The Income-tax Act, 2025 and associated Direct Tax Code–style reforms aim to modernise India’s direct tax framework without abruptly rewriting every rate and rule investors are used to.[2][5][8] For markets, that stability is positive, but there are structural shifts investors must internalise.

Key pillars of the new framework include:

- Replacement of much of the 1961 Act with a cleaner, simplified Income-tax Act, 2025, effective 1 April 2026.[2][5] - Retention of most existing tax rates and regimes in the initial phase, reducing disruption.[5] - Formalisation of the new tax regime as the practical default for individuals, with broader use due to higher effective zero-tax thresholds and enhanced Section 87A rebate.[2][6] - Greater powers for faceless, technology-driven administration aimed at lower litigation and more consistent assessments.[5][8]

For investors, the biggest practical changes around 2025–26 are:

- Higher effective zero-tax income level for salaried individuals (around ₹12.75 lakh under the new regime via rebate and standard deduction).[2][6] - Rationalisation and higher thresholds for TDS on rent, interest (especially for senior citizens), and dividends.[2] - Extended time window (up to 48 months) to file updated returns, which can be helpful for reporting omitted capital gains or loss set-offs.[2]

Below is a simplified comparison of the old and evolving framework from an investor’s lens (illustrative, based on current and notified provisions):

From a strategic standpoint, this shift should increase disposable income for middle-class households and slightly reduce tax friction on dividend and interest flows, supporting systematic investing (SIPs) and long-term equity participation.

While the Income-tax Act, 2025 broadly preserves capital gains concepts, incremental changes around TDS thresholds and administration influence net returns and liquidity for investors.[2][5][8]

Key dynamics for equity and fund investors:

- Capital gains framework: Short-term vs long-term categorisation for listed equities and equity mutual funds remains, along with concessional long-term rates (subject to continuing notifications). The new Act focuses more on cleaning language than re-rating all gains.[5] - Dividend taxation: Dividends continue to be taxed in the hands of investors at slab rates, but Budget 2025 has proposed increasing the TDS threshold from ₹5,000 to ₹10,000 per financial year per payer.[2] - Interest income TDS: For senior citizens, the TDS threshold on bank interest has been doubled from ₹50,000 to ₹1,00,000, which is significant for debt-heavy retirees.[2]

Illustrative TDS impact for a dividend-oriented investor holding shares of large dividend payers such as ITC, Coal India, and PSU banks (numbers hypothetical):

For senior citizens heavily invested in fixed deposits (FDs), the TDS change can be material:

Pros vs cons from a market-return perspective:

For portfolio design, these changes favour:

- Systematic withdrawal plans (SWPs) from mutual funds over high-dividend stock concentration for those in higher slabs. - Careful planning of equity sales across financial years to optimise slab usage. - Higher comfort with interest-earning instruments for seniors due to reduced TDS friction.

The new Income-tax Act, 2025 largely follows the existing approach of treating mutual funds and Portfolio Management Services (PMS) as pass-through structures where investors bear the tax on gains and income.[5][8] However, how investors choose funds and strategies will be influenced by the new regime’s emphasis on simplicity and cash-flow efficiency.

Mutual funds remain central for tax-efficient wealth creation, especially under the new regime where classic deductions like 80C are less dominant for many investors. Instead of chasing deductions, investors will compare post-tax returns and volatility across categories.

Illustrative equity fund comparison (hypothetical, but aligned with typical large-cap funds):

Even a 0.3–0.4% difference in expense ratio can compound meaningfully over 15–20 years when tax rates on long-term equity gains are concessional. Under a stable direct tax regime, cost and behaviour (SIPs, no panic-selling) matter more than one-time deductions.

For debt and hybrid funds, the shift from tax-arbitrage driven investing (e.g., earlier indexation windows) towards risk-adjusted returns is likely to intensify.

Illustrative hybrid vs pure debt comparison:

Pros vs cons of using mutual funds as a core vehicle under the new tax code:

PMS and AIFs will continue to cater to HNIs and UHNIs, with more complex tax reporting. Under a more digital tax system, data-matching between PMS/AIF statements and ITRs will likely intensify, increasing the importance of accurate capital gains reporting and audit trails.

From a market-valuation lens, a predictable direct tax framework reduces the “tax policy risk premium” that foreign and domestic institutional investors demand. With the Income-tax Act, 2025 retaining most corporate rate structures in the initial rollout, sectors that depend on long-gestation capex (infrastructure, manufacturing, renewables) benefit from stability.[3][4][5][8]

Illustrative large-cap company comparison (data points stylised for illustration but directionally consistent with typical market ranges):

Under a clear, unified corporate tax structure and fewer disputes, valuation drivers re-focus on:

- Sustainable ROE/ROCE vs cost of equity. - Earnings growth visibility. - Sectoral policy stability (e.g., PLI schemes, infra push).

Sector valuation snapshots (indicative ranges):

Pros vs cons of a stable but not necessarily lower corporate tax regime for investors:

For investors, this environment favours bottom-up stock and fund selection based on fundamentals and cash-flow resilience rather than short-term tax announcements.

The real benefit of the 2025–26 direct tax reforms will accrue only if investors translate them into concrete portfolio and cash-flow decisions. While specifics must be tailored with a qualified advisor, certain broad strategies align with the emerging framework.[2][5][6]

For salaried middle-income investors (up to ~₹20 lakh):

- Treat the higher zero-tax threshold (~₹12.75 lakh) as an opportunity to raise SIPs rather than lifestyle spending. - Rationalise old-regime deductions: calculate whether staying in the old regime (with 80C/80D/home loan interest) still beats the new, simplified regime. - Use low-cost index funds and large-cap funds as the core, with small satellite allocations to mid/small-cap funds.

For senior citizens:

- Take advantage of the doubled TDS threshold on interest (₹1 lakh) to design laddered FDs and debt funds that match cash-flow needs.[2] - Use SWPs from conservative hybrid or balanced advantage funds to create tax-efficient monthly income instead of entirely relying on interest. - Keep sufficient liquidity in senior citizen schemes and short-duration funds for medical and emergency needs.

For HNIs and professionals:

- Use PMS/AIFs only when there is a clear value proposition over mutual funds after considering post-fee and post-tax outcomes. - Actively harvest tax losses in equity and debt portfolios where permitted, especially with a 48-month window to correct returns via ITR-U.[2] - Ensure all global income and assets are accurately reported, as the modern tax framework and data exchange treaties reduce opacity.[3][5][8]

Pros vs cons of aggressive tax optimisation under the new regime:

Ultimately, the 2025–26 tax code transition is an opportunity to simplify personal finance: fewer moving parts on the tax side and more emphasis on savings rate, asset allocation, and long-term compounding.