The New Income Tax Act 2025 : Is This Landmark ‘SIMPLE’ Law Truly a Step Towards a Transparent Tax Regime and Easier Compliance for Taxpayers?

“It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand-fold” – Kalidas

The revised Income Tax Bill, 2025, having secured Lok Sabha approval and the President’s assent, has now become the Income Tax Act, 2025. It marks a landmark overhaul of India’s direct tax framework, in place for more than six decades. The new law will come into effect on April 1, 2026, and will apply for the financial year 2026-27

Historical Background

Income tax in India has a long history, with its introduction by Sir James Wilson on July 24, 1860, a date now celebrated as Income Tax Day. The groundwork for a structured tax system was laid with the Income-tax Act of 1922, which formalised various income tax authorities and established a systematic administration framework. Further strengthening the structure, the Central Board of Revenue Act (1924) established a statutory body for tax administration.

Over the decades, India’s tax ecosystem has undergone continuous digital transformation. Key milestones include:

• Computerization was introduced in 1981, beginning with electronic processing of tax challans.
• The Permanent Account Number (PAN) was introduced in 1972, with its current 10-digit alphanumeric series launched in 1995 to improve unique identification and information matching, leading to a wider tax base.
• The Centralised Processing Centre (CPC) was set up in Bengaluru in 2009 for automated processing of bulk tax returns and refunds, operating in a jurisdiction-free, tech-driven manner.
• The TDS Reconciliation Analysis and Correction Enabling System (TRACES) was introduced in 2012 to resolve mismatches in Tax Deducted at Source.
• Linking of PAN with Aadhaar was undertaken in 2017 to improve compliance and eliminate duplication.
• Tax Information Network (TIN) and its updated version, TIN 2.0, were introduced to provide multiple payment modes and real-time credit of taxes.
• PROJECT INSIGHT was launched to build an integrated data repository, creating a “360-degree profile” of each taxpayer, leveraging data analytics to improve compliance and widen the tax base.
• The Faceless Assessment Scheme was launched in 2019 to enhance transparency, efficiency, and accountability by eliminating physical interaction between taxpayers and tax officers.
• The Annual Information Statement (AIS), implemented in November 2021, provides a comprehensive view of a taxpayer’s financial activities and facilitates pre-filled returns, reducing errors and saving time.
• NUDGE (Non-Intrusive Usage of Data to Guide and Enable) Taxpayers Campaigns have been adopted, based on behavioral economics, to encourage voluntary compliance.

Need for Change in the Income Tax Act, 1961

The Income Tax Act of 1961 had become outdated and unwieldy after decades of numerous amendments. It was initially designed for a different economy with manual compliance and narrower transaction scopes. Over time, it transformed into a complex, lengthy, and difficult-to-understand legislation, characterized by:

• A “maze” of layered definitions, exceptions, and cross-references from frequent amendments, making routine filings difficult to navigate.
• An “overgrowth” of over 800 sections, rules, circulars, and notifications, which increased compliance costs.
• Ambiguous drafting that led to competing interpretations, fostering high litigation and multi-year case backlogs.
• A mismatch with the digital economy, struggling to accommodate e-commerce and platform income while rooted in paper-era structures.
• Vague provisions that gave tax officials significant discretion, potentially leading to taxpayer harassment.

These issues highlighted the need for a complete rewrite rather than further amendments. The first version of the Income Tax Bill 2025, introduced in 13 th February, was referred to a Select Committee of Members of Parliament for detailed scrutiny. This Committee submitted a comprehensive report in 21 July, leading to the withdrawal of the original Bill and the incorporation of recommended changes into a single, updated draft.

The New Income Tax Act 2025 Framework

The New Income Tax Bill 2025 (No. 2) aims to modernize, streamline, and simplify the tax law. Its primary objective is simplification and rationalization, not to alter tax rates or slabs, which remain subject to adjustments through the Union Budget.

Key structural changes include:

• Reduction in complexity: The Act reduces the number of chapters from 47 to 23 and sections from 819 to 536.
• Reduced word count: The total word count has been halved from 5.12 lakh to 2.6 lakh.
• Enhanced clarity: It expands the use of tables (57 vs. 18) and formulae (46 vs. 6), and simplifies language by removing legal jargon and including practical examples to make tax law more accessible.
• Introduction of “Tax Year”: A new concept of “tax year,” defined as April 1 to March 31, has been introduced to simplify reporting and compliance timelines, replacing the “assessment year”.
• Digital alignment: The framework is designed to be digitally aligned, accommodating the modern digital economy.

Tax Rates and Slabs:

The new Income Tax Act 2025 primarily focuses on streamlining and simplifying the law, and does not aim to alter tax rates or slabs directly; these continue to be adjusted separately through the Union Budget.

However, the Budget for 2025-26 has provided some relief measures for taxpayers:

Key Changes in the New Act

The revised Income Tax Act 2025 incorporates several key corrections and modifications to address drafting errors, align with existing provisions, and enhance taxpayer convenience.

• Nil TDS Certificate: This Act reinstates the explicit reference to “Nil” deduction alongside “lower” deduction in Clause 395, aligning with Section 197 of the Income-Tax Act, 1961. This helps avoid ambiguity and operational challenges for taxpayers who require a nil TDS rate, such as those with income up to the basic exemption limit (Rs 2.5 lakh or Rs 3 lakh, depending on the regime) or those tax-free up to Rs 12 lakh after Section 87A tax rebate, as well as NRIs claiming DTAA benefits.
• Tax Deduction for Commuted Pension: The Act clarifies full tax exemption for commuted pension not only for employees but also for payments received from approved pension funds, irrespective of employment status. Section 93(1)(g) was incorporated to grant a deduction for the entire amount of commuted pension to non-employees and private individuals receiving pension payouts from approved pension funds, ensuring parity with the current law.
• Standard Deduction on House Property Income: It explicitly states that a standard deduction of 30% on the net annual value of residential house property is calculated after subtracting municipal taxes paid, aligning with the Income Tax Act, 1961.
• Pre-Construction Interest Deduction for Let-Out House Property: The revised Act extends the deduction for interest on borrowed capital during the pre-construction period to let-out (rented) or deemed to be let-out properties, ensuring equitable treatment across all categories of ownership, consistent with Section 24(b) of the 1961 Act. The initial draft had limited this deduction solely to self-occupied properties.
• Tax Exemption for Anonymous Donations: For non-profit organisations, the Act now allows exemption for 5% of the “total donation” instead of 5% of “anonymous donations,” aligning with the Income-Tax Act, 1961, and correcting a previous drafting anomaly.
• Taxation Laws for Vacant Commercial Property: The new law ensures that all commercial properties, whether occupied or vacant, are explicitly excluded from “Income from House Property” taxation. This prevents tax authorities from considering temporarily idle or vacant commercial properties (like warehouses or factories) for deemed rental income tax under house property income, thus preventing unfair taxation and potential disputes.
• Return Filing and Updated Returns: The Act has removed the restrictive clause that implied taxpayers could only claim refunds if they filed tax returns on or before the due date, allowing refunds even for belatedly filed returns. Additionally, the time limit to file updated returns has been increased from 24 months to 48 months from the end of the relevant assessment year, providing taxpayers more opportunity to correct mistakes without penal liability.
• TCS on Liberalised Remittance Scheme (LRS): It clarifies that there will be nil Tax Collected at Source (TCS) on LRS remittances for education purposes financed by financial institutions, a provision that was missing in the earlier version. The overall threshold to collect TCS on foreign remittances under LRS has also been increased to Rs. 10 lakhs from Rs. 7 lakhs.
• Corporate Tax Updates: The Act corrects errors related to inter-corporate dividend deductions for companies availing concessional tax rates. It also aligns the applicability of Alternate Minimum Tax (AMT) for Limited Liability Partnerships (LLPs) with existing I-T Act provisions, removing an expanded scope that would have attracted a higher rate.
• Expanded Search Powers and Digital Provisions: The Act retains the definition of “virtual digital space,” granting tax authorities powers during searches and seizures that extend to digital assets such like email servers, social media accounts, online investments, cloud servers, and digital applications. Taxpayers are now legally required to provide “reasonable technical and other assistance,” including sharing passwords. If access is denied, tax officials are empowered to override access codes. While this raises privacy concerns, the government states it is necessary due to the prevalence of significant financial information in digital formats. Standard Operating Procedures (SOPs) are assured to safeguard personal digital data seized during searches.
• Other Rationalisation and Simplification Measures: Provisions for Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) have been separated into two distinct sub-sections for improved clarity. The period for which assessments can be reopened has been reduced to five years, ensuring greater certainty for taxpayers. The TDS limit on interest for Senior Citizens has been doubled from Rs. 50,000 to Rs. 1 lakh, and the TDS limit on rent increased from Rs. 2.4 lakh to Rs. 6 lakh per annum. The decriminalisation of delay in TCS payments has also been introduced. Additionally, withdrawals from National Savings Scheme (NSS) accounts after August 29, 2024, are now fully tax-exempt, and tax deduction for National Pension Scheme (NPS) Vatsalya accounts under the old regime is provided. The period of registration for small charitable trusts/institutions has been increased from 5 years to 10 years, and the annual value of two self-occupied properties (previously one) is now allowed without conditions.

The SIMPLE Framework

The new Income Tax Act, 2025, is underpinned by the ‘SIMPLE’ framework, which forms its structural foundation and will guide interpretation, administration, and future amendments.

S — Streamlined: The Act significantly reduces the volume of the law from over 800 sections to 536 and chapters from 47 to 23, using plain-language drafting to reduce reliance on dense legal jargon.

E — Efficient: The Act extends faceless, digital-first administration to a broader range of processes, including scrutiny, reassessment, and appeals, to expedite assessments and refunds while reducing physical interactions.

Benefits Across Taxpayer Segments

The Act introduces tailored changes to benefit various taxpayer profiles:

• Salaried Individuals: They will experience stability from the unchanged basic exemption limit and modest relief from slab adjustments. Consolidated provisions will also improve clarity in computing total income.
• Small Businesses & Professionals: They will benefit from a simpler compliance structure, reducing hours spent on filing and record-keeping. The digital-first processes are expected to eliminate the need for travel to tax offices.
• High-Net-Worth Individuals: Predictable timelines and clearer penalty provisions are designed to reduce litigation risks, thereby aiding in long-term financial planning.
• Startups & Digital Enterprises: The Act’s alignment with digital economy realities reduces grey areas in the taxation of cross-border and platform income, with faster refund cycles improving cash flow.

Before vs. After — Key Differences and Implications

The Income-Tax Act, 2025, represents a fundamental shift from the Income-Tax Act, 1961, involving not just changes in volume and terminology but a rethinking of structure and safeguards.

Aspect	Income-Tax Act, 1961	Income-Tax Act , 2025	Implication
Volume of Law	More than 800 sections	536 sections	Shorter Act
Formative Phase	Jumbled provisions, more cross-referencing	23 chapters, 16 schedules	Rational grouping of related provisions improves comprehension.
Terminology	Assessment Year	Tax Year	Easier to comprehend to new taxpayers.
Refund Rules	Strict deadlines; missing ITR meant forfeiting the refund	Refunds allowed post-deadline without penalties	Reduces financial loss from administrative delays.
Administration	Somewhat faceless processing	Fully digital-first & faceless	Transparency improved.
Enforcement	No uniform notice protocol before action.	Mandatory notices before enforcement.	Safeguards against arbitrary action.

Insights

The new Income Tax Act 2025 signifies a bold and ambitious move towards a more transparent, efficient, and citizen-friendly tax ecosystem in India. It reflects a paradigm shift from incremental amendments to a comprehensive rewrite, aiming to simplify the law for everyday taxpayers while addressing the complexities of a modern digital economy.

The emphasis on digital transformation and faceless administration is a key aspect, demonstrating a commitment to reducing physical interfaces, thereby potentially curbing corruption and enhancing accountability. While the introduction of expanded search powers over digital assets raises valid privacy concerns, the government’s stance suggests a perceived necessity to combat tax evasion in an increasingly digital financial landscape. The assurance of Standard Operating Procedures (SOPs) is crucial to ensure these powers are exercised responsibly and do not lead to misuse.

Furthermore, the process of its creation—involving a Select Committee that identified and rectified drafting errors—highlights a proactive approach to prevent unintended hardships and future litigation, ensuring the new law aligns with existing beneficial provisions of the 1961 Act. This ensures that while the law is fundamentally reformed, it maintains continuity where necessary, providing clarity and relief to various taxpayer segments. If implemented effectively, this reform could indeed serve as a blueprint for legal overhauls in other sectors, contributing to a stable and robust economic structure.