Parliament on Tuesday passed the new Income Tax Bill 2025, set to replace the six-decade-old Income Tax Act, 1961. The legislation, aimed at simplifying and modernising tax laws, is expected to come into effect from April 1, 2026.
Finance Minister Nirmala Sitharaman, speaking in the Rajya Sabha, described the new law as “leaner and more focused,” designed to be easier to read, understand, and implement.
The Income Tax Bill 2025 was initially introduced in February and referred to a Parliamentary Select Committee for review. On August 12, the government tabled a revised version—Income-Tax (No.2) Bill, 2025—incorporating most of the Committee’s recommendations.
Key Features of the New Bill
Return Filing and Refund Rules
The earlier draft included a provision restricting refunds to returns filed on or before the due date. The new version has removed this clause, ensuring taxpayers can claim refunds even for belatedly filed returns.
“The provision represented a major departure from the existing law. Its removal prevents undue hardship and legal ambiguity,” said Amit Maheshwari, Tax Partner, AKM Global.
The Bill also clarified that no Tax Collected at Source (TCS) will apply to Liberalised Remittance Scheme (LRS) transactions for education, provided financing is through a financial institution—an important clarification missing in the earlier draft.
Changes for Corporate Taxpayers
The legislation corrects drafting errors concerning inter-corporate dividend deductions for companies using concessional tax rates. It also aligns the Alternate Minimum Tax (AMT) for LLPs with current law, removing the expanded scope that would have subjected some LLPs to a higher 18.5% rate instead of the preferential 12.5%.
Other amendments include:
- Allowing taxpayers with no income-tax liability to obtain a nil-TDS certificate.
- Clarifying transfer pricing provisions and rules on carry-forward and set-off of losses.
- Omitting references to “beneficial owner” to align with Section 79 of the 1961 Act.
- Correcting calculations for house property income, factoring in 30% standard deduction after municipal taxes.
- Amending donation exemptions for non-profit organisations (NPOs), allowing 5% exemption of total donations instead of only anonymous donations.
Tax Year and Digital Searches
The Bill introduces the concept of a “tax year” beginning April 1. It reduces outdated language and cuts Sections from 819 to 536, chapters from 47 to 23, and words from 512,000 to 260,000, adding 39 tables and 40 formulas.
However, the contentious definition of “virtual digital space” remains. Income-tax authorities retain powers to collect information from emails, social media, online accounts, cloud servers, and other digital platforms during surveys, searches, and seizures. Sitharaman confirmed a standard operating procedure (SOP) will be issued to handle personal digital data.
Taxation Laws (Amendment) Bill, 2025
In parallel, the government introduced the Taxation Laws (Amendment) Bill, 2025, which updates the Finance Act, 2025. Key provisions include:
- Exemption of income from dividends, interest, and long-term capital gains for investments made by the Public Investment Fund (PIF) of Saudi Arabia and its subsidiaries in India. This provides clarity and lifts previous restrictions on subsidiary investments.
- Extending tax benefits under the market-linked National Pension System (NPS) to the Guaranteed Unified Pension Scheme (UPS), allowing tax-free withdrawals of up to 60% of the corpus at retirement.
With these reforms, the government aims to simplify tax compliance, reduce ambiguities, and modernize the legal framework, making India’s tax system more transparent and taxpayer-friendly.