Income Tax Bill, 2025

Context : Parliament passed a new income tax Bill to replace the Income Tax Act, 1961. The new Bill removes redundant provisions and archaic language, and is likely to come into effect from April 1, 2026.

UPSC Relevance:

Prelims , UPSC has asked questions on taxation, trends and important economic terms.

PYQ: 

2022 Prelims

Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with reference to India ?  

A An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment.

B A foreign company investing in India and paying taxes to the country of its base on the profits arising out of its investment.

C An Indian company purchases tangible assets in a foreign country and sells such assets after their value increases and transfers the proceeds to India.

D A foreign company transfers shares and such shares derive their substantial value from assets located in India.

2018 Prelims

With reference to India’s decision to levy an equalization tax of 6% on online advertisement services offered by non-resident entities, which of the following statements is/are correct?

1. It is introduced as a part of the Income Tax Act.

2. Non-resident entities that offer advertisement services in India can claim a tax credit in their home country under the “Double Taxation Avoidance Agreements”.

Select the correct answer using the code given below:

 A 1 only

 B 2 only

 C Both 1 and 2

 D Neither 1 nor 2

Important provisions of the Income Tax Bill 2025

For Individual Taxpayers

• Simplified Terminology – The bill eliminates the distinction between “assessment year” and “previous year” .
  • The Bill formally introduces the single concept of a “tax year,” which is defined as the 12-month period beginning on April 1st.
• Easier Refund Process – Taxpayers will now be able to claim a refund even if they file their returns after the statutory deadline.ie. if they are late. 
• House Property Income – The Bill clarifies that the 30% standard deduction for house property income will be calculated after deducting municipal taxes. It also ensures that the deduction for pre-construction interest on home loans is available for both self-occupied and let-out properties.
• Nil-TDS Certificate – The bill allows taxpayers with no tax liability to obtain a nil-TDS (Tax Deducted at Source) certificate.
  • The concept of TDS was introduced with an aim to collect tax from the very source of income. As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government. 
  • The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of TDS certificate issued by the deductor.
• Unified Pension Scheme (UPS) – Tax benefits under the Unified Pension Scheme have been aligned with the National Pension System (NPS), including tax-free withdrawal of up to 60% of the corpus at retirement.
• Commuted Pension – The bill provides clarification on the deductions applicable to commuted pension and gratuity payments received by family members.
• TCS on LRS – The bill clarifies that there will be a nil TCS (Tax Collected at Source) on remittances made under the Liberalised Remittance Scheme for educational purposes, as long as they are financed by a financial institution.
  • TCS refers to the tax payable by a seller which he collects from the buyer at the time of sale of goods. 
  • TCS is levied on specified goods like alcohol (1% – 5%), on specified leasing activities (2%), on sale of high value motor vehicles (1%) , and specified remittances under Liberalized Remittance Scheme (LRS) of RBI (5% – 20%).

For Corporate Taxpayers and Businesses

• AMT for LLPs – The Alternate Minimum Tax (AMT) for Limited Liability Partnerships (LLPs) has been aligned with the existing provisions of the Income Tax Act, removing an expanded scope that would have subjected LLPs not claiming specific tax benefits to a higher rate.
  • The expanded scope, which would have subjected LLPs not claiming specific tax benefits to a higher AMT rate of 18.5%, has been removed, reverting to the preferential rate of 12.5%.
  • A Limited Liability Partnership (LLP) is a business structure that combines the benefits of a traditional partnership with the limited liability protection of a company. In an LLP, partners are not personally liable for the debts and obligations of the business beyond their individual investment. This means their personal assets are generally protected from business liabilities. 

• Inter-Corporate Dividend Deduction – The bill reinstates inter-corporate dividend deductions for companies that have opted for concessional tax rates.
• Loss Carry Forward – The provisions for carrying forward and setting off losses have been amended.
  • It implies that if  loss of any business/profession (other than speculative business) cannot be fully adjusted in the year in which it is incurred, then the unadjusted loss can be carried forward for making adjustment in the next year.
  • This provision helps reduce taxable income in subsequent years.
• Electronic Payments for Professionals – Professionals with total annual receipts exceeding Rs 50 crore are now mandated to use electronic payment methods.
• Ambiguities related to transfer pricing provisions have been removed.
  • Transfer pricing is the price that is paid for goods or services transferred from one unit of an organization to its other units situated in different countries
• The reference to the “beneficial owner” has been omitted to align with Section 79 of the Income-tax Act, 1961.
  • While legal ownership refers to the registered owner of an asset, beneficial ownership focuses on who actually benefits from the asset or controls it. 
  • Example – A person who owns shares in a company but whose name is not on the register of shareholders. 

Other Changes 

• Simplified Structure – The bill significantly reduces the number of sections from 819 to 536 and the number of words from 5.12 lakh to 2.6 lakh, making the tax law more concise and easier to understand.
• Donations to NPOs – The exemption for donations to non-profit organizations has been corrected, allowing an exemption for 5% of the “total” donation instead of just 5% of “anonymous” donations.
• Digital Search Powers for Tax Authorities – The bill retains the contentious power for income tax authorities to access “virtual digital spaces,” such as email servers, social media accounts, and online banking accounts during searches and seizures. However, the government has stated it will issue a Standard Operating Procedure (SOP) to govern the handling of personal digital data.
• Expanded Definition of “Undisclosed Income” – The definition of “undisclosed income” has been expanded to include virtual digital assets during search and seizure cases.