The Parliament on Tuesday passed the modified Income Tax Bill, 2025, alongside the Taxation Laws (Amendment) Bill, 2025, aimed at overhauling India's six-decade-old direct tax framework for both individuals and corporations.
Finance Minister Nirmala Sitharaman introduced the two money bills in the Rajya Sabha, which returned them to the Lok Sabha by voice vote. The Income Tax Bill, 2025 will replace the Income Tax Act, 1961, in force since April 1, 1962.
Why a New Income Tax Law Was Needed
Explaining the rationale, FM Sitharaman said parts of the existing legislation had become outdated, necessitating a fresh, modern framework.
The revised bill incorporates several amendments recommended by the Select Committee, chaired by BJP MP Baijayant Panda, which reviewed the earlier version introduced in the Lok Sabha on February 13, 2025. The government withdrew that draft last week to make way for a corrected and updated version.
Key Recommendations Accepted
The Parliamentary Panel suggested 285 changes to improve clarity, remove drafting errors, and align provisions with existing laws. Significant amendments include:
- Clause 21: Removing "in normal course" and clarifying the comparison between actual rent and "deemed rent" for vacant properties.
- Clause 22: Specifying that the 30% standard deduction on house property income applies after deducting municipal taxes; extending pre-construction interest deduction to let-out properties.
- Clause 19: Allowing commuted pension deductions for non-employees receiving pensions from a fund.
- Clause 20: Ensuring temporarily unused commercial properties are not taxed as "house property" income.
The panel said these changes would enhance fairness, reduce ambiguity, and align with the spirit of the existing tax code.
What the Withdrawn Bill Proposed
The original February draft was billed as the most significant overhaul of India's direct tax laws in more than 60 years, with the following key features:
- Simplified language and shorter provisions to make compliance easier.
- Consolidation of deductions and lower penalties for certain offences.
- No change in tax slabs, capital gains rules, or income categories.
- Focus on reducing litigation with a "trust first, scrutinise later" model.
- Modernised administration through digital monitoring and enhanced CBDT powers.
- Introduction of a "tax year" concept for clearer assessment timelines.
The earlier draft spanned 23 chapters, 536 sections and 16 schedules, featuring tables and formulas for easier interpretation. It also streamlined TDS rules, simplified depreciation provisions, and retained existing residency criteria and financial year timelines.
When It Takes Effect
Once enacted, the Income Tax Bill, 2025 will come into force on April 1, 2026, marking the end of the Income Tax Act, 1961, and ushering in a new era of simplified, modern, and digitally driven tax administration.
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