India's Income-tax Act, 2025 (Act 30 of 2025), which received presidential assent on 21 August 2025 and came into force on 1 April 2026, represents the most significant structural overhaul of India's direct tax legislation in over six decades. While the stated policy position is that the new Act modernises language and reorganises the statute without altering underlying tax policy, foreign investors and multinational groups operating in India face a period of genuine interpretive uncertainty as courts, tribunals and the Central Board of Direct Taxes (CBDT) work through the implications of recast provisions. Income earned in the financial year 2025–26 continues to be assessed under the Income-tax Act 1961, making parallel compliance management unavoidable during the transition.
The Legislative Transition: What Has and Has Not Changed
The Income-tax Act, 2025 consolidates and restates the 1961 Act, which had accumulated more than six decades of amendments, judicial interpretation and administrative circulars. The Income-tax Rules 2026, notified on 20 March 2026, provide the procedural framework under the new statute. Both instruments were designed to sit alongside existing treaty commitments and international standards rather than to replace them.
The government's public position, reiterated in the Income Tax Department press release of 1 April 2026, is that no substantive change in tax policy was intended. For foreign investors, this framing is reassuring in one respect but carries its own risk: where restructured language departs even slightly from the phrasing that courts and the Income Tax Appellate Tribunal (ITAT) have interpreted over decades, new rounds of litigation become possible before settled positions re-emerge.
Practitioners should note that income of financial year 2025–26 – the year in which the 2025 Act was passed and assented to – remains entirely within the scope of the 1961 Act for assessment purposes. Groups managing tax risk across multiple Indian entities therefore face a two-statute compliance environment for at least one full assessment cycle.
Transfer Pricing Under the New Framework
Transfer pricing has long been one of the most contested areas of Indian direct taxation, and the transition to the 2025 Act does nothing to reduce its complexity in the near term. The arm's length principle and the associated documentation, benchmarking and reporting obligations have been restated in the new statute, but the interpretive weight of ITAT decisions, High Court rulings and CBDT guidance issued under the 1961 Act will need to be re-examined for continued applicability.
Several open questions are of immediate practical concern for cross-border groups:
- Carry-over of precedent: Decisions of the ITAT and higher courts interpreting transfer pricing provisions under the 1961 Act are expected to retain persuasive authority, but the extent to which they bind under recast statutory language is not yet authoritatively settled. Groups that have relied on specific rulings to support their pricing positions should reassess whether the underlying statutory text in the 2025 Act is materially identical.
- Advance pricing agreements (APAs): APAs concluded under the 1961 Act framework reference its specific provisions. Whether those agreements require formal amendment to reflect the new statutory references, or whether transitional provisions treat them as continuing on equivalent terms, is subject to national rules and CBDT clarification.
- Secondary adjustments and safe harbours: Provisions on secondary adjustments, safe harbour rules and the dispute resolution mechanism available through the Dispute Resolution Panel (DRP) have been restated. The interaction of the new text with pending proceedings initiated under the 1961 Act will require careful monitoring as the CBDT issues further guidance.
- Documentation and reportable transactions: The Income-tax Rules 2026 set out documentation requirements for international transactions and specified domestic transactions. Groups should review whether the categories of reportable transactions or the benchmarking methodology guidance have been adjusted in any way that affects their current compliance approach.
For multinationals with significant related-party transactions touching India, a proactive review of existing transfer pricing policies, master file and local file documentation, and benchmarking studies is advisable before the first full filing cycle under the 2025 Act.
If your group has active APAs, pending transfer pricing assessments or benchmarking studies that were prepared under the 1961 Act framework, Ferraz & Whitmore's India tax structuring practice can assist in evaluating the transitional risk. Please contact us at info@ferrazwhitmore.com or visit our contacts page to arrange a consultation.
Anti-Avoidance Rules and the Interpretive Gap
India's General Anti-Avoidance Rules (GAAR) and specific anti-avoidance provisions were among the more contentious elements of the 1961 Act framework, having generated significant ITAT and court litigation since their introduction. Their restatement in the 2025 Act raises questions that are familiar from other jurisdictions that have consolidated tax codes: does restated language freeze the law at the point of enactment, or does the body of case law interpreting functionally equivalent prior provisions continue to develop?
For foreign investors, the practical concern is whether structures that were reviewed and approved under the older framework – including holding structures approved through the tax treaty network or intra-group financing arrangements – will attract fresh scrutiny by the Income Tax Department applying the new Act's text. The interaction between domestic anti-avoidance rules and India's bilateral tax treaty network is an area where legal advice calibrated to the specific treaty and transaction structure is essential. Treaty shopping limitations, the principal purpose test under BEPS-influenced treaty amendments, and the substance requirements increasingly applied by the CBDT all remain relevant irrespective of the statutory restatement.
Related party financing, royalty and service fee arrangements, and holding company structures routed through treaty-protected jurisdictions are the categories most likely to attract attention during the first wave of assessments under the 2025 Act. The dispute path under the new framework follows the established hierarchy: appeal to the Commissioner (Appeals) or the Dispute Resolution Panel; then the ITAT; then the relevant High Court; and ultimately the Supreme Court of India. That path is unchanged in structure, but the dockets at each level will take time to develop a body of interpretation specific to the 2025 Act's text.
Cross-Border Implications: Treaty Positions, Withholding and Outbound Investments
India maintains an extensive network of double taxation avoidance agreements. Those treaties are negotiated instruments that reference Indian domestic law in defined ways – for example, in determining the meaning of terms not defined in the treaty itself. Where the 2025 Act assigns new definitions or restructures definitional provisions, there is a question of whether treaty-defined terms now take their meaning from the new statute or from the prior version, particularly for assessment years that straddle the transition.
Withholding tax obligations on payments to non-residents – one of the primary compliance touchpoints for foreign investors receiving dividends, interest, royalties or fees for technical services from Indian entities – are restated in the 2025 Act. The mechanism and the relationship to treaty benefits are preserved in their general form, but the specific procedural rules under the Income-tax Rules 2026 should be reviewed to confirm that existing withholding processes remain compliant.
For European and other non-Indian groups investing into India, the transition also intersects with the regulatory environment maintained by SEBI (for listed securities and collective investment schemes), the RBI (for foreign direct investment and external commercial borrowing approvals) and, increasingly, the Data Protection Board under India's data protection legislation. Tax structuring decisions for India-facing investments cannot be made in isolation from these regulatory frameworks, and the 2025 Act's entry into force is a useful moment to conduct a holistic review of the Indian investment structure.
Those considering or reviewing exit strategies should also be aware of the interaction between Indian capital gains provisions as restated in the 2025 Act and applicable treaty provisions on gains from alienation of shares. The analysis of exit taxation concepts in the EU context provides a useful comparative reference for understanding how similar structural pressures operate across jurisdictions, even though the Indian rules are governed by their own distinct legal framework.
Practical Risk Areas for Foreign Investors in the First Assessment Cycle
The following risk areas warrant particular attention as the first full compliance cycle under the 2025 Act unfolds:
- Interpretation of recast permanent establishment provisions: The language used to define and apportion income to a permanent establishment in India has been restated. Groups with Indian operations that have historically taken positions on PE attribution should review those positions against the new text.
- Continuity of circular and notification positions: A large body of CBDT circulars, notifications and instructions issued under the 1961 Act underpinned day-to-day compliance. The extent to which each of those instruments carries forward automatically under the 2025 Act, or requires fresh notification under the new Rules, is a practical compliance question that should not be assumed resolved.
- Pending litigation and assessments: Proceedings initiated under the 1961 Act – whether at assessment stage, before the Commissioner (Appeals), the DRP or the ITAT – will need to be managed with attention to whether statutory references in pleadings and orders require updating.
- NCLT proceedings with a tax dimension: Restructuring transactions before the National Company Law Tribunal (NCLT) often carry direct tax consequences. Where such transactions are now assessed under the 2025 Act, the relevant provisions on slump sales, demergers, amalgamations and their tax treatment should be re-examined in the context of the new Act's language.
- SEBI-regulated entities: Foreign portfolio investors and other SEBI-regulated vehicles will need to confirm that their Indian tax compliance processes – including withholding, return filing and treaty benefit claims – align with the 2025 Act and the Income-tax Rules 2026.
Ferraz & Whitmore works with international clients on India-facing tax risk management, including the review of existing structures against the 2025 Act framework. To discuss your specific situation, reach us at info@ferrazwhitmore.com or through our contacts page.
Strategic Recommendations for International Groups
Given the nature of the transition – a structural restatement rather than a policy change, but one whose interpretive implications will take years to fully resolve – a measured and documented approach is more appropriate than either inaction or wholesale restructuring.
For groups with existing Indian operations, the immediate priority is a structured mapping exercise: identifying each material tax position, whether in transfer pricing, treaty benefit claims, permanent establishment analysis or anti-avoidance exposure, and assessing whether that position rests on statutory language that has been materially restated in the 2025 Act. Positions that depended on specific 1961 Act phraseology, rather than on broader legal principle, carry the greater transition risk.
For groups considering new investment into India, the 2025 Act's entry into force provides an opportunity to structure from the outset around the new statute rather than on the basis of 1961 Act interpretations that may be revisited. Entry structure decisions – including choice of vehicle, funding mechanism, profit repatriation route and treaty protection – should be taken with legal advice that engages directly with the 2025 Act text and the Income-tax Rules 2026. Our India tax structuring practice supports clients at each stage of this analysis.
For groups that are already engaged in ITAT or court proceedings on transfer pricing, anti-avoidance or treaty benefit matters, coordination between litigation strategy and the evolving interpretation of the 2025 Act is essential. Early engagement with Indian counsel on how the new statutory language will interact with pending proceedings is advisable.
Those involved in corporate transactions – whether acquisitions, mergers, demergers or joint ventures – should ensure that the due diligence and transaction documentation process specifically addresses the 2025 Act transition. Deal representations and warranties that were drafted with reference to the 1961 Act may need updating, and tax indemnity provisions should account for the uncertainty that attends the first assessment cycles under new legislation. Our India corporate law practice can assist with transaction-side structuring and documentation.
Outlook
The Income-tax Act, 2025 is the starting point of a long interpretive process rather than its conclusion. The CBDT will issue further circulars, notifications and guidance notes as specific questions arise in practice. The ITAT and the High Courts will begin to build a body of decisions under the new Act. The Central Government may make amendments to the Income-tax Rules 2026 as administrative experience accumulates. For foreign investors, the practical risk horizon extends well beyond the formal effective date of 1 April 2026.
What the new Act does provide is a structurally cleaner statute that is intended to reduce the interpretive burden over the medium term. Groups that engage actively with the transition – auditing existing positions, seeking advance clarity from the CBDT where appropriate and maintaining well-documented compliance files – will be better placed to manage the uncertainty of the first few assessment cycles than those that assume continuity without verification.
India remains one of the world's most significant investment destinations, and the tax framework for foreign investors, while complex, is supported by an established appellate structure, a deep body of treaty relationships and an increasingly sophisticated approach to advance pricing agreements. The 2025 Act, once its interpretation stabilises, has the potential to make that framework more accessible. The transition period requires careful navigation.
Sources
- Income Tax Department of India, Press Release: "Income Tax Act 2025 Comes into Force from 01 April 2026" (1 April 2026) – Income Tax Department of India
Facts last verified: 22 September 2026.
For a structured review of your India tax exposure in light of the 2025 Act, or for advice on transfer pricing documentation under the Income-tax Rules 2026, please contact Ferraz & Whitmore at info@ferrazwhitmore.com or visit our contacts page.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.