ITR Filing for Proprietors, Partners & Directors AY 2026-27: What's New Under the Income Tax Act 2025?

At a glance: Which Act governs what

Bottom line: You file last year under the 1961 Act while already operating this year under the 2025 Act. Two legal tracks, running at the same time.

A clarification that will save you an embarrassing error this season: the return you are filing right now for FY 2025-26 is still an AY 2026-27 return governed by the Income Tax Act, 1961. The new Income Tax Act, 2025 did not touch it. The 2025 Act governs income earned from 1 April 2026 onwardstha t is Tax Year 2026-27 and the first return under the new Act is not due until July 2027.

So why does this matter to a business owner today? Because while you file last year's return under the old law, your business is already operating inside the first tax year of the new Act. Every advance-tax instalment, every TDS deduction, every ESOP grant letter and every vendor contract dated on or after 1 April 2026 now sits under the 2025 Act and its renumbered sections. You are running on two legal tracks at once. This is the practitioner's note on navigating both - twelve practical points for proprietors, partners and directors.

1. Two Acts, two tracks, know which one governs each filing

The income-tax e-filing portal now runs both Acts in parallel. For FY 2025-26 (AY 2026-27) you file using the old ITR forms under the 1961 Act - due 31 August 2026 for non-audit business/professional cases (ITR-3/ITR-4) and 31 October 2026 for audit cases. For FY 2026-27 (Tax Year 2026-27) - the income you are earning now - the return comes only in 2027, under the 2025 Act. Treat them as two distinct compliance obligations and never mix the wording.

2. "Tax Year" replaces "Previous Year" and "Assessment Year"

Section 3 of the 2025 Act collapses the old twin-year system into a single Tax Year (1 April to 31 March). Income earned in a Tax Year is assessed after that year ends mechanically identical to the old Previous Year, just without the parallel "Assessment Year" label. For a newly set-up business, the first Tax Year runs from the date of setup to the following 31 March. From your 2027 filings onward, drop "AY" from client notes, engagement letters and computations for new-Act periods.

3. The entire business-income chapter has been rehoused

Under the 1961 Act, "Profits and Gains of Business or Profession" (PGBP) ran from Section 28 to 44DA. Under the 2025 Act it is a clean, sequential block - Sections 26 to 66 . The charging section moves from old Section 28 to Section 26 ; the computation provision from old Section 29 to Section 27 . The underlying mechanics - start with turnover, apply statutory deductions, arrive at taxable business income - are unchanged. What changes is every cross-reference in your working papers.

4. Depreciation is now Section 33, not Section 32

The block-of-assets method survives intact; only the address changes. Depreciation moves from old Section 32 to Section 33 of the 2025 Act. Tangible and intangible assets, the same blocks, the same WDV mechanics. Update your depreciation schedules, tax-audit annexures and fixed-asset registers to cite Section 33 for Tax Year 2026-27 onward.

5. Presumptive taxation (44AD / 44ADA / 44AE) merges into a single Section 58

This is the structural change proprietors and small professionals feel most. The three separate presumptive sections of the old Act are consolidated into Section 58 of the 2025 Act, which uses an internal serial-number structure to distinguish general business, transport, and professionals. Two sub-rules to flag:

• No further deductions: under Section 58, no additional deductions, allowances or set-off of losses are allowed against income computed on a presumptive basis - a tighter, clearer statement of the old principle.
• Section 58(6): written-down value is computed as if depreciation had been claimed and allowed each year - continuing the old Section 44AD(3) logic, so you cannot "save up" depreciation by staying presumptive.

The eligibility thresholds you know (₹3 crore turnover for business / ₹75 lakh receipts for profession, where at least 95% is non-cash) are set by the annual Finance Acts, not the structural Act, and continue to apply.

6. The perennial 44AD question: turnover with or without GST?

This is the single most-asked presumptive query, and the 2025 Act does not settle it by statute. The prudent professional position remains: where GST is collected and routed through a separate liability account (not credited to the P&L), it is generally excluded from "total turnover or gross receipts" for presumptive computation. Where GST is accounted inclusively, the turnover figure carries it. The compliance point that actually triggers notices is consistency - whatever basis you adopt must reconcile with the turnover declared in your GST returns , which the ITR's GST schedule now invites the department to cross-check. Pick a basis, document it, and make it tie out across income tax and GST.

7. Tax audit moves to Section 63; books of account to Section 62

Old Section 44AB (tax audit) becomes Section 63 ; old Section 44AA (maintenance of books) becomes Section 62 . The thresholds and the audit obligation itself continue under their renumbered home, and Form 3CD references are being realigned to the new sections. If you sign or rely on tax-audit reports, refresh your clause-reference sheet before the new-Act cycle.

8. TDS is the highest transition risk - section codes have changed

Under the old Act, TDS lived across 60-plus sections (192 to 194T). The 2025 Act consolidates this: Section 392 for salary TDS (old 192) and Section 393 for virtually all other TDS, structured into tables for residents, non-residents and any person. For a business, this is where errors will surface first. Any payment dated on or after 1 April 2026 must be deducted, deposited and reported citing the new section. Update your Tally/Zoho/SAP TDS masters and verify that Form 24Q/26Q/27Q generate the new section numbers for FY 2026-27 transactions. A circular issued under an old TDS section (e.g., the meaning of "work" under old 194C) continues to apply to its new equivalent (Section 393) where the intent is unchanged.

9. Carry-forward of losses: rules unchanged, but the due-date discipline is unforgiving

The 2025 Act preserves the loss framework substantively - business loss carried forward for 8 years and set off only against business income; capital loss 8 years; speculative loss 4 years; unabsorbed depreciation indefinitely. Two practical reminders that cost business owners real money:

• File on time. Carry-forward of business and capital losses still requires the return to be filed by the due date. A belated return forfeits the carry-forward (house-property loss and unabsorbed depreciation excepted).
• Old losses survive the transition. Section 536 (the repeal-and-savings clause) expressly preserves losses validly determined under the 1961 Act - they retain their original character and continue to be set off under the corresponding head. But a loss that was not validly carried forward under the old Act (e.g., a belated loss return) is not revived by the new Act.

10. ESOPs: same two-stage tax, new section numbers - and a common founder mistake

For directors and startup founders, the ESOP framework is substantively unchanged: a perquisite at exercise (FMV on exercise date minus exercise price, taxed as salary) and capital gains at sale (with the exercise-date FMV as cost base, preventing double taxation). What changes is the plumbing. Perquisite TDS shifts to Section 392 (old 192). The eligible-startup tax holiday moves from old Section 80-IAC to Section 140 and the perquisite-tax deferral mechanism (old Section 192(1C)) to its Section 392 equivalent. The recurring error: assuming DPIIT recognition alone unlocks the ESOP deferral. It does not - the company also needs the Inter-Ministerial Board (IMB) certificate under the Section 140 regime, which only a small fraction of DPIIT-recognised startups hold. Every grant letter, ESOP scheme document and board resolution citing 1961-Act sections is now an invalid reference for income earned from 1 April 2026 - get them re-papered.

11. Deductions and regime: 80C is now Section 123, new regime is the default

Old Section 80C becomes Section 123 (the ₹1.5 lakh aggregate cap retained, available only under the old regime; the eligible instruments now sit in a Schedule). The new tax regime continues as the default under Section 202 (old 115BAC), with the old regime available on opt-in. Note the structural trap for business owners specifically: unlike salaried individuals who may switch regimes each year, a taxpayer with business income who opts for the old regime is locked in and cannot toggle annually - so the regime decision for your first new-Act year deserves deliberate modelling, not a default click. The old Section 10 exemptions have moved into a Schedule rather than remaining as Section 10 sub-clauses.

12. The red flags: reconcile before you file, and audit your section references

Two failure points to pre-empt:

• Data mismatches. The department's analytics cross-match the income and turnover you declare against your AIS , Form 26AS and your GST-return turnover . Mismatches - a sales figure that doesn't tie to GSTR-1, TDS credits that don't match 26AS, presumptive turnover inconsistent with the GST schedule - are the most common trigger for portal validation errors and scrutiny. Reconcile all four before submission, not after a notice.
• Stale legal references. Across the practice, the quiet risk is documents that still cite 1961-Act sections for post-1 April 2026 income: vendor contracts, ESOP paperwork, board resolutions, internal SOPs and accounting-software TDS codes. Each is now an incorrect reference. Build a one-time sweep into your FY 2026-27 housekeeping.

Your old-to-new mental model: the 10 business-owner provisions to memorise

Keep this table on your desk through the transition. (Verify any specific provision against the Income Tax Department's official section-mapping utility before relying on it for a filing.)

FAQ

1. I am filing my proprietorship return now. Which Act applies?

The 1961 Act. Your current return is for FY 2025-26 (AY 2026-27), and income earned up to 31 March 2026 is governed entirely by the old Act - even though you are filing it after 1 April 2026. The 2025 Act applies to income from 1 April 2026 (Tax Year 2026-27), which you will file in 2027.

2. Have the ITR-3 and ITR-4 forms changed under the new Act?

The forms you use this season are the AY 2026-27 forms notified under the 1961 Act . The new-Act ITR forms for Tax Year 2026-27 are awaited and will apply to the 2027 filing cycle. Do not expect "Income Tax Act 2025" ITR forms for the return you file now.

3. Did my tax rates or presumptive thresholds go up?

No. The 2025 Act is a re-codification, not a rate change. Slabs, the presumptive thresholds and the digital-receipt conditions are set by the Finance Acts and continue. What changed is the structure and the section numbers.

4. As a partner in a firm, which form do I file?

Salary, interest and profit share from a firm are taxed under business income and require ITR-3 (for the old-Act AY 2026-27 cycle) not ITR-1 or ITR-2, regardless of how small the partnership income is.

5. Do I need to do anything differently right now, mid-2026?

Yes. Although you file 2027, you are operating in the first new-Act Tax Year. Deduct and report TDS under Sections 392/393, pay advance tax on the new-Act framework, and update software, contracts and ESOP paperwork to the new section numbers for all transactions dated on or after 1 April 2026.

6. Will my brought-forward business losses carry into the new Act?

Yes, provided they were validly determined and timely filed under the 1961 Act. Section 536 preserves them in their original character, set off under the corresponding head. Losses that were not eligible under the old Act are not revived.

This article is a practitioner's overview for general guidance. Section equivalents are based on the enacted Income Tax Act, 2025 and the CBDT section-to-clause correspondence; specific provisions should be confirmed against the gazetted text and the Income Tax Department's official mapping utility before being relied upon for a filing. It is not a substitute for advice on a specific case.

Authored by CA Sundram Gupta, Patron Accounting LLP, a chartered accountancy and company secretarial firm advising proprietors, partnership firms and companies on income tax, GST and ROC compliance, with offices in Pune, Mumbai, Delhi and Gurugram.