Executive Summary
introduced the Income Tax Bill 2025, which fundamentally transforms The recently passed Lok Sabha has shifted the Income Tax Bill 2025, fundamentally transforming the direct tax system in India. This legislation heralds the complete replacement of the Income Tax Act of 1961, which has remained in effect for sixty years. It aims to streamline the taxation system, minimise confusion, and reduce the frequency of legal disputes. Notable reforms include the introduction of a new “tax year”, significant reduction of legal text and oversimplified compliance procedures, and a reduction in the volume of legal text. The bill also addresses specific relief allocations for various groups. It aims to provide easier refunds for late filings, clearer deductions for income derived from house property and pensions, and to remove the Alternative Minimum Tax for some Limited Liability Partnerships. While the bill maintains the existing tax rates and brackets, it increases privacy concerns by granting tax officials more discretionary powers to access digital records during searches. This legislative shift has the potential to make tax compliance more streamlined and, in turn, attract domestic and foreign investments to fuel the economy of India.
Introduction: The Dawn of a New Tax Era in India
India’s economic framework: Lok Sabha passed Income Tax Bill 2025 on August 12, 2025. The New Direct Tax Code is not an amendment but a “complete re-imagination” of the direct tax system, replacing the traditional yet increasingly cumbersome Income Tax Act, 1961.
Historical Context: The Income Tax Act, 1961 – Its Evolution and Complexities
The Income Tax Act, 1961, has been the cornerstone of India’s direct tax system for over six decades. 1 Over the intervening decades, the Act has been amended, supplemented and judicially interpreted beyond recognition such that those original nine pages have spawned a complex legal cathedral of statutes, regulations, guidelines and decisions. The result has been a labyrinthine system of organic growth that, though necessary to keep up with changes in the economy, is complex and riddled with ambiguity and intricate legal disputes.
The colossal size of the current Act–819 sections and 47 parts has put an inordinate compliance burden on individuals, businesses, and MSMEs. This complexity has manifested into higher compliance costs, administrative overloads and delays in litigation driving up ease of doing business rankings in India. 3 As the economy opened up and started integrating with global markets, there was a long-felt need for making tax laws easier to understand.
Table 1: Key Structural and Conceptual Changes: ITA 1961 vs. ITB 2025
| Parameter | Income Tax Act 1961 | Income Tax Bill 2025 |
| Total Sections | 819 | 536 |
| Total Chapters | 47 | 23 |
| Word Count (approx.) | 5.12 lakh | 2.60 lakh |
| Tax Year Concept | “Previous Year” and “Assessment Year” | Unified “Tax Year” (aligns with Financial Year) |
| Residential Status | Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), Non-Resident (NR) | Resident, Non-Resident (RNOR eliminated) |
| Tax Audit Authority | Chartered Accountant (CA) only | CA, Company Secretary (CS), or Cost and Management Accountant (CMA) |
| Capital Gains Treatment | Taxed at special rates | No change in rules or income categories (as per User Query) |
| Deductions/Exemptions | Numerous, complex | Streamlined, fewer categories (general philosophy) |
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