India’s Income-Tax Bill, 2025: A Comprehensive Overhaul of the Direct Tax Regime

The Income-Tax Bill 2025 is a reform of significant magnitude and it is expected to replace the sixty-year-old Income-Tax Act 1961. The Bill was introduced in the Lok Sabha on 13 February 2025, and was drafted during a six-month period, with some 75,000 person-hours of tax officials input. Its features include to streamline the old language, to remove duplications, to reduce litigation, and to increase compliance with increased clarity and technology. The Bill thus introduces efficiency, transparency and agility to the digital economy without increasing or decreasing the current tax rates, but rather developing a leaner structure that is aimed at enabling expansion and comfort of doing business. 

On 11 August and 12 August 2025, the Lok Sabha and the Rajya Sabha respectively passed the Bill along with the Taxation Laws (Amendment) Bill, and it will come into effect on 1 April 2026, which in turn supersedes the 1961 Act. Transitioning provisions were added to ensure continuity as far as assessments and tax credits and carry-forward losses were concerned. The government is going to release the FAQs, guidance notes, and simplified rules and renovate information technology systems to meet the new framework. Although it was withdrawn on 8 August before being re-introduced as the Income-Tax (No. 2) Bill, 2025, it was passed with great rapidity, which highlights the urgency of reforming the Indian direct tax system. 

Key Changes, Comparison by the Previous Framework, Implications of the Old Regime and Rationale of Reform. 

The Income Tax Bill, 2025, has structural and procedural changes that radically change the tax code without repealing the substantive part of it, including tax rates, definitions, and penalties. The major changes are a great decrease in Bill volume: the number of sections is reduced to 536, the number of chapters to 23, the number of words to 2.6 lakh, with the elimination of 1,200 provisos, 900 explanatory notes and outdated clause like investment allowances on new plant and machinery and pre-emptive purchase of immovable property. The grammatic structure of the archaic like notwithstanding anything contained has been substituted with comparatively shorter terms; excessively long sentences have been divided and active voice has been used to facilitate readability. The Bill includes 39 new tables and 40 formulas to help present intricate information in a concise form such as TDS/TCS rates and salary perquisites and move enumerations to schedules to help them be easily consulted. 

There are some specific additions that deal with the digital age: virtual digital assets (VDAs), including cryptocurrencies, are now disclosed income, and a tax agency has the right to access so-called virtual digital spaces (e.g., email servers, social media accounts) when conducting a search, and may also circumvent access codes when ordered to do so. The compliance is provided by consolidated TDS/TCS provisions in one section, the broadening of lower-TDS certificates, and rationalised audit regime, which only provides business receipts with 95 per cent online mode threshold. In the case of non-profits, a single chapter classifies organisations into seven sub-types, transitioning to a operate on a cash basis, as well as banning non-incidental commercial operations. Rules on transfer pricing are made clearer and the word determined has been used instead of computed in reference to arm-length prices and export incentives have been increased to decrease litigation. 

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Conversely, the 1961 Act, which was passed in a pre-digital economy, developed over a series of amendments, so that by the time it was enacted it was a bloated, convoluted statute full of cross-references, provisos and explanatory notes that often spawned interpretation controversies. By way of example, definition of income on business connections was unclear whereby taxing only on the income that could be reasonably obtained was permissible, thus making such cases subject to litigation regarding attribution; the new Bill clarified that it can be taxed on attributable income, which is now certain. The TDS provisions were scattered over the Act making compliance difficult, and non-profits were at odds with fragmented rules that could be used to find loopholes in capital gain reinvestment. The consequences of such an ancient regime were severe: the number of litigation cases overwhelmed the courts, and by 2024 more than 100000 unresolved tax cases existed, costing the taxpayer faith and causing delays in collecting revenue. Economic effects were a discouragement of foreign investment because of unpredictable interpretations as it has been seen in the transfer pricing cases where the ambiguous definition of an associated enterprise has resulted in lengthy appeals. The complexity was unequally distributed socially, disfavoring small taxpayers and non-profits, encouraging non-compliance and avoidance, and estimates of the tax gap were estimated to range between INR 5-7 lakh crore a year. These have been as a result of the failure of the Act to accommodate globalization and digitization where VDAs and online transactions have soared up without a systematic taxation standard leading to loss of revenue and gaps in enforcement. 

The necessity to change is therefore based on empirical inefficiency, the opaqueness of the 1961 Act led to an annual rise in tax appeals of between 15 and 20 per cent, according to CBDT data, which is counteracting India scorecards on ease of doing business. The Bill avoids this how by reducing ambiguity via the introduction of tables (to reduce the likelihood of misinterpretation) and the why by keeping up with current demands (e.g., the addition of VDAs to reflect new sources of income in the context of the crypto market, which was estimated at 4 bn dollars in 2024). The rationale behind this reform is that there have been many consultations, such as 285 recommendations by a Select Committee, so that the reform addresses root causes such as litigation-prone provisos and hence leading to voluntary compliance and increasing revenue efficiency; other instances of such simplifications in jurisdictions have led to 1015% increase in compliance. In the absence of these reforms, the endemic complexities would continue to increase the fiscal strains especially with the growth objectives of the Indian GDP demanding strong mobilisation of taxes.

Overlaps and Conflicts in Provisions

As it attempts to achieve coherence, the proposed legislation, nonetheless, has overlapping provisions, which may hurt the aims of simplifying it. In relation to non-profit entities, the amalgamated chapter now provides having earlier registration of entities that were earlier relieved, thus overlapping with the Societies Registration Act, 1860, and creating double compliance costs. The definition of incidental commercial activities such as in the case of hospital pharmacies, runs the risk of taxation despite the charitable purpose behind it. In the transfer pricing field, broader definitions of associated enterprise can come into conflict with GST requirements on related-party transactions, resulting in inappropriate valuations and cross-regime conflicts. Similarly, the non-capital-determinative character of the vacancy allowance as let in normal course conflicts with capital-gains rules, which have an intent criterion which is non-determinative, granting officers leeway on the interpretation of the vacancy allowance. The persistence of the fundamental elements of the 1961 Act in addition to the layers of simplification without overall harmonisation with other ancillary statutes, including the Finance Act, 2025, which, in some aspects, momentarily overlaps with other provisions like block assessments, are major contributors to these frictions.

Probable Challenges Post-Enactment

Even after enforcement, several challenges may persist, rooted in implementation and adaptation gaps. Transitioning the Income Tax Department’s IT systems could face delays, as rebooting for new formulas and tables requires extensive testing, potentially causing filing disruptions in the 2026-27 assessment year and leading to backlog spikes. Ambiguities in provisions like VDA taxation, without detailed rules on valuation, might sustain litigation, as taxpayers challenge access to virtual spaces on privacy grounds under the Digital Personal Data Protection Act, 2023. For SMEs, enhanced compliance tools assume digital literacy, but rural entities may struggle, widening the urban-rural divide and non-compliance rates. Moreover, the CBDT’s expanded rule-making powers could invite judicial scrutiny if perceived as overreach, echoing past challenges with faceless assessments. These hurdles are well-established given historical precedents: similar overhauls like GST in 2017 faced initial teething issues, with compliance dipping 10% before stabilizing. Thus, while the bill premises success on simplification, its efficacy hinges on proactive rulemaking and stakeholder training; failure here could perpetuate the very litigation it seeks to curb.

Author: Ritika Khatri, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney. 

References

1.     The Income-Tax (No. 2) Bill, 2025, Bill No. 110 of 2025, Lok Sabha (India), https://prsindia.org/files/bills_acts/bills_parliament/2025/Income-Tax_(No._2)_Bill,_2025.pdf.

2.     The Income-Tax Act, 1961, No. 43 of 1961, India Code (1961), https://www.indiacode.nic.in/bitstream/123456789/2435/1/a1961-43.pdf.

3.     The Taxation Laws (Amendment) Bill, 2025, Bill No. 111 of 2025, Lok Sabha (India).

4.     The Societies Registration Act, 1860, Act No. 21 of 1860, India Code (1860), https://www.indiacode.nic.in/bitstream/123456789/2262/1/AA1860-21.pdf.

5.     The Digital Personal Data Protection Act, 2023, No. 22 of 2023, India Code (2023), https://www.meity.gov.in/writereaddata/files/Digital%20Personal%20Data%20Protection%20Act%202023.pdf.

6.     The Finance Bill, 2025, Bill No. 14 of 2025, Lok Sabha (India), https://www.indiabudget.gov.in/doc/Finance_Bill.pdf.

7.     Press Info. Bureau, Gov’t of India, Income-tax Bill, 2025, Tabled in Parliament Today Towards Achieving Comprehensive Simplification of the Income-tax Act, 1961 (Feb. 13, 2025), https://www.pib.gov.in/PressReleasePage.aspx?PRID=2102744.

8.     PRS Legislative Research, The Income-Tax (No. 2) Bill, 2025 (Aug. 2025), https://prsindia.org/billtrack/the-income-tax-no2-bill-2025.

9.     Lok Sabha Select Comm., Report on the Income-Tax Bill, 2025 (Aug. 2025).

10.  Parliament Passes Income-Tax and Taxation Laws (Amendment) Bills, 2025, All India Radio (Aug. 12, 2025), https://www.newsonair.gov.in/parliament-passes-income-tax-and-taxation-laws-amendment-bills-2025/.