New Income Tax Bill 2025 Clears Lok Sabha: Key Changes You Must Know
Introduction
On August 11, 2025, the Lok Sabha passed the Income Tax (No. 2) Bill, 2025, marking a significant overhaul of India’s 63-year-old direct tax framework. This new legislation, set to replace the Income Tax Act, 1961, aims to simplify tax laws, enhance compliance, and reduce litigation. Finance Minister Nirmala Sitharaman introduced the revised bill, incorporating nearly all 285 recommendations from a Parliamentary Select Committee chaired by BJP MP Baijayant Panda. Effective from April 1, 2026, the bill promises a modernized, taxpayer-friendly system. Here’s a breakdown of the key changes you need to know.
Key Changes in the Income Tax Bill 2025
1. Simplified Structure and Language
The bill reduces the number of sections from 819 to 536 and chapters from 47 to 23, making the tax code more concise and easier to understand. Dense legal jargon has been replaced with user-friendly language to improve accessibility for taxpayers and authorities alike.
- Why It Matters: Simplified language reduces confusion and empowers individuals to file returns independently, potentially lowering compliance costs.
2. Introduction of "Tax Year"
The bill replaces the terms "Financial Year" and "Assessment Year" with a unified "Tax Year" (April 1 to March 31). Tax on income will now be paid in the same year it is earned, aligning tax computation with the financial year.
- Why It Matters: This change eliminates complexity for new entrepreneurs and individuals, making tax calculations more straightforward.
3. Flexible Refund Claims
Taxpayers can now claim refunds even if returns are filed after the due date, provided valid reasons (e.g., illness or technical issues) are given. The restrictive Clause 263 (1) (ix) has been removed to facilitate this.
- Why It Matters: This promotes fairness, especially for small taxpayers who may face delays due to unforeseen circumstances.
4. No Penalties for Late TDS Filing
The bill waives financial penalties for late filing of Tax Deducted at Source (TDS) statements. Additionally, the time limit for filing TDS correction statements has been reduced from six years to two years.
- Why It Matters: This reduces grievances for deductees and eases compliance burdens for businesses.
5. Nil-TDS Certificates
Both Indian and non-resident taxpayers with no tax liability can apply for "nil" TDS certificates in advance, streamlining the process for those not required to pay income tax.
- Why It Matters: This simplifies tax processes for individuals and entities with minimal or no taxable income.
6. Restored Deductions for Inter-Corporate Dividends
The bill reinstates deductions under Section 80M (Clause 148) for inter-corporate dividends, addressing concerns about double taxation in multi-tiered company structures, especially for companies opting for the 22% corporate tax regime.
- Why It Matters: This ensures fair taxation for corporates and prevents financial strain in complex corporate structures.
7. Pension and Gratuity Deductions
Deductions for commuted pensions and gratuity for family members are explicitly provided under Clause 93. Non-employee individuals receiving pensions from approved funds (e.g., LIC Pension Fund) can also claim these deductions.
- Why It Matters: This brings equity in tax treatment for pensioners, particularly those outside traditional employment.
8. Property Income Taxation
A standard 30% deduction on income from house property (after municipal taxes) has been codified, with deductions for interest on borrowed capital extended to let-out properties. The valuation of rental income is now based on the higher of actual rent received or deemed rent, and temporarily unoccupied commercial properties are exempt from notional rent taxation.
- Why It Matters: These changes provide clarity and relief for property owners, reducing disputes over rental income calculations.
9. Relief for Non-Profits and Charitable Trusts
The bill reinstates tax exemptions for anonymous donations to mixed-object (religious and charitable) non-profit organizations and allows reinvestment of capital gains into new assets without losing tax benefits. The mandatory requirement to invest 15% of deemed accumulated income in specified modes has been removed.
- Why It Matters: These provisions support non-profits by reducing financial constraints and aligning with existing tax benefits.
10. Alternate Minimum Tax (AMT) Reforms
AMT provisions now apply only to non-corporates claiming deductions, and LLPs with only long-term capital gains (taxed at 12.5%) are exempt from AMT (18.5% plus cess and surcharge). This corrects an earlier drafting error that risked higher taxation for LLPs.
- Why It Matters: This ensures fair taxation for LLPs and prevents unintended tax burdens on capital gains income.
11. Digital Compliance and Virtual Digital Assets
The bill broadens the definition of Virtual Digital Assets to include cryptocurrencies and non-fungible tokens. It also mandates that assessees provide access to digital spaces (e.g., social media, cloud storage, trading accounts) during search operations to curb undisclosed income.
- Why It Matters: This aligns tax regulations with the digital economy, ensuring transparency in digital transactions.
12. Faceless Assessments and Taxpayer Charter
The bill emphasizes digital-first processes, including faceless assessments to minimize human interaction and corruption. A new Taxpayer Charter ensures fair treatment, privacy, and faster dispute resolution.
- Why It Matters: These reforms enhance transparency and trust, making tax administration more efficient and impartial.
Background and Legislative Journey
The Income Tax Bill, 2025, was first introduced on February 13, 2025, but withdrawn on August 8 to address drafting errors and incorporate stakeholder feedback. The revised bill, passed without debate amid opposition protests, reflects a comprehensive review by the Select Committee, which submitted a 4,575-page report on July 21, 2025. The bill now awaits Rajya Sabha approval and Presidential assent to become law.
Expert Opinions
Experts have praised the bill’s taxpayer-friendly measures. Rajesh Gandhi from Deloitte India noted that provisions for pension funds and sovereign funds are structured more clearly, though some industry suggestions (e.g., extending tax benefits to holding companies) were not adopted. Dinesh Kanabar, CEO of Dhruva Advisors, highlighted the removal of AMT for LLPs and relaxed provisions for charitable trusts as welcome changes.
Criticisms and Concerns
The bill’s passage without debate has drawn criticism from opposition parties and legal experts, who argue that such significant legislation requires thorough discussion. Some, like X user @ashish_nujs, have raised concerns about provisions granting tax officers broad powers to access digital spaces, potentially infringing on privacy.
Conclusion
The Income Tax Bill 2025 is a landmark reform aimed at modernizing India’s tax system. With simplified language, digital-first processes, and taxpayer-friendly provisions, it promises to reduce compliance burdens and litigation while aligning with the digital economy. However, its success depends on effective implementation, robust digital infrastructure, and addressing privacy concerns. As the bill moves to the Rajya Sabha, taxpayers should stay informed and prepare for the transition by April 1, 2026.
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