India: Exploring the features of the Income Tax Bill, 2025

published on 24 February 2025 | reading time approx. 4 minutes

The Income-tax Bill, 2025 (“Bill”) is set to replace the Income-tax Act, 1961 (“ITA”) ushering in a significant transformation in India’s taxation framework. This overhaul aims to simplify tax compliance, reduce disputes, and make the taxation system more current. The Bill has been not introduced any structural changes in the taxation framework as it neither tinkers with the tax rates nor proposed any new schemes of taxation.

The Bill is the result of a comprehensive review of the existing ITA. The objective was to make the ITA concise, lucid, easy to read, and understand and aims to create a tax code that is straightforward, transparent, and less complex.

Following the release of the Bill, the government has issued a series of 12-page and 36-page FAQs, designed to clarify various provisions and aspects of the new legislation. Additionally, the Central Board of Direct Taxes (“CBDT”) has provided a section mapping navigator, offering a clear comparison between the old and new provisions.

The Bill is expected to be enacted with effect from 1 April 2026. Some key features of the New Income-tax Bill:

Introduction

A key change in the new Bill is the introduction of the term “Tax Year”, which refers to the period of financial year commencing on 1 April. This term will apply to all transactions and income pertaining to that period.

This change replaces the earlier distinction between Assessment Year and Previous Year, thereby providing a single year concept for taxation purposes, making it simple to understand. The Assessment Year and previous year constructs, lead to confusion since, any communication between taxpayers and tax department (including tax returns, notices etc) referred to the Assessment Year, which was the year following the relevant financial year in which income was derived.

With the introduction of the ‘Tax Year’ which aligns with the relevant financial year in which income is received, any confusion with respect to the relevant year of taxation and applicable provisions and interpretation issues in connection with the applicability of the amendments introduced by the Finance Bill every year are expected to be eased out.

Financial Year, on the other hand, will still be used to determine timelines for compliance and procedural aspects.

Shorter and concise

The new Bill significantly reduces the overall length and complexity of the previous tax framework.

As per the tax department’s own admission, the number of sections in the Bill have been reduced by approximately 40 per cent, while the chapters have been reduced by around 50 per cent. One of the notable changes is the removal of nearly 1,200 Provisos and 900 Explanations from the previous Act.

Over the period, numerous amendments were made into the 1961 Act using provisos and explanations to explain the intent of the legislature and/or to enhance the scope of the provision. Eventually, the provisions in the ITA were entangled by a myriad of provisos and explanations, which made the law ambiguous and difficult to interpret.

The Bill now uses subsections and clauses instead of relying on complex provisos and explanations to various exceptions, thereby infusing simplicity and clarity.

Use of formulae and tables

To enhance clarity, formulae and tables have been incorporated wherever feasible. This includes areas such as tax calculations, deductions, and assessment timelines, which are straightforward to understand and apply.

Repeal and savings provisions

The provisions that apply to Tax Year before 1 April 2026 will be governed by the Repeal and Savings provisions. This ensures that any pending issues related to the preceding years are handled appropriately under the previous legal framework.

Harmonization of salary related provisions

The provisions pertaining to salary taxation have been consolidated at one place in the Bill for ease of reference and understanding. The deductions, exemptions etc, which hitherto were provided for in various sections, have been incorporated in a tabular format for simplification and better reading.

Certain exempt allowances, which were previously dealt in separate Sections, are now covered in Schedule II of the new Bill.

Some misses, areas of clarifications

It was widely speculated that various provisions relating to Tax Deduction at Source (“TDS”) prescribing various rates would be streamlined into common rates. However, this does not appear to have been done. Besides, there is a new requirement that to be able to claim refund of taxes paid in advance, tax returns have to be filed within the due date and belated returns may not suffice. This is one provision which is likely to create some difficulty and may be discussed at length. Measures surrounding Base Erosion Profit Shifting (“BEPS”) have also not found their way into the new Bill and this is an area to watch out for in the coming years. Considering the backlog of litigation, some changes were expected around easier and faster dispute resolution mechanism, however presently the framework remains unchanged.

Conclusion

Overall, the Bill aims to downsize the existing legislation in terms of words, removes redundant provisions, minimize the use of jargons, and uses a moresimpler language to make it easier to read. The incorporation of tabular format and formulae to explain the provisions infuses clarity and goes with the intent of simplification and better understanding. The wording of many provisions (other than cosmetic simplification efforts) has not been tinkered, which may enable the Courts and Tribunals decisions (Income Tax Appellate Tribunals, High Courts and Supreme Court) to continue to have relevance.

With an expected implementation date of 1 April 2026, the tax community have been provided sufficient time to assess the impact and prepare themselves accordingly. In the meantime, the Government has also constituted a Select Committee to review the Bill, and a draft report of the Committee is expected to come in the monsoon session of Parliament.

The impact on taxpayers, both individuals and businesses, will become clearer as they begin to navigate through the new Bill. The taxpayers will have to adjust/realign their accounting systems according to the new section numbers and in general, the proposed law.

Having said that, any new change in the legislation brings with itself its own set of challenges as it unsettles the existing practice. As the Bill does not brings any change in the core structural framework, questions have been raised as to whether such an exercise was even relevant or required. While the removal of redundant provisions is a step in a right direction, but does it make sense to change the language of the law altogether? Whether the attempt to provide simplification may cause a shift from an acceptable level of uncertainty in tax regime to greater uncertainty and emerging of new controversies? The answers to these questions will unfold in the course of time as the law becomes effective and come into practice.