Clause 107 of the Finance Bill, 2026 proposes amendments to section 536 of the Income-tax Act, 2025, which contains the repeal and savings provisions following the repeal of the Income-tax Act, 1961.
The amendment clarifies how amounts allowed as deductions or excluded from total income under the repealed Act are to be treated in subsequent tax years under the 2025 Act, particularly in cases where such amounts were required to be brought to tax under the old law, whether due to violation of conditions or for any other statutory reason.
The amendments take effect from 1 April 2026, i.e., tax year 2026-27 onwards.
Background: Purpose of Section 536
Section 536 ensures continuity of tax consequences during the transition from the Income-tax Act, 1961 to the Income-tax Act, 2025. It preserves:
- Rights and liabilities arising under the repealed Act, and
- Tax consequences that were intended to occur in later years under the old law
Without such savings provisions, repeal could unintentionally extinguish deferred tax liabilities.
Existing Position Under Section 536(2)(h)
Prior to the proposed amendment, section 536(2)(h) provided that:
- Where a deduction was allowed or income was excluded under the repealed Act, subject to fulfilment of conditions, and
- Those conditions were later violated,
the amount would be deemed to be income in the year in which the violation occurred.
Limitation of the existing provision
This clause covered only violation-based inclusions. It did not expressly cover situations where, under the Income-tax Act, 1961 “an amount was required to be included in a later year without any violation, purely by operation of law” (for example, time-linked or event-linked inclusions).
What Does Clause 107 of the Finance Bill 2026 Propose?
Clause 107 introduces two related amendments:
1. Substitution of Section 536(2)(h)
The substituted clause provides that where:
- Any sum has been allowed as a deduction, or
- Has not been included in total income,
for any tax year beginning before 1 April 2026, and
- Such sum was required to be included in the total income of a subsequent tax year under the repealed Income-tax Act, 1961,
- on account of violation of conditions, or
- for any other reason,
then such sum shall:
- Be deemed to be the income of that subsequent tax year; and
- Be included under the same head of income as it would have been under the repealed Act.
This expands the scope from only violation-based cases to all cases of deferred inclusion contemplated under the old law.
2. Amendment to Section 536(2)(l)
Clause 107 also substitutes sub-clauses (i) and (ii) of section 536(2)(l) to include references to section 206(3) and section 206(4), ensuring that the savings clause comprehensively covers all relevant transitional provisions.
Meaning of the Proposed Amendment
In effect, the amendment establishes that:
- The repeal of the Income-tax Act, 1961 does not disrupt or nullify deferred tax consequences
- If an amount would have become taxable in a later year had the 1961 Act continued, the same result will occur under the 2025 Act
- This applies regardless of whether the inclusion arises due to a violation or due to statutory design
The amendment preserves the tax outcome, not the repealed statute itself.
Implications of the Amendment
1. Complete Transitional Continuity
- Ensures that deferred inclusions under the old law are fully carried forward
- Prevents tax leakage arising solely from repeal
2. Coverage of Non-Violation Cases
- Explicitly includes situations where income becomes taxable without breach of conditions
- Closes a previously unaddressed gap in section 536
3. Head of Income Remains Unchanged
- Amount is taxed under the same head of income as under the repealed Act
- Avoids reclassification disputes and interpretational complexity
4. Clarificatory and Prospective in Application
- Applies to tax years beginning on or after 1 April 2026
- Does not reopen past assessments or completed proceedings
What the Amendment Does Not Do
- ❌ It does not introduce new clawback provisions
- ❌ It does not expand the tax base beyond what the 1961 Act contemplated
- ❌ It does not alter substantive charging sections
The amendment strictly strengthens the repeal and savings mechanism.
Effective Date
✔ Effective from 1 April 2026. Applicable to tax year 2026-27 and subsequent tax years.
Conclusion
Clause 107 of the Finance Bill, 2026 provides a necessary and precise clarification to section 536 of the Income-tax Act, 2025. By extending the deeming provision to cover all situations where deferred inclusion would have arisen under the repealed Income-tax Act, 1961, the amendment ensures continuity, certainty, and neutrality in the transition between tax statutes.
The change is protective of legislative intent, preventing repeal from becoming a tool for unintended tax avoidance.
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