The Finance Minister of India has tabled the new Income Tax Bill, 2025 before the Parliament on 13 February 2025. The bill seeks to replace the existing Income Tax Act, 1961 with a linguistically simplified and structurally rationalized piece of legislation.
Effective date
The new law is expected to come into force from 1 April 2026 and apply to income earned and transactions carried on from Financial Year 2026-27 onwards. The existing law will apply till Financial Year 2025-26.
Need for new income tax law – Stated objectives
The existing Income-tax Act, 1961 had become very complex and bulky over a period of time due to multiple amendments to reflect and deal with changing economic and social scenarios. Also, many amendments were carried out to deal with various judicial pronouncements. Use of legal jargon, verbose provisions, multiple explanations and provisos, cross-referencing of Sections, etc. had made it difficult even for legal/ tax practitioners to read and interpret the provisions.
The proposed law seeks to address these problems by using simple and direct language in the provisions, reorganizing and consolidating Sections, using tables and formulae for ease of reading, removing redundant and obsolete provisions, etc. By this process, the overall volume of the income tax law is sought to be reduced by almost half in terms of number of words and chapters.
What changes in the new law?
- Simplified language – more direct and avoidance of legal jargons
- Logical rearrangement and renumbering of Sections
- Consolidation of provisions scattered and repeated across various Sections and chapters
- Movement of various related provisions to schedules for ease of reference
- Removal of explanations and provisos
- Extensive use of tables and formulae to replace verbose provisions
- Deletion of redundant and obsolete provisions
- Concept of “tax year” to replace existing “previous year”/ “assessment year”
What doesn’t change in the new law?
- Tax policy: No major change
- Tax rates
- Basic scheme of taxation of income
- Scope of total income and heads of income
- Persons liable to tax – individuals, HUF, partnerships
- Residential status – Concept of resident (R), resident but not ordinarily resident (RNOR) & Non-resident (NR)
- Exemptions/ deductions
- Old and new regime of taxation for individuals/HUF, companies, etc.
- Compliances and due dates
- Collection and recovery of tax – advance tax, TDS/TCS, self-assessment tax, etc.
- General scheme of assessment and reassessment, appeals, advance ruling, dispute resolution, etc.
- Penalties, offences and prosecution
As per the FAQs released by the CBDT, the new bill intends to carry forward in substance the existing law in the Income Tax Act, 1961 along with the amendments proposed in the Finance Bill, 2025.
What are the key things to look out for?
Intentional changes:
Though the stated objective is to not introduce any substantial change in the existing law, a first reading does indicate that there are certain conscious changes introduced in some of the provisions, which can materially alter the interpretation and implications of these provisions. Some of these examples are enlisted below:
- Interpretation of terms not defined in tax treaties – Existing Section 90(3) vis-à-vis proposed Section 159(7)
- Definition of Associated Enterprises and International Transaction in Transfer Pricing – Existing Sections 92A & 92B vis-à-vis proposed Sections 162 & 163
- Exemption to long-term capital gain upon reinvestment in specified long-term assets – Existing Section 54EC/54 vis-à-vis proposed Section 85
- Virtual Digital Asset (VDA) – included in the scope of assets or property in various Sections (like existing Section 281 vis-à-vis proposed Section 499)
- Virtual Digital Space – New concept introduced in the search and seizure provisions to expand the jurisdiction and powers of the tax authorities [proposed Section 261(i)]
- Exemption to income derived from “property held under legal obligation” - Existing Section 11(1)(a) read with Section 2(24)(iia) vis-à-vis proposed Section 335 read with Section 332
- Lower/Nil TDS certificate – Option available at present to only specified TDS provisions [Existing Section 197(1)] now proposed to be extended to all TDS provisions [proposed Section 395(1)]
Unintentional changes (Lost in translation):
There are other situations where the rephrasing of the provisions may have the unintended consequence of changing the meaning or implication of the earlier provision. A few examples are given below:
- MAT Credit to successor in case of conversion of private or unlisted public companies into LLP – Existing 115JAA vis-à-vis proposed Section 206(17)
- Timing of TDS in case of winnings from online games – Existing 194BA vis-à-vis proposed 393(3)
New language providing more certainty and clarity:
There are many instances where the existing language was ambiguous and capable of different interpretations, whereas the language in the new law provides greater certainty and clarity. It will also be interesting to see whether the new law will have any impact on the pending disputes for the past, either in favour or against the taxpayer. One example is as under:
- Restriction on purchase of third residential house – 1 year or 2 years? – Existing Section 54F(1) [proviso] and 54F(2) vis-à-vis proposed Section 86(5) and 86(6)
New language unsettling the settled issues:
Some of the terms and phrases have been historically used in the tax legislations (For example, “notwithstanding”, “without prejudice”, “charitable institution”, “property held under trust”, etc.). These terms either have a precise and definitive meaning in the legal world or have been subject matter of extensive interpretation by the courts in the past. Replacing such terms and phrases with other less precise ones may be counterproductive. Unintentionally, it may open up new avenues for disputes and lead to uncertainties.
Clerical errors and misses:
The herculean task of rewriting the whole income tax law has been undertaken in a very short span of time. Inspite of best of efforts, it is quite natural for some errors to have crept into the new draft. Some of these errors have already been identified and a corrigendum has been tabled alongside the new bill. There may be other errors, which one would hope to get corrected before the bill is finally enacted. Some examples may be as under:
- Existing Section 9(1)(vi)(c) vis-à-vis proposed Section 9(6)(a)(iii)(B) – “outside India” inadvertently mentioned in place of “in India”
- Existing Section 115BAA vis-à-vis proposed Section 200 – Omission of reference to proposed Section 148 (equivalent of existing Section 80M) as one of the permissible deductions
Transition provisions:
History teaches us that transitioning from an existing to a new law always comes with its own teething issues. As income tax is assessed and paid on income for each financial year, there are many interlinkages between different financial years. Elaborate repeal and savings clause have been proposed in the new law to ensure smooth transition (proposed Section 536). However, it is possible that some aspects may not have been specifically mentioned and may lead to ambiguity and avoidable disputes.
Next steps leading to the implementation of the new law
- Bill is expected to be referred to a Standing Committee for detailed examination and suggestions.
- Representations may also be received from various stakeholders (tax professionals, industry associations, etc.) and suitable changes may be incorporated in the bill
- Bill may then be considered, passed by the Parliament and enacted with assent of the President
- Draft rules and forms may be put up in public domain for feedback and suggestions before being notified
- Consequential changes will have to be made in the tax department’s software systems