disappears. The trap is staying in the old regime for deductions you never got around to making, and paying more tax for the privilege of an intention.

The regime survived the rewrite. The Income Tax Department’s own transition material confirms the new regime formerly at 115BAC now sits at Section 202 of the 2025 Act. Same bargain, new address.

What the new Income Tax Act changed, and what it didn’t

The rewrite took a year and a half. The Income-tax Bill, 2025 was introduced in the Lok Sabha on 13 February 2025 and sent to a Select Committee chaired by Baijayant Panda, which reported in July with hundreds of recommendations. The government then withdrew that Bill and brought a fresh Income-tax (No. 2) Bill, 2025, which the Lok Sabha passed on 11 August 2025 and the Rajya Sabha on 12 August 2025. It received assent on 21 August 2025 as Act No. 30 of 2025, and came into force on 1 April 2026.

What actually changed is structural, and the department’s own numbers are the ones to quote: sections down from 819 to 536, schedules up from 14 to 16, and the rulebook trimmed from 511 rules and 399 forms to 333 rules and 190 forms. Provisos and explanations got folded into the main text. Tables and formulas replaced walls of prose. And Section 3 retired both “previous year” and “assessment year” in favour of a single tax year, the twelve months of the financial year starting 1 April. One label instead of two.

What didn’t change is the more important half. The Income Tax Department states it flatly: “The Income Tax Act, 2025 does not impose any new tax.” Rates still come from the annual Finance Act, exactly as before. The five heads survived. PAN, TAN and faceless proceedings carry on. The new regime moved from 115BAC to Section 202 and kept its terms. This was a translation, not a policy shift, and anyone who told you their tax bill would change on 1 April 2026 because of the new Act was selling something. The rate changes that landed that day came from the Finance Act, 2026, which is a separate law doing its usual annual job. That distinction is the whole reason the Section 4 design matters, and it’s where most commentary on the taxation reforms story goes wrong.

Now the transition, which is where the 1961 Act refuses to die. The old Act stands repealed on 1 April 2026, but it continues to govern all tax years beginning before that date. The new Act applies to income earned from FY 2026-27 onwards. So a return being filed right now for FY 2025-26 is a 1961 Act return, assessed for assessment year 2026-27, under sections that no longer exist in the current statute. Section 536 of the new Act carries the savings and the mapping, so a reference to a tax year reads back to the corresponding previous year of the old Act. Pending proceedings, appeals and searches that started under the old Act finish under it. Practically, the two Acts will run in parallel for the better part of a decade, and a fuller account of the rewrite is worth reading alongside the new Income-tax Act in its own right.

How to study and apply this

Anchor everything on one sentence: the Act builds the machine, the Finance Act sets the dial. If you can say that and explain why (Article 265, annual parliamentary sanction, Money Bill route), you already hold the spine of the topic and you’ll never lose marks hunting for slabs inside the wrong statute.

Then hang the detail off it in the Act’s own pipeline order: charge (Section 4), exempt (Section 10), compute under five heads (Section 14), club, set off, deduct (Chapter VI-A), rate, collect (TDS and advance tax). Learn the five heads as a table, not a list, because the differences between them are what gets tested, not the names.

Drill one worked year-pair until it’s reflex: FY 2025-26 is the previous year, AY 2026-27 is the assessment year, and under the 2025 Act both collapse into tax year 2025-26. For residence, memorise 182, or 60 plus 365, then attach the Rs 15 lakh carve-outs. For the rewrite, carry four numbers: 819 to 536 sections, 14 to 16 schedules, assent 21 August 2025, in force 1 April 2026.

Where the topic connects outward, tie it to the direct-versus-indirect split, to the buoyancy of direct tax collection, and to fiscal federalism, since income tax is a Union levy whose proceeds are shared with the states on the Finance Commission’s formula. Those links are where the analytical marks live. The Act’s own text is where the accuracy marks live. You need both.

Frequently Asked Questions

What is the Income Tax Act, 1961?

It’s the central law governing income tax in India, in force from 1 April 1962, which replaced the Income-tax Act, 1922. It ran to 23 chapters, 298 sections and 14 schedules as enacted, and it lays down who is taxed, on what, how income is computed, and how tax is collected. It was repealed on 1 April 2026 by the Income-tax Act, 2025.

Does the Income Tax Act specify the tax rates?

No, and this surprises people. Section 4 charges tax at the rate prescribed by a Central Act, which is the annual Finance Act. The slabs sit in the Finance Act’s First Schedule. This forces Parliament to approve the rates every year rather than letting a permanent rate run indefinitely.

What are the five heads of income?

Under Section 14: salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. Each head has its own computation rules. The last one is residual, catching any taxable income that fits nowhere else. All five carry over into Section 13 of the Income-tax Act, 2025.

What is the difference between previous year and assessment year?

The previous year (Section 3) is the financial year in which you earn. The assessment year (Section 2(9)) is the next financial year, in which that income is assessed and taxed. Income of previous year 2025-26 is taxed in assessment year 2026-27. The Income-tax Act, 2025 replaces both terms with a single tax year.

Is the Income Tax Act, 1961 still relevant after the new Act came into force?

Yes, for years. The 1961 Act stands repealed from 1 April 2026, but it continues to govern all tax years beginning before that date. The new Act applies to income from FY 2026-27 onwards. Returns, assessments and appeals for earlier years still run under the 1961 Act.

What changed in the new Income Tax Act?

Structure and language, not policy. Sections fell from 819 to 536, schedules rose from 14 to 16, rules from 511 to 333, and forms from 399 to 190. “Previous year” and “assessment year” became a single “tax year”. The Income Tax Department states the Act “does not impose any new tax”: rates still come from the annual Finance Act.

Who administers income tax in India?

The Central Board of Direct Taxes, a statutory body under the Central Boards of Revenue Act, 1963, sitting in the Department of Revenue, Ministry of Finance, with a Chairman and six Members. It controls the Income Tax Department, whose field officers run down to the Assessing Officer who handles an individual case.

Which tax regime am I in by default?

The new regime. Introduced as Section 115BAC by the Finance Act, 2020, it became the default from assessment year 2024-25 under the Finance Act, 2023. You must actively opt out for the old regime, and a taxpayer with business or professional income files Form 10-IEA to do so. The regime continues as Section 202 of the 2025 Act.

Practice Questions

1. The Income-tax Act, 1961 came into force on:

a) 1 April 1961
b) 1 April 1962
c) 1 April 1965
d) 1 April 1922

Answer: b) 1 April 1962

2. The rates of income tax for a given year in India are prescribed by:

a) The Income-tax Act itself
b) A notification of the Central Board of Direct Taxes
c) The annual Finance Act
d) The Reserve Bank of India

Answer: c) The annual Finance Act

3. Which of the following is NOT one of the five heads of income under Section 14?

a) Income from house property
b) Capital gains
c) Income from agriculture
d) Income from other sources

Answer: c) Income from agriculture

4. Under the Income-tax Act, 2025, the terms “previous year” and “assessment year” are replaced by:

a) Financial year
b) Tax year
c) Fiscal year
d) Charge year

Answer: b) Tax year

5. The Central Board of Direct Taxes derives its statutory status from:

a) The Income-tax Act, 1961
b) The Central Boards of Revenue Act, 1963
c) The Constitution of India, Article 280
d) The Finance Act, 2020

Answer: b) The Central Boards of Revenue Act, 1963

Mains-style questions

1. “The Income-tax Act builds the machinery, while the Finance Act sets the rate.” Examine this division of labour and explain its constitutional rationale.

2. Discuss the structure of the Income-tax Act, 1961 under its five heads of income, and explain why the classification matters for computation of total income.

3. Explain how residential status determines the scope of total income in India. Analyse the rationale behind the deemed-resident provision introduced by the Finance Act, 2020.

4. The Income-tax Act, 2025 has been described as a simplification rather than a reform. Critically examine this claim with reference to what the new Act changed and what it retained.

5. Evaluate the shift to the new tax regime as the default. What does it suggest about the direction of India’s direct tax policy?

The most useful thing about the 1961 Act isn’t any single section. It’s what the Act’s silence on rates tells you: a permanent law can define the tax without ever being trusted with the number. That silence is why Parliament has to show up every February, and it’s the reason the 2025 rewrite could shrink 819 sections to 536 without moving a single rupee of anybody’s liability. So when you read about the new Act, sort every claim into one of two piles. Structure, which the 2025 Act changed a great deal. Or burden, which only a Finance Act can touch. Almost every confused headline on this topic comes from someone putting a claim in the wrong pile.

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