Finance Minister Nirmala Sitharaman introduced the New Income Tax Bill in Parliament on Feb. 13, 2025, to reform and repeal the Income Tax Act 1961. The provisions of the existing income tax laws are complex, making them difficult to understand for the common man and tax interpreters alike. Moreover, the existing law has many redundant clauses making decoding a tough task. The government is working on simplifying taxation, and the new income tax bill is widely hailed as a step in the right direction.
Once passed, the Income Tax Bill 2025 will become the law, replacing the 64-year-old Income Tax Act 1961. The new income tax bill is shorter, written in simple language, and has fewer cross-references, making it easier to understand for the average taxpayer.
This blog post will give you the lowdown on some of the significant changes introduced in the Income Tax Bill 2025.
Key features of the New Income Tax Bill
The new Income Tax Bill 2025 tabled in Parliament on Feb. 13, 2025, aims to overhaul the direct taxation system in India by replacing the Income Tax Act 1961. Once passed, the bill will be known as the ‘Income Tax Act 2025’ and will be in force from April 1, 2026. Here are the key changes in the Income Tax Bill 2025:
- The newly introduced Income Tax Bill, 2025 comprises 536 sections, more than 298 sections of the current Income Tax Act, 1961. The existing law has 14 schedules, while the new bill increased it to 16, breaking the longer chapters and making them simple to interpret. The Income Tax Bill 2025 significantly compressed the length of the tax statute to 622 pages, nearly half of the 1961 Act.
- One of the most significant changes in the bill is the removal of the terms ‘Assessment Year’ and ‘Previous Year’ or ‘Financial Year,’ while introducing a new term ‘Tax Year.’
- The Bill simplifies the language, making it reader-friendly with the use of tables and formulae. The bill illustrates salaries, deductions for bad debts, and TDS presumptive taxation with tables and formulas.
- The bill empowers the Central Board of Direct Taxes (CBDT) to declare and adopt a ‘Taxpayer’s Charter’ that outlines the rights and obligations of taxpayers. CBDT can issue orders, instructions, directions, or guidelines to other income-tax authorities as it considers fit for the administration of such a charter.
- The new bill simplifies TDS-related laws by bringing all of them under a single clause illustrated with easy-to-understand tables. This enhances ease of interpretation.
- The Bill is free from ‘explanations or provisos,’ making the language easy to understand.
- The new bill also omits several redundant sections.
What does the tax year introduced in Income Tax Bill 2025 mean?
We are all aware of the term ‘Assessment Year.’ The term has also been a source of endless confusion due to the complex nature of its interpretation. An ‘Assessment Year’ refers to the year following the financial year in which the income is earned. This is confusing for taxpayers.
For example, the income earned by a salaried employee in the financial year 2024-25 will fall under the assessment year 2025-26. While filing income tax, the taxpayer needs to choose Assessment Year 2025-26 and all the related forms and notices will be issued accordingly.
In another instance, if a taxpayer receives a tax default notice for Assessment Year 2022-23, it concerns the income earned in the financial year 2021-22.
The complexity of the financial year and assessment year confuses taxpayers. Additionally, tax professionals face challenges in interpreting changes to provisions as amendments refer to different years, making it difficult to determine the effective year of changes.
The Income Tax Bill 2025 replaces the term Assessment Year with “Tax Year,” which is now aligned with the financial year.
The new bill defines ‘Tax Year’ as the same year the income is earned and will be taxed accordingly.
How do the changes made to the new tax regime simplify taxation for Indians?
The Union Budget 2025 further simplified the New Income Tax Regime by rationalizing tax rates for all slabs and making income up to Rs. 12 lakh tax-free for Indian taxpayers. Additionally, the standard deductions were kept constant at Rs. 75,000. We at Lemonn have published a detailed income tax guide to help you understand the changes made in the budget.
Here are the updated tax slabs applicable for Tax Year 2025-2026.
| FY 2025-26 Income Tax Slab | Income Tax Rates |
| Up to Rs. 4 lakh | NIL |
| Rs.4 lakh – Rs.8 lakh | 5% |
| Rs.8 lakh – Rs.12 lakh | 10% |
| Rs.12 lakh – Rs.16 lakh | 15% |
| Rs.16 lakh – Rs.20 lakh | 20% |
| Rs.20 lakh – Rs.24 lakh | 25% |
| Above Rs. 24 Lakh | 30% |
However, it is important to note that no tax up to Rs. 12 lakh does not mean that Indians will pay taxes only on income above Rs. 12 lakh. This simply means that individuals earning up to Rs. 12 lakh will have no effective taxes. However, individuals earning more than Rs. 12 lakhs will have to pay taxes. Additionally, any income earned from short-term or long-term capital gains is taxed separately, and thus, even individuals earning less than Rs. 12 lakh will have to pay these taxes.
Notably, no changes were made to the old tax regime.
Restructuring of Section 80C to Section 123 of the Income Tax Act 2025
Section 80 of the Income Tax Act mentions various deductions that help taxpayers reduce their taxable income under the old tax regime.
The Income Tax Bill 2025 restructures Section 80C to enhance clarity and accessibility for taxpayers. The benefits of deduction under Section 80C have been moved to Section 123 of the Income Tax Bill 2025, as outlined in Schedule XV, which specifies the savings instruments eligible for deductions.
Below is a detailed list of savings instruments eligible for deduction under Section 123:
- Life Insurance Premiums: Life insurance policy premiums paid for taxpayers, their spouses, or children.
- Deferred Annuity Contract Payments: Sum paid for a deferred annuity contract, excluding annuity plans.
- Government Salary Deduction for Annuity: Deductions from salary, up to 20%, for securing a deferred annuity or making provisions for a spouse or children.
- Employee Provident Fund (EPF) Contributions: EPF contributions made by taxpayers for long-term retirement savings.
- Approved Superannuation Fund Contributions: Contributions made by employees to an approved superannuation fund for retirement benefits.
- Sukanya Samriddhi Yojana (SSY): Contributions to SSY can be made in the name of a girl child by her parents or guardian.
- National Savings Certificate (NSC): Subscription to NSC, which offers guaranteed returns and tax benefits.
- Unit-Linked Insurance Plan (ULIP): Contributions made to ULIPs.
- Annuity Plan Contributions: Contributions made for an annuity plan from LIC or other insurers notified by the Central Government.
- Equity-Linked Savings Scheme (ELSS): Investments in units of ELSS, providing market-linked returns with tax deductions.
- National Housing Bank (NHB) Pension Fund Contributions: Deposits in pension funds or schemes set up by the NHB, promoting post-retirement financial security.
- Tuition Fees: Tuition fees (excluding donations or development fees) paid for the full-time education of up to two children in India.
- Home Loan Principal Repayment: Payments made for the purchase or construction of a residential house property generating taxable income under “Income from house property.”
- Five-Year Fixed-Term Deposits: Term deposits with a lock-in period of at least five years, offering secure savings options.
- NABARD Bonds: Subscription to bonds issued by the National Bank for Agriculture and Rural Development (NABARD), supporting rural development initiatives.
- Senior Citizen Savings Scheme (SCSS): Deposits made under the Senior Citizen Savings Scheme Rules, 2004, designed to provide regular income for senior citizens.
- Post Office Time Deposit: Five-year term deposits under the Post Office Time Deposit Rules, 1981, offering risk-free returns.
- National Pension System (NPS): Contributions made to NPS or any other government-notified pension scheme aimed at providing retirement benefits.
The comprehensive list mentioned in one place in the Bill makes it easy for taxpayers under the old regime to figure out the available deduction options. This makes financial planning easier and more accessible for all.
Implementation Timeline of Income Tax Bill 2025
The Income Tax Bill 2025 was presented before Parliament on 13 February 2025. The bill will become law once it is passed by both houses of Parliament, followed by the assent of the President of India.
It will be known as ‘Income Tax Act 2025’ and will come into effect from 1 April 2026.
Impact of Income Tax Bill 2025
The Income Tax Bill 2025 is drafted primarily to make understanding tax laws easy for individuals and tax professionals alike. The bill removes 1200 provisos, streamlines the structure, brings related laws under the same sections, and reduces the need for cross-referencing. It introduces the concept of ‘Tax Year,’ replacing the complicated terminology of the assessment year and financial year. These changes will make tax laws easier to understand and accessible for all.
