In a significant development for India’s tax framework, the Lok Sabha has passed the Income‑Tax (No. 2) Bill, 2025, via voice vote. The bill, which aims to replace the Income‑tax Act, 1961, introduces a modern, simplified structure and was cleared without a formal debate alongside the Taxation Laws (Amendment) Bill, 2025. It now moves to the Rajya Sabha. If passed there and assented to by the President, the new provisions would take effect on April 1, 2026.
Note: This article is for general information only and does not constitute tax or legal advice.
Why This Bill Matters
For more than six decades, the 1961 Act set the rules for how individuals, businesses, and other entities compute and pay income tax. Over time, it grew lengthy, complex, and technical, creating interpretation issues and compliance burdens. The new bill aims to:
- Simplify language and structure so rules are easier to understand.
- Reduce compliance friction and ambiguity.
- Align the law with today’s digital, globalized economy.
Major Highlights of the Income‑Tax (No. 2) Bill, 2025
- Complete Replacement of the 1961 Act
The bill repeals the Income‑tax Act, 1961, and introduces a fresh, streamlined statute with fewer chapters and plain‑English drafting. The goal is to make provisions more accessible to individual taxpayers and small businesses. - “Tax Year” Replaces Legacy Terms
Legacy terms like “assessment year” and “previous year” would give way to the simpler “tax year,” reducing confusion around period references. - Post‑Deadline Refunds for TDS
Individuals would be able to claim refunds for Tax Deducted at Source (TDS) even when filing an Income‑tax Return (ITR) after the due date—welcome relief for those who miss deadlines but are still due refunds. - AMT Relief for LLPs
Limited Liability Partnerships (LLPs) would no longer be subject to Alternate Minimum Tax (AMT) unless they claim specified deductions, potentially making the LLP structure more attractive and lowering tax friction. - Restoration of Certain Deductions
Select deductions return under the bill, including:
- Inter‑corporate dividend deductions for eligible companies.
- Nil TCS on overseas education‑related remittances under the Liberalised Remittance Scheme when routed through financial institutions.
- Shorter Window for TDS Corrections
The correction period for TDS statement errors would drop from six years to two years, enabling quicker resolution of discrepancies and reducing long‑pending compliance issues. - Support for Charitable and Religious Trusts
The bill restores exemptions for anonymous donations received by charitable‑cum‑religious trusts, recognizing their unique operating context and social role. - Penalty Waivers and Nil‑Tax Certificates
Taxpayers could apply for a nil‑tax certificate in advance to prevent inapplicable deductions at source. In certain cases of bona fide non‑compliance, penalties may be waived—signaling a more facilitative, taxpayer‑centric approach.
Why the Changes Were Needed
Stakeholders have long flagged the 1961 Act’s complexity and litigation propensity. Frequent disputes, evolving business models, cross‑border flows, and modern financial products strained an aging framework. The bill reportedly incorporates 285 recommendations from the Select Committee of Parliament and inputs from multiple stakeholders, indicating a broad consultative process.
How It Will Impact Taxpayers
- Individuals
- Clearer, easier‑to‑read rules and definitions
- Time‑saving compliance procedures
- Ability to claim TDS refunds even after missing the ITR deadline
- Lower disputes due to plain language and standardized processes
- Businesses (especially MSMEs and LLPs)
- Reduced compliance costs and complexity
- AMT relief for LLPs (except where specified deductions are claimed)
- Alignment with MSME frameworks and simplified provisions
- Faster TDS corrections and fewer retrospective controversies
- Charitable Organizations
- Restored exemptions aiding sustainable funding
- Clearer eligibility rules for tax‑exempt donations
Expert Reactions
Early reactions from tax practitioners and industry bodies have been broadly positive, praising the clarity of drafting and the focus on administrative ease. That said, experts emphasize that implementation and transition planning will determine real‑world success. Clear guidance, timely rulemaking, and robust systems will be essential to avoid confusion as taxpayers migrate to the new regime.
The Road Ahead
Passage in the Lok Sabha is the first step. The bill must clear the Rajya Sabha and receive Presidential assent. If finalized on schedule, the law would apply beginning April 1, 2026—providing a runway for taxpayers, advisors, and businesses to understand the provisions, update systems, and retrain staff.
Conclusion
The Income‑Tax (No. 2) Bill, 2025, is more than a routine amendment—it is a reset of India’s direct tax architecture. By simplifying language, modernizing definitions, and easing compliance, it aims to build a clearer, more trusted system. If executed effectively, the reform could reduce litigation, improve compliance, and strengthen confidence between taxpayers and the administration—allowing individuals and businesses to focus more on growth and innovation and less on paperwork.
My Opinion
I view the bill’s plain‑language approach and shorter TDS correction window as practical wins that should reduce friction for everyday taxpayers. AMT relief for LLPs also feels directionally right, provided anti‑abuse rules are clear. The real test will be transition—early guidance, seamless utilities, and proactive taxpayer education will matter as much as the law’s text. If the rollout is steady and predictable, this reform could materially lower compliance anxiety each tax season.
