New Income Tax Bill 2025 Passed in Parliament: Key features and Changes
New Income Tax Bill 2025 Passed, Key Changes, Refund Rules: Parliament on Tuesday passed a new income tax Bill to replace the six-decade-old Income Tax Act, 1961. The Bill is likely to come into effect from April 1, 2026. Here's all you need to know
Parliament on Tuesday passed a new income tax Bill to replace the six-decade-old Income Tax Act, 1961. The new Bill removes redundant provisions and archaic language, and is likely to come into effect from April 1, 2026,
Speaking in the Rajya Sabha, Finance Minister Nirmala Sitharaman said, “This leaner and more focused law is designed to make it easy to read, understand and implement.”
The new Income-tax Bill, 2025 was first introduced in February, and then sent to a Parliament Select Committee. On August 12, the government introduced a new version, the Income-Tax (No.2) Bill, 2025, incorporating most recommendations of the Committee.
Here are the key features of the new Bill.
Why the 1961 Act Needed a Complete Rewrite
When it was enacted in 1961, the Income-tax Act was built for a different economy. In those days, the scope of taxable transactions was narrower, compliance was largely manual, and disputes were handled through face-to-face interactions with tax officers. Over the decades, however, the law evolved into something far more unwieldy.A maze built over decades: Across six decades, frequent Finance Act amendments layered definitions, exceptions, and cross‑references, making the law hard to navigate even for routine filings.
Overgrowth of provisions: By 2025, the Act had grown to 800+ sections, supported by a thicket of rules, circulars, and notifications complexity that raised compliance costs.
High litigation and uncertainty: Ambiguous drafting left room for competing interpretations, fuelling disputes and multi‑year case backlogs.
Mismatch with digital reality: The framework was stretched to accommodate e‑commerce, platform income, and cross‑border flows but remained rooted in paper‑era structures.
Structured feedback and revisions: A Select Committee review of the February 2025 draft flagged 285 refinements; 32 major changes informed the revised text
In short, the 1961 law had become a patchwork, functional but friction‑heavy. The new bill responds with a cleaner structure and clearer drafting to lower the day‑to‑day burden on taxpayers and administrators alike.
The SIMPLE Framework: Principles Behind the Rewrite. The SIMPLE framework is a structural foundation of the new law, intended to guide interpretation, administration, and future amendments.
S — Streamlined: Cuts the volume from 800+ sections to 536, arranged into 23 chapters and 16 schedules. Plain‑language drafting reduces dependence on dense legalese.
I — Integrated: Consolidates related rules to avoid duplication and scattered cross‑references; improves on‑screen form design for e‑filing.
M — Minimized Litigation: Clarifies procedures and threshold conditions to narrow interpretational gaps that commonly led to disputes.
P — Practical: Aligns compliance steps with realistic taxpayer capacity, especially for sole proprietors, small firms, and professionals.
L — Learn & Adapt: Structures the code for incremental updates so emerging income streams can be accommodated without disruptive rewrites.
E — Efficient: Extends faceless, digital‑first administration to speed up assessments and refunds while reducing in‑person interface
Together, these six pillars aim to translate policy intent into everyday ease, shorter reading paths, fewer disputes, and technology‑enabled administration that meets today’s pace.
Major Changes Introduced
The bill is not just a cleaner rewrite of the old law. It also introduces substantive structural, procedural, and conceptual changes. These adjustments are designed to address long-standing bottlenecks while preparing the Indian tax system for future demands.
Reduced Structure for Easier Navigation: The statute is compressed from over 800 sections to 536, organised into 23 chapters and 16 schedules. This consolidation reduces the need for repeated cross‑referencing and helps both taxpayers and professionals locate relevant provisions more quickly.
Digital‑First & Faceless Administration: The bill extends faceless assessment to more processes, including scrutiny, reassessment, and appeals. Mandatory e‑notices become the norm for most communications with the department. This reduces physical office visits, cutting opportunities for harassment and bias.
Retention of ₹12 Lakh Basic Exemption Limit: The existing ₹12 lakh exemption remains, providing stability for taxpayers while revised slabs marginally reduce burdens for middle‑income earners.
Flexible Refund Mechanism: Taxpayers can now claim TDS refunds even after missing the ITR deadline without penalty. This change mitigates the financial impact of procedural delays.
Introduction of 'Tax Year' Concept: Replaces the 'Assessment Year' with 'Tax Year' to simplify reporting and compliance timelines.
Taxpayer Protections & Trust Oversight: Mandatory notices before enforcement actions, and tighter rules for anonymous donations to religious trusts not engaged in approved social service.
These changes combine structural streamlining with procedural safeguards, aiming to make compliance easier while protecting taxpayer rights.
Benefits Across Taxpayer Segments
By tailoring changes to different taxpayer profiles, the bill aims to distribute compliance benefits widely, from individuals to complex enterprises. Let’s get a closer look at it:
Salaried Individuals: Stability from the unchanged exemption limit and modest relief from slab adjustments. Consolidated provisions improve clarity in computing total income.
Small Businesses & Professionals: Simpler compliance structure reduces hours spent on filing and record‑keeping. Digital‑first processes eliminate travel to tax offices.
High‑Net‑Worth Individuals: Predictable timelines and clearer penalty provisions reduce litigation risks, aiding in long‑term financial planning.
Startups & Digital Enterprises: Alignment with digital economy realities reduces grey areas in taxation of cross‑border and platform income, with faster refund cycles aiding cash flow.
Yet, even with these benefits, the transition from an entrenched legal framework to a brand-new code will present challenges that taxpayers and administrators must be ready for.
Before vs After — Key Differences and Implications
This comparison illustrates not just a change in volume and terminology, but a rethinking of structure and safeguards.
Aspect Income-Tax Act, 1961 Income-Tax (No. 2) Bill, 2025 Implication
Volume of Law 800+ sections 536 sections Shorter, easier to navigate. Reduces compliance time.
Organisation Scattered provisions, frequent cross-referencing 23 chapters, 16 schedules Logical grouping of related provisions improves readability.
Terminology Assessment Year Tax Year Easier to understand for new taxpayers.
Refund Rules Strict deadlines; missed ITR meant forfeiting the refund Refunds allowed post-deadline without penalties Reduces financial loss from procedural delays.
Administration Partial faceless processing Fully digital-first & faceless Transparency and reduced physical interface.
Enforcement No uniform notice protocol before action Mandatory notices before enforcement Safeguards against arbitrary action.
Rules about return filing, TCS on LRS
The first draft of the Bill, introduced in February, had included a provision — Clause 263(1)(a)(ix) — that implied that taxpayers could only claim a refund if they had filed tax returns on or before the due date. The new version has removed this provision.
“The provision represented a significant departure from the established legal position, where refunds could be claimed even for belatedly filed returns. Recognising the potential for this to cause undue hardship and create ambiguity, the newly introduced Bill has completely omitted this restrictive clause,” Amit Maheshwari, Tax Partner, AKM Global, said.
The new Bill also clarified that there will be nil TCS on Liberalised Remittance Scheme (LRS) remittances for education purposes financed by any financial institution, a provision that had gone missing in the earlier version.
Changes for corporate taxpayers
The Bill has corrected other drafting errors such as those related to inter-corporate dividend deductions for companies availing concessional tax rates. The applicability of the Alternate Minimum Tax (AMT) for Limited Liability Partnerships (LLPs) has been aligned with the existing provisions of the I-T Act, by removing the expanded scope that would have included LLPs not claiming specific tax benefits and attracted a higher rate of 18.5 per cent as against the preferential rate of 12.5 per cent.
The Bill has also allowed taxpayers who do not have any I-T liability to obtain a nil-TDS certificate.
Additionally, the Bill has been tweaked to remove ambiguities related to transfer pricing provisions along with changes relating to the carry-forward and set-off of losses. The reference to the beneficial owner has been omitted to align with Section 79 of the Income-tax Act, 1961, along with a clarification of applicability of 30 per cent standard deduction after deduction of municipal taxes while calculating house property income.
The government has corrected the anomaly regarding donations linked to non-profit organisations in line with the recommendation of the Select Committee. Exemption has been allowed to NPOs for 5 per cent of the ‘total’ donation instead of just 5 per cent of ‘anonymous’ donations, as is the case in the existing Act.
Tax year, digital searches
The new Bill introduces the concept of “tax year”, which has been defined as the 12-month period beginning April 1. The concept was introduced in the first draft in February. The new Bill removes redundant provisions and archaic language and reduces the number of Sections from 819 in the Income Tax Act of 1961 to 536 and the number of chapters from 47 to 23. The number of words has been reduced from 5.12 lakh to 2.6 lakh in the new Income Tax Bill, and 39 new tables and 40 formulas have been introduced.
The government has, however, retained the contentious definition of “virtual digital space” — the powers to call for information by income tax authorities during surveys, searches and seizures, including email servers, social media accounts, online investment, trading and banking accounts, remote or cloud servers and digital application platforms. Sitharaman said the tax department will bring out standard operating procedure (SOP) for handling personal digital data seized during searches.
Taxation Laws (Amendment) Bill
Separately, the government also brought in the Taxation Laws (Amendment) Bill, 2025, which amends the Finance Act, 2025. It has exempted income from dividend, interest, long-term capital gains or other incomes from investments made by the ‘Public Investment Fund of the Government of the Kingdom of Saudi Arabia’ and its wholly-owned subsidiaries, which make investment, directly or indirectly, out of the Fund in India under clause (23FE) of the Income-tax Act.
Saudi’s Public Investment Fund has over $925 billion assets under management and was notified for I-T exemption in November 2022. However, the Fund had faced some restrictive norms related to investments through various subsidiaries. With this amendment, the government has granted complete income tax exemption to Saudi’s Fund by specifying its name explicitly in the Act as has been done earlier for the Abu Dhabi
Investment Authority (ADIA).
The Taxation Laws (Amendment) Bill also extended income tax benefits under the market-linked national pension system (NPS) to the guaranteed unified pension scheme (UPS), by allowing tax-free withdrawal of lump sum payments or the accumulated UPS corpus, up to 60 per cent, at the time of retirement.
Final Thoughts
Replacing a law that has been in place for over six decades is both a bold move and a high-stakes gamble. The Income-Tax (No. 2) Bill, 2025, is ambitious in its goals: making tax law simpler, clearer, and more responsive to modern economic realities. If implemented well, this reform could serve as a blueprint for future legal overhauls in other sectors. If mishandled, it could create new forms of complexity that undo its intended benefits.