New I-T law, higher securities transaction tax on F&O trade to kick in from April 1

What Happened

• From April 1, 2026, India's six-decade-old Income Tax Act, 1961 is replaced by the Income-tax Act, 2025, representing the most comprehensive overhaul of India's direct tax law since independence.
• Securities Transaction Tax (STT) on Futures and Options (F&O) trades has been hiked: STT on futures rises to 0.05% (from 0.02%) — a 150% increase; STT on options premium rises to 0.15% (from 0.10%); STT on exercised options rises from 0.125% to 0.15%.
• A 20-year tax holiday for data centre services commences, aiming to attract investment into India's rapidly growing digital infrastructure sector.
• New safe harbour rules for software firms take effect, providing predictability on transfer pricing assessments for technology companies with global operations.
• Tax treatment of share buybacks changes: amounts received from buybacks will now be taxed as capital gains in the hands of shareholders, not as deemed dividends.
• The concept of "Assessment Year" (AY) and "Previous Year" (PY) — a uniquely complex feature of Indian tax law — is eliminated, replaced by a single unified "Tax Year."
• Lower Tax Collected at Source (TCS) on overseas tour packages also takes effect, reducing the compliance burden on travellers.

Static Topic Bridges

The Income-tax Act, 2025: A Structural Simplification

The Income-tax Act, 1961 was enacted shortly after India's independence and underwent over 60 years of piecemeal amendments, resulting in a law with 819 sections that was widely criticised for complexity, ambiguity, and excessive litigation. The Income-tax Act, 2025 — drafted by a review committee and enacted through Budget 2025 — replaces this with a 536-section framework designed for clarity and digital-era compliance. The government explicitly described the new law as "revenue neutral" — tax rates, income slabs, deductions, and rebates for individuals remain unchanged. The structural changes are primarily to language, organisation, and administration rather than tax burden. This is India's most significant direct tax law reform since the introduction of the Goods and Services Tax (GST) on the indirect tax side in 2017.

Securities Transaction Tax: Design, Purpose, and Market Impact

Securities Transaction Tax (STT) was introduced in India on October 1, 2004 (Finance Act, 2004) by then Finance Minister P. Chidambaram as a substitute mechanism to address widespread evasion of capital gains tax on securities. By taxing every transaction at source — regardless of profit or loss — STT is impossible to evade, ensuring a baseline revenue from securities markets. STT is levied on the seller in delivery-based equity transactions and on both buyer and seller in F&O trades. Unlike capital gains tax (which depends on the gain), STT is levied on the full transaction value. The F&O segment is particularly active in India — by volume, India's NSE is among the world's largest derivatives exchanges, with retail participation accounting for a significant share of trading. Raising STT on F&O is designed to discourage excessive speculative trading and protect retail investors.

Data Centres and India's Digital Infrastructure Policy

Data centres are physical facilities housing computing infrastructure (servers, storage, networking) that process and store digital data. They are the physical backbone of the digital economy — supporting cloud computing, AI workloads, fintech, e-commerce, streaming, and government digital services like DigiLocker, GSTN, and UIDAI (Aadhaar). India's data centre capacity has been growing rapidly, but the country still lags behind the US, EU, and China in terms of installed capacity relative to its digital economy size. The government has recognised data centres as critical infrastructure and under the National Data Centre Policy (2020) and subsequent measures, has been working to attract investment. The 20-year income tax holiday signals a commitment to make India a competitive data centre hub in Asia — competing with Singapore, Malaysia, and the UAE.

Transfer Pricing and Safe Harbour Rules for Technology Firms

Transfer pricing refers to the prices at which transactions are conducted between related entities within the same multinational group (e.g., an Indian subsidiary paying its US parent for software services or IP licences). Tax authorities scrutinise these prices because multinationals can manipulate them to shift profits to lower-tax jurisdictions. India has had Transfer Pricing regulations since 2001, requiring related-party transactions to be conducted at "arm's length price." Safe harbour rules — introduced in India in 2013 and periodically revised — provide predetermined acceptable profit margins for specific categories of transactions (like IT-enabled services), freeing companies that stay within these ranges from detailed audit scrutiny. The new safe harbour rules effective April 2026 update these margins to reflect current market conditions and provide enhanced certainty for software exporters.

Key Facts & Data

• New law: Income-tax Act, 2025, effective April 1, 2026 — replaces Income Tax Act, 1961
• Sections reduced from 819 to 536 (35% reduction)
• "Tax Year" concept introduced — eliminates the Financial Year / Assessment Year distinction
• STT on futures: 0.05% (up from 0.02%) — 150% increase
• STT on options premium: 0.15% (up from 0.10%)
• STT on exercised options: 0.15% (up from 0.125%)
• Data centre income tax holiday: 20 years, for services commencing April 1, 2026 onwards
• Buyback taxation: now treated as capital gains for shareholders (not deemed dividends)
• ITR-3 and ITR-4 filing deadline extended to August 31 (from July 31) for non-audit cases
• SGB secondary market purchases: capital gains tax on redemption (exemption limited to original subscribers only)