The Government has proposed a significant clarification to the repeal and savings provisions under the Income-tax Act, 2025 , addressing situations where deductions or income exclusions allowed under the repealed Income-tax Act, 1961 may need to be taxed in later years.
This clarification is proposed through an amendment to Section 536(2)(h) of the new Act and is aimed at closing interpretational gaps that could otherwise lead to unintended tax benefits.
Existing Provision Under Section 536(2)(h)
Section 536(2)(h) currently provides that where:
- Any deduction has been allowed , or
- Any amount has not been included in total income
under the repealed Income-tax Act, 1961, subject to fulfilment of certain conditions and
- Those conditions are violated in a later year,
then such amount shall be deemed to be income in the tax year in which the violation occurs.
This ensures continuity and prevents misuse of conditional tax benefits claimed under the old law.
The Gap in the Current Law
However, several provisions under the repealed Income-tax Act, 1961 require taxation of earlier deductions or excluded income even without any violation of conditions.
In such cases:
- The inclusion of income is triggered automatically by operation of law and
- Not by breach or non-compliance of any specific condition.
The current wording of Section 536(2)(h) does not cover these scenarios, creating uncertainty over whether such amounts can be taxed under the new Income-tax Act, 2025.
Proposed Amendment: Wider Scope of Deemed Income
To address this issue, it is proposed that Section 536(2)(h) be amended to provide that:
- Where any sum was allowed as a deduction or not included in total income under the repealed Income-tax Act, 1961,
- Such sum shall be deemed to be income under the Income-tax Act, 2025,
- Even without violation of any conditions,
- If the amount would have been includible in total income under the Income-tax Act, 1961 had it not been repealed.
This amendment ensures that tax consequences intended under the old law continue seamlessly under the new regime.
Effective Date
- Effective from: 1st April 2026
- Applicable from: Tax Year 2026-27 onwards
- Legislative reference: Clause 107
Why This Clarification Matters
- Prevents unintended tax leakage during the transition to the new tax law
- Ensures continuity of taxation principles despite the repeal of the 1961 Act
- Reduces litigation by eliminating ambiguity around savings clauses
- Brings alignment between old-law tax triggers and new-law enforcement
Key Takeaway
Taxpayers who claimed deductions or exclusions under the old Income-tax Act must carefully evaluate whether such amounts could now be deemed as income under the Income-tax Act, 2025 , even in the absence of any breach of conditions. The amendment reinforces the Government’s intent that repeal of the old law should not result in unintended tax advantages.
Official copy of the Clause is as follows
Clarifying repeal and savings clause where amount allowed as deduction earlier is to be treated as income in a later year
Section 536(2)(h) of the Act provides that where any deduction has been allowed or any amount has not been included in the total income under the repealed Income-tax Act, 1961, subject to fulfilment of certain conditions, then on violations of such conditions, such amount will be deemed to be income in the tax year in which violation takes place.
2. However, there are provisions in the repealed Act, where any deduction allowed or any income which has not been included in the total income under the repealed Income-tax Act, 1961 may have to be included as income as per the provisions of the Income-tax Act, 1961 under the provisions of Income-tax Act, 2025, even without violations of any conditions. Section 536(2)(h) presently does not cover these cases.
3. Thus, to include such situations, it is proposed that where any sum has been allowed as deduction or has not been included in the total income under the repealed Income-tax Act, 1961, such sum will be deemed to be income under Income-tax Act, 2025, even without violations of any conditions, if it was to be included in the total income under the provisions of Income-tax Act, 1961 had it not been repealed.
4. It is proposed to amend section 536(2)(h) of the Act.
5. The amendment will take effect from the 1st day of April, 2026 and will, accordingly, apply to tax year 2026-27 and subsequent tax years.
[Clause 107]
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