Practitioners who read only the assented text of the Income-tax Act 2025 miss the actual operative law. The assented text was published in the Gazette on 21 August 2025. Between then and the 1 April 2026 commencement, Finance Act 2026 was enacted with 56 income-tax amendments, some of which amend the not-yet-in-force 2025 Act. On 20 March 2026, CBDT notified the Income-tax Rules 2026 vide Notification No. 22/2026, along with the FAQ on Interplay and Transition. The version of the law that governs FY 2026-27 is the assented Act as amended by Finance Act 2026, read with the Rules 2026 and the CBDT FAQ. This lesson walks the layers.
The Finance Act 2026 layer
Finance Act 2026 was enacted after Finance Bill 2026 was presented by Finance Minister Nirmala Sitharaman in Parliament on 1 February 2026 [L3-C1]. The Act contains 56 income-tax amendments, layered across both the still-in-force 1961 Act (for FY 2025-26 residual computations) and the not-yet-in-force 2025 Act (for FY 2026-27 onwards). Four of those amendments are substantive changes every practitioner must remember.
Substantive change 1: TCS rationalisation on foreign remittances
Finance Act 2026 reduced the TCS rate on Liberalised Remittance Scheme (LRS) remittances for education or medical purposes from 5 percent to 2 percent, with effect from 1 April 2026 [L3-C2]. It also reduced TCS on overseas tour programme packages from up to 20 percent to 2 percent. Impact: parents remitting fees to a foreign university, patients remitting for overseas medical treatment, travellers booking overseas tour packages all see lower TCS at the time of remittance. Authorised dealer banks and tour operators must update their TCS collection systems.
Substantive change 2: buyback shift to shareholder capital gains
Finance Act 2026 shifted the tax incidence on buyback of shares from the company (under the erstwhile Section 115QA of the 1961 Act, where the company paid 23.296 percent tax on the distributed income) to the shareholder receiving the buyback proceeds [L3-C3]. Under the new regime, buyback proceeds are taxable in the hands of the shareholder as capital gains, chargeable at STCG or LTCG rates depending on holding period. Impact: retail investors, ESOP-holding employees, and promoter shareholders participating in buybacks now bear the direct tax cost. Companies no longer pay buyback tax. Corporate treasurers modelling buyback vs dividend decisions must update the tax comparison to reflect shareholder-level tax.
A practical example. When Infosys announces a buyback at Rs 1,850 per share and a retail shareholder tendered 100 shares acquired 3 years earlier at Rs 1,200 per share, the erstwhile framework would have had Infosys pay buyback tax under Section 115QA on the distributed income (roughly Rs 65,000 per shareholder, computed on the excess of buyback price over issue price). The retail shareholder received Rs 1,85,000 tax-free. Under the new regime, Infosys pays no buyback tax; the retail shareholder computes LTCG (buyback price Rs 1,85,000 minus cost of acquisition Rs 1,20,000 = Rs 65,000 LTCG), which is chargeable at 12.5 percent above the Rs 1.25 lakh threshold per Clause 198 of the new Act (LTCG on equity above Rs 1.25 lakh). Retail investors need to plan for this shift; corporates must communicate the change in shareholder circulars.
Substantive change 3: SGB secondary market taxation
Finance Act 2026 narrowed the capital-gains exemption on Sovereign Gold Bonds (SGBs) redemption. Only SGBs purchased in the initial / primary issuance by the Reserve Bank of India retain the exemption on redemption. SGBs purchased from the secondary market (typically through NSE / BSE where SGBs trade) are now taxable as capital gains upon redemption [L3-C4]. Impact: retail investors and portfolio managers who bought SGBs on the secondary market for the exemption on redemption now face taxation. Only original subscribers retain the exemption. Practitioners must trace acquisition method (primary vs secondary) for every SGB holding in a client portfolio.
Substantive change 4: HRA 50 percent cities expansion
Finance Act 2026 read with Rules 2026 expanded the list of cities where salaried employees can claim HRA exemption at 50 percent of basic salary (instead of the default 40 percent for other cities). Previously the 50 percent bracket was restricted to the four metros: Mumbai, Delhi, Chennai, Kolkata. Post-Finance Act 2026 expansion, the 50 percent bracket now includes four additional cities [L3-C5]. VERIFY: exact list of 4 new cities added. Per common practitioner sources, the 4 new cities are Bengaluru, Hyderabad, Ahmedabad, and Pune, but this requires confirmation against the Rules 2026 gazette. Impact: salaried employees in these 4 additional cities can now claim higher HRA exemption. Employer TDS computation systems must update the HRA calculation logic. Payroll teams at TCS Bengaluru, Infosys Bengaluru, Wipro Bengaluru, HDFC Chennai, DLF Delhi, Reliance Mumbai are all affected.
The Rules 2026 layer
The Income-tax Rules 2026 were notified by CBDT Notification No. 22/2026 dated 20 March 2026, with effect from 1 April 2026 [L3-C6]. Replaces the Income-tax Rules 1962 which had been in force for 64 years. Provides the procedural and operational framework for the new Income-tax Act 2025. The Rules follow the same "simplified language" philosophy as the Act.
Key operational content in Rules 2026:
- ITR forms: ITR-1 through ITR-7 for different assessee types (see Lesson 5 of Module 8)
- Tax audit report forms: Form 3CA (for auditor-approved accounts under any other law such as Companies Act), Form 3CB (for other assessees), plus Form 3CD detailed particulars (44 clauses)
- TDS / TCS return forms: Form 24Q (salary TDS), Form 26Q (non-salary TDS to residents), Form 27Q (TDS to non-residents), Form 27EQ (TCS)
- Outward remittance forms: Form 15CA (remitter declaration), Form 15CB (CA certification)
- TDS certificates: Form 16 (salary), Form 16A (non-salary)
- Valuation methodologies: perquisite valuation, ESOP valuation, gift valuation
- Allowance exemption limits: LTA, medical, transport, meal, uniform, children education, hostel
- HRA computation: including the Finance Act 2026 expanded 50 percent cities list
- PAN quoting thresholds: transactions requiring mandatory PAN quoting (with revised threshold amounts under Rules 2026)
The consolidated text as your working reference
Practitioners work from the "Income-tax Act 2025 as amended by Finance Act 2026" consolidated PDF published by the Income-tax Department on incometaxindia.gov.in [L3-C7]. This is the operative version. The assented text (as published in the Gazette on 21 August 2025) is a historical artefact; do not cite the bare assented text without checking whether the specific section was amended by Finance Act 2026.
Cross-references to Rules 2026 provisions are cited as "Rule X of the Income-tax Rules 2026" and to CBDT documents as "CBDT Notification No. 22/2026" or "CBDT FAQ on Interplay and Transition dated 20 March 2026." Old-Act CBDT circulars that continue to apply via Section 536(2)(j) are cited as "CBDT Circular No. X dated Y, continued under Section 536(2)(j) of the Income-tax Act 2025 unless in conflict."
Why the Finance Act 2026 amendments landed before the Act came into force
A structural feature of the Indian legislative calendar. Finance Bills are typically presented on 1 February of every year and enacted before the new financial year begins on 1 April. Finance Bill 2026 was no exception. But because the Income-tax Act 2025 was assented in August 2025 with a delayed commencement date of 1 April 2026, Finance Act 2026 had the opportunity to amend the not-yet-in-force Act. This is unusual but not unprecedented; similar patterns have applied when major legislation has been assented well before its commencement date.
Practical consequence for practitioners: always check the consolidated Act text ("as amended by Finance Act 2026") when researching a specific section. Never cite the bare assented text as if it were still current.
Practitioner alert: further Finance Act layers may come
Every future Finance Bill (from Finance Bill 2027 onwards) will layer additional amendments on top of the Income-tax Act 2025. Practitioners must build a habit of checking the current consolidated text before every citation. Every quarterly compliance review should include a delta scan for new Finance Acts, CBDT circulars, and notifications issued in the intervening period. This is not new; the same discipline applied under the 1961 Act, where every Finance Act amended the base statute. But the transition to the new Act means the "base" against which future amendments layer is the 2025 Act, not the 1961 Act.
Next lesson: Section 536 Repeal and Savings in operational detail. Four sub-sections, 22 sub-clauses, and the transitional plumbing that governs every matter straddling 1 April 2026.