India's Direct Tax System Set for Overhaul in FY27

As India prepares for the fiscal year FY27, a major overhaul of the direct tax system is set to take effect from April 1, 2026. The new Income Tax Act, 2025, will replace the outdated 1961 legislation, introducing a single 'tax year' to simplify filing processes. Key changes include revised deadlines for income tax returns, increased Securities Transaction Tax on derivatives, and enhanced employee tax benefits. Additionally, the tax treatment of stock buybacks and Sovereign Gold Bonds will see significant shifts. Taxpayers will also enjoy a longer window for revising returns and reduced TCS on foreign tours. This comprehensive reform aims to improve clarity and compliance for taxpayers across the nation.

By Narendra Chaudhary Mar 31, 2026, 13:30 IST

Significant Changes in India's Tax Framework

New Delhi, March 31: As India gears up for the fiscal year FY27, a comprehensive reform of the direct tax system is on the horizon, effective from April 1, 2026. This reform will introduce the new Income Tax Act, 2025, which will replace the long-standing 1961 legislation, bringing in updates to compliance, terminology, and taxation processes.

A key aspect of this reform is the consolidation of the 'Financial Year' (FY) and 'Assessment Year' (AY) into a single 'tax year', aimed at streamlining the filing process and enhancing clarity for taxpayers.

Additionally, while the deadline for salaried individuals to file income tax returns remains July 31, self-employed individuals and professionals not subject to audits will now have until August 31 to submit their returns.

The cost associated with trading in derivatives is expected to rise due to an increase in the Securities Transaction Tax (STT) on futures and options, as announced by Finance Minister Nirmala Sitharaman.

Furthermore, the criteria for claiming House Rent Allowance (HRA) have been tightened, necessitating the disclosure of landlord details, including PAN, in certain situations. The list of cities eligible for higher HRA exemptions has expanded to include Bengaluru, Hyderabad, Pune, and Ahmedabad, alongside existing metro cities.

Employee-related tax benefits are also set to improve, with an increase in the exemption limit for meal benefits and a rise in the annual cap for tax-free gifts.

Moreover, allowances for children, covering education and hostel expenses, have seen an increase under the previous tax regime.

In a significant change, stock buybacks will now be taxed as capital gains rather than deemed dividends, affecting both promoters and retail investors.

The government has revised the tax treatment for Sovereign Gold Bonds, limiting the exemption on redemption to bonds acquired during the original issuance.

Additionally, taxpayers will no longer be able to deduct interest expenses against dividend and mutual fund income, even if these investments are financed through loans.

To simplify tax procedures, individuals can now submit a single declaration to avoid TDS across various income sources. Buyers purchasing property from non-resident Indians can also deduct TDS using their PAN, removing the previous requirement for a TAN.

Taxpayers will benefit from reduced Tax Collected at Source (TCS) on foreign tours, now set at a flat 2 percent, with further reductions on remittances for education and medical expenses abroad.

The window for revising tax returns has been extended to March 31, although additional fees will apply for late submissions beyond December.

Among other updates, interest earned on compensation awarded by the Motor Accident Claims Tribunal is now fully tax-exempt.

Importantly, the government has released the income tax return forms (ITR-1 to ITR-7) for the assessment year 2026-27, allowing individuals, pensioners, and other taxpayers to start filing their returns within the designated timelines.

Experts have noted that the updated forms include significant changes, such as allowing ITR-1 (Sahaj) to report income from up to two house properties, an increase from the previous limit of one, which is anticipated to simplify the filing process for many taxpayers.