Income Tax Bill 2025
Syllabus Areas:
GS III - Economy
The Lok Sabha passed the Income Tax
Bill, 2025, replacing the Income Tax Act, 1961, which
had been in force for over six decades. This is part of the largest direct
tax law overhaul in recent years.
The government’s main
objectives:
- Simplify tax laws.
- Ease the compliance burden for taxpayers.
- Ensure clarity and reduce litigation.
- Make the law future-ready to adapt to digital and global tax challenges.
What is the Income Tax Act, 1961?
The Income Tax Act, 1961 is India’s primary law that governs how income tax is levied, calculated, collected, and enforced.
- Purpose: To define what counts as "income," who is liable to pay tax, how much they must pay, and the procedure for assessment and appeals.
- Came into force: 1 April 1962, replacing the earlier Indian Income Tax Act of 1922.
- Applies to: All individuals, Hindu Undivided Families (HUFs), companies, firms, LLPs, associations of persons, and any other taxable entities in India.
- Structure:
- Sections (1–298): Define provisions, rates, exemptions, deductions, and penalties.
- Schedules: Contain supplemental rules.
- Rules: Income Tax Rules, 1962 provide practical procedures for implementation.
- Key Features:
- Scope of Income: Income earned in India and certain income earned abroad by residents is taxable.
- Tax Rates: Determined annually by the Union Budget (Finance Act).
- Exemptions & Deductions: E.g., Section 80C for investments, Section 10 for certain incomes.
- Filing Requirements: Mandatory return filing for certain income thresholds.
- Assessment & Appeals: Provisions for scrutiny, reassessment, and legal remedy.
It’s essentially the legal backbone for India’s income taxation system — interpreted and updated regularly through amendments, judicial rulings, and annual budgets.
Background of the recent bill:
- It was originally introduced on 13 February 2024.
- Withdrawn on 8 August 2024 after criticism from stakeholders and MPs for ambiguity and technical issues.
- Revised Bill introduced later in August 2024, incorporating suggestions.
- The Select Committee of Parliament, headed by Baijayant Panda (BJP), examined the draft and made 285 recommendations.
- The government accepted almost all recommendations.
- Feedback also taken from industry, tax experts, and public consultations.
Key Features & Reforms
Simplification of Law
- Removal of redundant/repetitive provisions.
- Logical reorganisation of sections for easier reference.
- Simplified language for better accessibility.
- Obsolete provisions eliminated.
Timeframe & Compliance
- TDS correction statement filing period reduced from 6 years → 2 years (expected to reduce grievances).
- Flexibility for delayed return cases — taxpayers can claim refunds even if returns filed late.
TDS (Tax Deducted at Source)
A system where tax is deducted at the time of payment (salary, rent, interest, etc.) by the payer and deposited with the government.
- It ensures advance collection of tax, reduces evasion.
- Change in Bill: Time limit to file TDS correction statement reduced from 6 years to 2 years.
TDS Correction Statement:
A revised statement filed to correct errors in the original TDS return (e.g., wrong PAN, wrong amount).
- It ensures proper credit of tax to deductee’s account.
Specific Changes
- Professionals with receipts > ₹50 crore/year allowed prescribed e-payment modes (clause 107).
- Deductions for commuted pension & gratuity for family members (Clause 93).
- MAT & AMT separated into distinct subsections under Sec 206.
- AMT only for non-corporates claiming deductions.
- LLPs with only capital gains income not liable for AMT (if no deductions claimed).
- Mandatory 15% investment of deemed accumulated income in specific modes removed.
MAT (Minimum Alternate Tax)
- Meaning: A minimum tax companies must pay, even if their taxable income is reduced to near zero due to deductions or exemptions.
- Formula: Usually a fixed percentage of “book profit” under the Companies Act.
- Relevance: Prevents zero-tax liability for profitable companies.
AMT (Alternate Minimum Tax)
- Meaning: Similar to MAT, but applicable to non-corporate taxpayers (like LLPs, partnerships, individuals in certain cases) to ensure they pay a minimum tax when claiming deductions.
- Change in Bill: Now applicable only to non-corporates claiming deductions. LLPs with only capital gains income and no deductions are exempt.
LLP (Limited Liability Partnership)
- Meaning: A hybrid business structure combining features of a partnership and a company.
- Advantage: Limited liability for partners, but operational flexibility like a partnership.
- Relevance: Often used by professionals and small businesses.
Expected Impact
- Ease of compliance for individuals, companies, MSMEs.
- Greater predictability in tax administration.
- Encouragement for foreign investment and domestic consumption.
- Reduction in disputes and ambiguity (esp. house property taxation, pension deductions, delayed refund process).
- Improved taxpayer confidence through responsive governance.
Prelims Questions:
1. Which feature is not true for a Limited Liability Partnership (LLP)?
- Partners have limited liability.
- LLP has a separate legal identity.
- LLP must compulsorily list on stock exchanges.
- LLP allows internal flexibility like a partnership.
2. Commuted pension refers to:
- Pension received in monthly instalments after retirement.
- Lump-sum payment instead of periodic pension instalments.
- Pension given to only government employees.
- Pension that is taxable without any exemption.
3. Which statement about gratuity is correct?
- It is given compulsorily to all employees regardless of tenure.
- It is a lump-sum payment as a mark of service appreciation, with certain tax exemptions.
- It can be claimed every year during service.
- It is paid only in the government sector.
Mains Question:
- Critically examine the major reforms introduced in the Income Tax Bill, 2025 and assess their potential impact on economic growth, investment climate, and taxpayer confidence. (250 words) (15 marks)
