The two-Act year: Section 536 of the Income-tax Act, 2025 and the documents that still cite the 1961 Act
The Income-tax Act, 2025 took effect on 1 April 2026 and repealed the Income-tax Act, 1961, which nonetheless continues to govern every proceeding relating to an earlier year. Two statutes now run alongside each other. Most of the contracts in circulation were drafted for only one of them.
The rule that settles most questions
Section 536 of the new Act repeals the 1961 Act and then saves nearly everything done under it. The operative test is not the date of the notice, the order or the appeal. It is the tax year to which the income relates. Proceedings in respect of any tax year beginning before 1 April 2026 continue under the repealed Act, and the saving is expressed to cover proceedings both pending at commencement and initiated after it, including notices, assessment, reassessment, recomputation, rectification, penalty, reference, revision and appeals.
So a scrutiny notice received in May 2026 for assessment year 2025-26 is a 1961 Act proceeding, and stays one through appeal. A search initiated before commencement carries its whole proceeding through under the old Act, block assessment, penalty and appeal included. A reply filed today on such a matter should cite the 1961 provision the notice itself relies on, with a line recording that the proceeding is saved and continued by Section 536(2)(c).
Two further limbs are worth knowing. Section 536(3) bridges the terminology, so that a reference in the new Act to a tax year commencing on 1 April 2025 or earlier is read as a reference to the corresponding previous year under the repealed Act. Section 536(4) applies Section 6 of the General Clauses Act, 1897 to anything Section 536 does not expressly address, which is the safety net for the situations nobody anticipated.
| Item | Position |
|---|---|
| Commencement | The Income-tax Act, 2025 is in force from 1 April 2026. The Income-tax Act, 1961 stands repealed from that date under Section 536(1) |
| Which Act governs a proceeding | The tax year of the income, not the date of the notice or order. Anything relating to a tax year beginning before 1 April 2026 continues under the repealed Act |
| Terminology | “Tax year” replaces the previous year and assessment year pair. References to a tax year commencing 1 April 2025 or earlier read as the corresponding previous year under the repealed Act |
| Continuity | Permanent account numbers, deduction account numbers, registrations, approvals and elections continue. Carried-forward losses retain their character and their original carry-forward period |
| Credits | Credits accrued under the repealed Act are preserved under the corresponding provisions of the new Act; the Finance Act, 2026 amended Section 536 to align minimum alternate tax and alternate minimum tax credits with Sections 206(3) and 206(4) |
| Residual rule | Section 6 of the General Clauses Act, 1897 applies where Section 536 is silent |
| Guidance | The Central Board of Direct Taxes issued transition FAQs in March 2026 |
| Where the risk sits | Not in the assessments, which Section 536 handles. In contracts, deeds, policies, resolutions and templates drafted by reference to sections of a repealed statute |
What the transition does not reach
Section 536 governs the relationship between the taxpayer and the revenue. It says nothing about the relationship between two contracting parties whose agreement is drafted around section numbers that no longer exist. That gap is filled, in part, by Section 8 of the General Clauses Act, 1897: where a Central Act repeals and re-enacts a provision, with or without modification, references in any other enactment or in any instrument to the repealed provision are construed as references to the provision re-enacted, unless a different intention appears.
“Instrument” carries contracts, deeds and trust instruments, so most references survive without anyone doing anything. The exceptions matter more than the rule, and there are three of them.
Where the clause freezes the reference
A clause drafted as “within the meaning of section 2(22)(e) of the Income-tax Act, 1961 as in force on the date of this agreement” is precisely the different intention that Section 8 preserves. The drafting that was intended to protect the parties from legislative change now prevents the statutory bridge from operating, and leaves the clause pointing at a repealed provision.
Where there is no corresponding provision, or its scope differs
Section 8 translates a reference to a provision that has been re-enacted. Where the new Act has restructured a concept, narrowed or widened it, or dispensed with it, there is nothing to translate, and the commercial allocation the parties agreed may shift. Definitions built on the repealed Act’s treatment of a particular receipt or deduction should be read against the new provision rather than assumed to have travelled intact.
Where the clause depends on machinery rather than meaning
This is the largest category and the least noticed. Section 8 construes a reference; it does not administer a procedure. Withholding rates, certificate and declaration procedures, form numbers, deposit timelines and reporting obligations are mechanics, and a clause that obliges a party to deduct at a stated rate, to obtain a certificate under a numbered section, or to furnish a particular form within a stated period needs to be checked against the new Act on its own terms. A gross-up, a tax indemnity, a withholding covenant in a facility agreement, a perquisite clause in an employee share plan and the tax representations in a share purchase agreement all belong in this category.
What to do with the templates
The efficient response is a single pass through the standard forms rather than an argument in each negotiation. Three drafting habits do most of the work. Use a dual reference: “section [ ] of the Income-tax Act, 2025, or the corresponding provision of the Income-tax Act, 1961 as applicable to the relevant tax year”. Define concepts rather than citations wherever the commercial intent can be stated in words. And make sure the change-in-law clause is wide enough to cover a re-enactment as well as an amendment, since a change-in-law definition drafted around amendments to a named statute may not capture the replacement of that statute altogether.
Live matters, and a point not to run
Appeals, reassessments and penalty proceedings for pre-2026 years continue under the old Act, but the refund and interest machinery operating after commencement may reference the new Act. An order for an old year that quotes a new-Act interest provision is therefore not necessarily bad; the question is whether the substantive provision applied is a 1961 provision. The mismatch is worth noting in the record and it is rarely worth leading an appeal with, and a ground built on it alone is likely to fail.
The exercise was structural rather than fiscal. Rates continue to be set by the annual Finance Act, and the restructuring was not an occasion for changing them. That is a useful thing to say to clients who have read the number 536 and concluded that something has happened to their tax bill.
The ANSV take
Section 536 is a competent piece of transitional drafting, and the assessment-side questions it governs are mostly answerable by a single test: which tax year does the income belong to. Advisers who internalise that test will find the revenue-facing side of the transition uneventful.
The unattended risk is on the paper. Thousands of agreements, trust deeds, employment contracts, facility documents and board resolutions in current use cite provisions of a statute that was repealed six months ago. Section 8 of the General Clauses Act rescues most of them silently, which is precisely why nobody is looking at the ones it does not rescue: the clauses that froze the reference, the concepts the new Act has reshaped, and above all the mechanical clauses, because a statutory bridge translates a reference and not a procedure.
The work worth doing once, rather than repeatedly and under time pressure, is an audit of standard-form clauses that cite the repealed Act, resolved at the template level. Everything after that is renewals. What we would watch over the next two assessment cycles is the first appellate treatment of orders that mix old-Act substance with new-Act machinery, and whether any court is asked to construe a frozen contractual reference to a repealed provision, which is the point at which this stops being a drafting question.
Transition checklist
- For every live matter, identify the tax year of the income and record which Act governs before drafting anything.
- In replies on old years, cite the 1961 provision used in the notice and note the saving under Section 536(2)(c).
- Check that carried-forward losses and credits have been brought forward with their original character and period intact, and that the minimum alternate tax and alternate minimum tax position reflects the Finance Act, 2026 amendment.
- Confirm that registrations, approvals and elections have carried over; nothing needs to be re-filed merely because of renumbering.
- Schedule every standard-form document that cites a 1961 section, and resolve each at the template level rather than in negotiation.
- Identify clauses that freeze the reference to the 1961 Act as in force on a date, since the statutory bridge will not operate on them.
- Re-check every mechanical clause: withholding rates, certificates, declarations, forms and timelines under the new Act.
- Widen change-in-law definitions to cover re-enactment and replacement, not only amendment.
- Where an order for an old year applies new-Act machinery, record the point but test the substantive provision before making it an appeal ground.
References
- Income-tax Act, 2025, Section 536, and Sections 206(3) and 206(4).
- Income-tax Act, 1961, repealed with effect from 1 April 2026.
- General Clauses Act, 1897, Sections 6 and 8.
- Finance Act, 2026, amendment to Section 536 on the treatment of accumulated credits.
- Central Board of Direct Taxes, transition FAQs, March 2026.