Context: The Income Tax Act 2025 has received the President’s assent. The new law will come into force from 1st of April 2026. The landmark reform replaces the Income Tax Act of 1961 and ushers in a simpler, transparent and compliance-friendly direct tax regime.
Relevance of the Topic: Mains: Key Features of Income Tax Act 2025.
Income Tax Act 2025
- The Income Tax Act 2025 will replace the Income Tax Act of 1961.
- The Act introduces a simpler, transparent and compliance-friendly direct tax regime.
- The new law will come into force from the next financial year starting April 1 2026.
Key Features of the Income Tax Act 2025
Simplification of the Law:
- The number of sections has been reduced from 819 to 536, chapters from 47 to 23, and the overall word count from 5.12 lakh to 2.6 lakh.
- It introduces 39 new tables and 40 formulas, making tax computations easier and more transparent.
- Redundant provisions and archaic language have been removed, ensuring that the law is simpler to read, understand, and implement.
Refunds and Return Filing:
- Earlier draft had restricted refund claims only to returns filed within the due date. In the new Act, this provision has been removed, and taxpayers can now claim refunds even in the case of belated returns.
TCS on Liberalised Remittance Scheme (LRS):
- The Act clarifies that no Tax Collected at Source (TCS) will be applicable on education-related remittances made under the Liberalised Remittance Scheme (LRS), if such payments are financed by banks or financial institutions.
Corporate Taxation Provisions:
- Drafting errors relating to inter-corporate dividend deductions for companies under concessional tax regimes have been corrected.
- The provisions for Minimum Alternate Tax (MAT) and Alternate Minimum Tax (AMT) have been clearly separated:
- MAT will continue to apply to companies.
- AMT will apply only to non-corporates who claim tax deductions.
- LLPs earning only capital gains and not availing deductions will not be liable to AMT.
- Taxpayers who have no tax liability can now obtain a nil-TDS certificate, reducing procedural hassles.
- Ambiguities related to transfer pricing and carry-forward and set-off of losses have been removed for greater clarity.
- For house property income, the Act specifies that the 30% standard deduction will be calculated after deducting municipal taxes.
Relief for Non-Profit Organisations (NPOs):
- Earlier, exemption was allowed for only 5% of anonymous donations. Under the new law, exemption is allowed for 5% of total donations, providing greater flexibility to NPOs.
- The benefit has also been extended to mixed-object registered organisations, broadening the scope of relief for charitable and non-profit bodies.
Retirement and Family Benefits:
- The Act provides explicit relief by allowing deductions on commuted pensions and gratuity payments received by family members. This ensures better financial support for dependents in cases of retirement or death of the primary earner.
Introduction of the Tax Year:
- The concept of a “Tax Year” has been formally introduced and defined as a 12-month period beginning April 1 each year. This codifies an already existing practice, reducing ambiguity in interpretation.
Digital Searches and Virtual Digital Space:
- The Act retains the definition of “Virtual Digital Space”, bringing digital transactions and platforms firmly within the tax net.
- Tax authorities are empowered to access information during surveys and searches from : Email servers, Social media accounts, Online banking, trading, and investment platforms, Cloud and remote servers, Other digital applications.
- To safeguard taxpayer privacy, the government has announced that Standard Operating Procedures (SOPs) will be issued for handling personal digital data during such searches.
