India’s Income Tax Bill 2025 - Ushering into New Epoch of Taxation in India

India’s Income Tax Act, 2025 heralds a pivotal modernization of the nation’s tax framework. On 11th August 2025, the Income Tax (no. 2) Bill, 2025 was passed by the Lok Sabha and shortly thereafter by Rajya Sabha, ultimately receiving President’s ascent on 21-22 August 2025. The Legislation will replace the decades old 1961 Act from 1st April 2026.

This development marks a watershed moment in India’s tax landscape. While much of the structure of the 1961 Act has been preserved including no new tax rates or rate alterations, the new legislation incorporates extensive refinements embodying a sweeping simplification of legal language, reduction of redundant provisions, consolidation of amendments and streamlined organisation. For businesses, investors, and not-for-profit entities, the Income Tax Act 2025 provides a clearer and more contemporary framework while also demanding timely adaption.

Structural and Linguistic Simplification

Reduction in Section:- Since its enactment in 1961, India’s Income Tax Act has undergone countless amendments leading to a bloated structure with 819 effective Sections and 47 Chapters. This complexity triggered confusion, litigation and inefficient compliances. Thus, the new drafted Income Tax Act, 2025 slashes the number of sections to 536 in the new Act nearly halving complexity. The out-dated provisions like Fringe Benefit Tax were removed, more than 1200 provisions and 900 explanatory clauses were eliminated, provisions scattered across disparate sections like those dealing with salary perks, gratuity, HRA, pensions are now centred under one section and schedule, the Act consolidated TDS/TCS Rules, e-filing details and organisational provisions (for not for profit) into unified chapters.

Introduction of Tables and New formulae:- There has been introduction of 39 new tables and 40 new formulae for improved clarity and navigation. Important details like TDS/TCS rates, presumptive taxation, salary deduction and other computations, deadlines, exemptions are now presented using tables. Formulae now define how to calculate key elements such as Advance Tax liabilities, Interest on refunds, Gratuity exemptions, cost of acquisition of capital gains.

Unified “Tax Year”

The Income Tax Act, 2025 eliminates the traditional dual concepts of “Previous Year” and “Assessment Year” replacing both with a single streamlined term “Tax Year”. Now, the Tax year corresponds directly to the financial year i.e. 1st April to 31st March. However, if a business or profession is newly established or new source of income arises during a financial year, the tax year begins from that date and ends with the standard financial year (31st March). This change does not disrupt existing due dates, advance tax schedules, or refund provisions.

Personal Taxation – Aligning with Past practise

The below changes/alignment done under Personal Taxation to ensure clarity, continuity and reducing risk of litigation particularly benefiting ex-pats, high net-worth individuals and family owned businesses.

1. Residential Status for Indian citizens leaving for Self-Employment abroad narrowed- In the 2025 Act, the words “for the purpose of employment outside India” restored to “for employment outside India” meaning the relief of 182 days to Indian citizen going abroad will available only in case of traditional employer-employee situation. Thus, the Indian citizens leaving India for self-employment, freelancer, business or professional assignment abroad will not be covered under employee-employee relationship and their residential status in India will be seen if he/she stays for 60 days or more in India in the FY.

2. House property provisions aligned with old Act

• Deduction w.r.t. Pre-Construction interest aligned:- In the Original Draft Bill, the interest on loan w.r.t. pre-construction properties was restricted to only self-occupied properties as against the 1965 Act. However, in 2025 Act, said tax relief reinstated to let out properties also. Thus, the deduction of pre-construction interest is available for both self-occupied and let out properties reinstating parity from 1961 law.
• Vacancy allowance provisions aligned:- In the Original draft Bill, the property owners were taxed on the notional rent even if they received less or no rent due to vacancy resulting in potentially higher tax liabilities. However, in 2025 Act, the phrase “in normal course” has been dropped reinstating the old provision aligned with 1961 Act i.e. Tax on lower value of actual rent received or receivable.

3. Gift exemption benefit extended to include both Maternal and In-laws relatives:- The Gift benefit exemption previous limited to paternal-line relatives has been now expended to include maternal relation and even spouse ascendants.

4. TDS on foreign currency salaries:- Explicit provisions reintroduced in alignment with 1961 ACT to ensure that TDS on payment of salary to employees abroad is calculated converting the salary into INR using the buying rate as per SBI on the date of deduction.

5. Insurance Policy Exemption Limit evaluated on Yearly basis:- With respect to the policy issued after 1st April 2023, the limit on insurance premium (i.e. 2.5 lakhs in case of ULIP and 5 lakh in case of other policy) will be evaluated on yearly basis and not average across the entire policy term. In other words, in order to avail the exemption, the annual premium must stay within the limit every year during the policy term.

Business Income and Deductions

The 2025 Act strikes a careful balance between plugging loopholes while ensuring legitimate deductions remain available which is crucial for tax provision and audits for businesses and individuals.

1. Proportionate deduction allowed for rent, repair, taxes when assets used partly for business:- If a property/ asset is used partly for business purpose and partly for personal use (eg. in case of business carried out from home), the expense pertaining to rent, repair, municipal taxes, etc. will be allowed as deduction on proportionate basis under 2025 Act.

2. Tax relief revived by allowing dedicated deduction for repair and depreciation (on intangible assets):- The entire amount of repair and maintenance expenses incurred to maintain the business assets i.e. plant, machinery, furniture, etc. are allowed as deduction. Further, depreciation on intangible assets like trademark, software, patents are eligible as deduction. This restores clarity and tax benefits in alignment with 1961 Act.

3. Scientific Research deduction realigned (approval only required for specific R&D facilities):- Expenditure pertaining to scientific research for in-house development and research activity (not related to cost of land or building) is allowed provided they are certified by prescribed authority in case of companies engaged in bio-technology or in the business of production of specified article reinstating the provisions as per 1961 Act.

4. Amortisation of Preliminary expenses clarified to cover both specific and general expenses:- It has been clarified and streamline that preliminary expenses namely general expenses like feasibility study, market survey, legal charges relating to setting up of business and specific expenses like legal fees for drafting MOA, issuing shares, etc. is allowed to companies amortised over the period of five years. Thus the set-up and expansion cost can be systematically written of in five years whether generic or specific nature of expense.

5. Relief to TDS defaulters-Expense allowed once TDS paid:- In 1961 Act, if TDS is not deducted on time, the corresponding expense (i.e. 30% in case of residents and 100% in case of non-residents) was permanently not allowed even if deducted at later stage. However, 2025 Act has rectified this anomaly and the taxpayer can reclaim the expense in the later year when TDS is payment is actually made reducing financial penalty in case of timely errors.

Capital Gains and Corporate Restructuring

In the 2025 Act, with the updates and clarifications, Group reorganisations, international investments and exit by private equity or venture capital firms will find greater certainty. However, businesses still need to be careful when dealing with currency fluctuations and tax rules around demergers.

1. Fair Market Value (FMV) to be used where intended:- The 2025 Act ensures, FMV of asset is used only when the laws specifically allows as against its usage in 1965 Act where that wasn’t the intent of law leading to unfair tax adjustments.

2. Block of Asset Approach for Depreciation and Capital gain retained:- The 2025 law aligns with “block of assets” method for calculating deprecation and capital gains for depreciable assets falling under same category like machinery, furniture, intangibles, etc. This is any asset within a block is sold, capital gains are calculated on the block’s overall w.d.v. value and not individual transaction.

3. Relief to NRI investing in Indian Companies via unlisted securities:- In 2025 Act, NRI excluding FPI (foreign portfolio investors) got specific relief from Long Term capital gain arising from unlisted securities (Equity shares and debentures) of Indian Companies by computing the LTCG on original foreign currency used for acquisition (eg. USD, GBP) and at the end convert net gains into INR. This ensures fair taxation on actual economic gain to NRI investing in start-ups and private companies in India through unlisted securities. However, in case of listed securities, NRI remain taxed on INR based gains regardless of currency fluctuation.

4. Carry forward of losses – “Beneficially held” retained:- In Income Tax Act, 2025, in case of carry forward of losses, the language was changed to beneficially owned in the original bill, however, “beneficially held” is now retained in the new Act aligning with 1965 Act meaning the companies continued to retain the ability to carry forward losses seamlessly provided shareholding test meet 51% criteria for threshold.

5. Restoration of Inter-Corporate Dividend deduction for 22%:- The revised Act reinstates the inter-corporate dividends deduction by Indian companies choosing concessional 22% tax regime receiving dividend from other companies/ business trust and passing on to their shareholders, thereby avoiding double taxation on the dividend amount (which were previously omitted in the original draft) meaning thereby dividends can move through corporate chains without being taxed multiple times.

International Tax and Transfer Pricing

1. Restoring clarity on “Royalty in India” replacing “Outside” Ambiguity:- In 2025 Act, Royalty are taxable only when India based usage is involved. In Original bill, in defining the royalty income, “outside India” was mistakenly used resulting in royalties outside India as taxable. This ambiguity is corrected in the Act 2025 meaning royalties are taxable only when the services or rights are used within India aligning with 1965 Act.

2. Clear “Associated Enterprise” Definition restoring “Anytime during the year” test:- The concept of associated enterprises streamlined and consolidated under one clause enabling the businesses to easily determine whether AE relationship exists. The new Act reinstated the principle that if AE conditions are met at any time during the tax year, the Companies are deemed associated for the entire year.

Compliance, Administration and Procedural Relief

In 2025 Act, the compliance framework has been softened and rationalised with more practical approach to administration.

1. NIL and lower TDS Certificate restored:- The new Act reinstated the availability of Nil TDS Certificates, allowing taxpayers with no tax liability to secure certificates correcting an unintended omission in the earlier draft. Thus, the taxpayer like senior citizens with tax-exmept interest can avoid TDS by seeking NIL or lower TDS certificate.

2. General Anti Avoidance Rule (GAAR) provision:- The 2025 Act reinstated “in the circumstances of the case” into GAAR provisions aligning them with 1961 Act in order to safeguard against misuse of anti-avoidance powers in transactions that are bonafide business arrangements. Thus, the tax officials must analyse unique context of specific transaction for the purpose of checking tax avoidance scheme and cannot apply GAAR mechanically.

3. Discretionary penalty for non- maintenance of books of accounts:- The 2025 Act has shifted the penalty of Rs. 25000/- for non-maintenance of books of accounts as automatic to at the discretion of the tax officer to drop said penalty in genuine or honest cases.

4. Refund and Late filing:- The 2025 Act removed a clause that barred refunds from the returns filed after the due date restoring the alignment with 1961Act’s refund provisions.

5. Due dates in case of Transfer Pricing:- In case of transfer pricing transactions i.e. international transaction with related party or specified domestic transactions, the due date to file Income Tax return will follow as 30th November in alignment with 1961 Act.

6. Digital payment requirement mandatory for high end revenue professional and not just businesses- Now professionals such as doctors, lawyers or consultants with gross receipts exceeding Rs 50 crores must start accepting payments through electronic modes a requirement which was previously restricted to business now expanded to include large professional practices.

Transitional Provisions and Sector Specific Matters

Transitional clarity in 2025 Act provide will allow company to plan restructuring, fund migrations and contract review.

1. Repeal and Savings :- The Agreement, Circulars, schemes under Income Tax Act, 1961 will continue unless inconsistent with 2025 Act.

2. Telecom Sector:- Since the telecom companies invest heavily in buying spectrum rights, the 2025 Act ensured continuity for telecom companies preserving the benefit of amortization of spectrum usage fees over the period of license validity.

3. IFSC Reallocation window extended to 31st March 2030:- In order to encourage investment and operational build up in HUB’s like GIFT City, the relocation benefit sunset w.e.t. tax exemption for transferring investment into International Financial Services Centre (IFSC) funds (without triggering Capital Gain Tax) extended to 31st March 2030.

4. Omission of Equalisation Ley:- Equation Levy imposing 6% charge on payments for online advertisement made by Indian businesses to foreign entities abolished w.e.f. 01 April 2025 will no longer apply in 2025 Act.

5. Micro and Small Enterprises (MSE) harmonizes with MSME policy:- The 2025 Act ensured that payments due to MSEs are directly governed by timelines specified in case of MSME law (15 or 45 days) making the system much easier to follow.

Conclusion

The Income Tax Act, 2025 represents both continuity and change at the same time. While most issues has been resolved however key policy questions in case of demergers, capital gain reforms, LLP taxation, etc. remains open. The businesses should start preparing for the transition in April 2026 beforehand like revisiting shareholding structures, loss carry forward positions, inter-company agreements, preparing compliance team for new reporting formats, digital payment obligations and refined GAAR applications.

Though, the Income Tax Act, 2025 is simpler version and litigation resistant framework but proactive adaption will be critical.

At ILO, we understand the challenges that businesses, professionals, and individual taxpayers may face with these changes. Our expert advisory and compliance services are designed to help you stay fully aligned with the provisions of the Income-tax Act, 2025. We assist in the following areas:

• Tax Advisory & Planning
• Compliance and Filing Assistance
• Handling Capital Gains & Investments
• Support with International Taxation
• Employee Benefits & Welfare
• Ongoing Updates and Assistance

With our strong expertise in taxation and digital compliance, ILO ensures you can navigate the evolving tax landscape with ease, achieving the best possible outcomes while focusing on your core activities.