Parliament passes revised Income Tax Bill 2025 to replace 1961 Act, aiming for simplified taxation

The Parliament has officially passed a new Income Tax Bill aimed at overhauling the existing Income Tax Act of 1961. The updated legislation, introduced by Finance Minister Nirmala Sitharaman, reflects significant changes and updates recommended by the Select Committee chaired by Baijayant Panda. The decision to replace the old Act came after identifying numerous outdated provisions.

FM Sitharaman highlighted that the new income tax law simplifies language without changing rates and thanked the Parliamentary Select Committee for their extensive review, noting that 75,000 person-hours were dedicated to drafting the bill.

Key recommendations by the Select Committee included amendments to various clauses to reduce ambiguity and improve clarity. For instance, Clause 21 eliminates the term “in normal course” and introduces a comparison between actual rent and “deemed rent” for vacant properties. Clause 22 specifies that the 30% standard deduction applies after deducting municipal taxes and extends pre-construction interest deduction to let-out properties. These changes aim to align the law with existing provisions and enhance fairness.

Finance Minister Sitharaman explained the rationale for the legislative shift, citing the necessity to update parts of the Income Tax Act, 1961, which have become obsolete over time. The new law seeks to modernise tax administration and simplify compliance procedures. The legislation includes provisions for simplified language, shorter clauses, and consolidated deductions, aiming to make tax compliance easier for taxpayers.

The newly passed law introduces a “trust first, scrutinise later” approach to reduce litigation. Additionally, it preserves the current tax slabs, capital gains rules, and income categories. The easing of penalties for certain offences is designed to create a more taxpayer-friendly system, reflecting a shift towards a more forgiving tax environment.

The Select Committee’s proposals also highlighted the need for digital monitoring and enhanced powers for the Central Board of Direct Taxes (CBDT). This modern administrative approach intends to facilitate efficient tax collection and management. Furthermore, the introduction of a “tax year” concept underlines this forward-thinking strategy.

During the legislative process, the committee identified several drafting errors in the original Bill proposed in February, which led to its withdrawal. As noted in the official statement, “There are corrections in the nature of drafting, alignment of phrases, consequential changes and cross-referencing. Therefore, a decision has been taken by the government to withdraw the Income-tax Bill, 2025, as reported by the Select Committee. Consequently, Income-tax (No. 2) Bill, 2025 has been prepared to replace the Income-tax Act, 1961.”

The initial draft of the Bill, described as the most significant reform of India’s direct tax code in over six decades, aimed to streamline the taxation process. However, it required substantial corrections and refinements before gaining parliamentary approval. This revised version now embodies those necessary adjustments, making it a landmark change in India’s fiscal policy framework.

The legislative proposal successfully passed through the Rajya Sabha, where it was returned to the Lok Sabha with voice approval. The transition to the new framework signifies a crucial move towards modernising India’s tax code, ensuring it remains relevant and effective in the current economic landscape.