The Income Tax Bill, 2025, set to replace the Income Tax Act, 1961, introduces significant reforms aimed at simplifying tax laws, improving compliance, and modernizing the Indian tax system. This article provides an in-depth look at the major changes introduced by the bill and their impact on taxpayers, comparing them with the provisions of the Income Tax Act, 1961.
Are you a Salaried Person then you must know How the New Income Tax bill 2025 Impacts Salaried Person?
1. Structural Overhaul & Simplification
What Changed?
The Income Tax Act, 1961, had undergone multiple amendments over the years, resulting in complex and sometimes contradictory provisions. The Income Tax Bill, 2025, seeks to replace the fragmented structure with a more coherent and simplified tax framework.
Old Act (1961):
- Frequent amendments led to an intricate and often confusing structure.
- Legal ambiguities resulted in higher litigation and disputes.
- Multiple exemptions and deductions created inconsistencies.
New Bill (2025):
- Streamlines provisions by removing redundant clauses.
- Simplifies language for better understanding.
- Introduces uniformity in taxation rules across different income sources.
Impact on Taxpayers:
✅ Easier compliance for individuals and businesses. ✅ Reduced dependence on tax consultants. ✅ Faster interpretation of tax laws, leading to fewer legal disputes.
2. Introduction of the “Tax Year”
What Changed?
The bill aligns the financial year and the assessment year into a single “Tax Year”. Previously, income was earned in one financial year and assessed in the following assessment year, leading to confusion.
Old Act (1961):
- Income was assessed in a separate assessment year following the financial year.
- Created confusion, especially among new taxpayers and businesses.
New Bill (2025):
- Merges financial and assessment years into a single tax year.
- Provides uniformity in tax filing.
Impact on Taxpayers:
✅ Simplifies income declaration and tax filing. ✅ Aligns India’s tax system with global standards. ✅ Reduces confusion, especially for businesses with international operations.
3. Changes in Residential Status Criteria
What Changed?
Residency rules have been revised to prevent tax evasion and ensure a broader tax base.
Old Act (1961):
- NRIs were taxed only on income earned or received in India.
- Residency was determined based on 182 days stay in India in a financial year.
New Bill (2025):
- Reduces the number of days required to qualify as a tax resident for specific categories.
- Expands the scope of ‘significant economic presence’ to include digital transactions.
Impact on Taxpayers:
✅ More NRIs may now fall under Indian tax laws. ✅ Increased taxation for digital businesses operating remotely in India. ✅ Greater clarity on dual tax residency conflicts.
4. Expanded Scope of Taxable Income
What Changed?
- Income earned outside India but linked to Indian businesses is now taxable.
- Digital economy transactions and offshore services fall under the tax net.
- Passive income sources, such as foreign dividends and royalties, may be subject to taxation.
Old Act (1961):
- Only direct income generated in India was taxable for NRIs and foreign entities.
- Digital businesses operating outside India with an Indian consumer base were not taxed.
New Bill (2025):
- Expands the scope to include income from digital and offshore services.
- Taxes businesses that generate revenue from India, even if they have no physical presence.
Impact on Taxpayers:
✅ Foreign companies and digital service providers face increased tax liability. ✅ Indian freelancers earning from global clients may have additional tax implications. ✅ Higher tax compliance requirements for global income earners.
5. Revised Tax Exemptions
What Changed?
- Certain deductions and exemptions have been removed or modified.
- Agricultural income remains tax-free, but reporting requirements have increased.
- Changes in tax benefits for startups, special economic zones (SEZs), and charitable organizations.
Old Act (1961):
- Provided deductions under Section 80C for life insurance, provident fund contributions, and tuition fees.
- House Rent Allowance (HRA) deduction under Section 10(13A) for salaried employees.
- Interest on education loan deduction under Section 80E.
- Deduction for donations to political parties under Section 80GGC.
- Special deductions for SEZ units under Section 10AA.
New Bill (2025):
- Deduction for donations to political parties is removed.
- SEZ tax benefits are curtailed, limiting the exemption period.
- HRA deduction has been modified, and eligibility criteria have changed.
- Certain education loan interest deductions are revised, with limits on eligibility.
- Deductions for contributions to specified pension schemes remain, but with stricter conditions.
Impact on Taxpayers:
✅ Businesses & Investors: Fewer tax loopholes mean potentially higher tax liabilities. ✅ Farmers: No taxation, but increased transparency in large agricultural incomes. ✅ Charities & NGOs: Stricter compliance norms may reduce tax advantages. ✅ Salaried Individuals: Some deductions, such as HRA, may be restricted based on income levels. ✅ Students & Borrowers: Education loan benefits are still available but under revised terms.
The Income Tax Bill, 2025 introduces stricter tax norms and compliance measures, affecting different taxpayer groups. Taxpayers should review the revised provisions and plan their financial strategies accordingly.
