On August 11, 2025, the Lok Sabha passed the Income Tax (No. 2) Bill, 2025, marking one of the most significant tax reforms in recent decades. The new bill aims to replace the Income Tax Act of 1961, simplifying provisions, enhancing transparency, and aligning the tax system with India’s digital governance vision.
This law is designed to benefit both taxpayers and the government by streamlining compliance, improving efficiency, and reducing unnecessary legal jargon. It also retains several taxpayer-friendly provisions, such as the much-discussed ₹12 lakh basic exemption limit.
2. Background and Legislative Journey
February 2025 – Initial Introduction
The original Income Tax Bill, 2025 was tabled in the Lok Sabha on February 13, 2025. Its aim was not to overhaul tax rates or penalties, but rather to simplify the structure, remove redundant sections, and make the law easier to understand.
Parliamentary Review
A Select Committee, chaired by MP Baijayant Panda, examined the bill closely. Over 285 recommendations were submitted, including 32 major reform points, many of which focused on simplifying compliance, improving taxpayer rights, and enhancing digital integration.
Withdrawal and Revision
On August 8, 2025, the government withdrew the original bill, incorporating the Select Committee’s suggestions. Merely three days later, the revised Income Tax (No. 2) Bill, 2025 was introduced and passed in the Lok Sabha via a voice vote. This swift turnaround demonstrated the urgency and priority given to tax reform.
3. Key Provisions of the New Bill
3.1 Simplification of Structure
- The total number of sections has been reduced from over 800 to 536.
- The law is now divided into 23 well-structured chapters, making it far easier to navigate.
3.2 ‘Tax Year’ Concept
- The confusing terms ‘Previous Year’ and ‘Assessment Year’ have been replaced with a single term — ‘Tax Year’.
- This simplifies the understanding of timelines for both taxpayers and tax authorities.
3.3 Digital-First and Faceless Assessments
- The bill enables faceless tax assessments, reducing direct interaction between taxpayers and tax officials.
- This move is aimed at increasing transparency, reducing corruption, and speeding up processes.
3.4 Stronger Taxpayer Protections
- Tax authorities must now issue a mandatory prior notice before taking any action against a taxpayer.
- TDS refunds can be processed even after the ITR filing deadline without penalty, offering relief for genuine delays.
3.5 Transparency in Religious Donations
- Anonymous donations to religious trusts not engaged in social services will now face restrictions, ensuring better accountability.
3.6 Relief for Homeowners
- Clearer rules for standard deduction on house property and pre-construction home loan interest claims have been introduced.
- This helps avoid confusion and reduces disputes with the tax department.
3.7 Pensioner Benefits
- Commuted lump-sum pension payments from specified plans will now be fully exempt from tax.
- This provision offers significant financial security for retirees.
3.8 ₹12 Lakh Basic Exemption Retained
- The new regime retains the ₹12 lakh basic exemption limit, ensuring continued relief for middle-income earners.
4. Impact on Different Taxpayer Segments
4.1 Salaried Individuals
- Lower compliance burden due to simplified provisions.
- Reduced chances of harassment through faceless assessments.
- Faster processing of refunds and greater procedural fairness.
4.2 Middle-Income Families
- The ₹12 lakh exemption limit remains intact.
- Clearer guidelines on deductions make tax planning easier.
4.3 Homeowners
- Improved clarity on home loan interest deductions.
- Easier claims for pre-construction interest, reducing the scope for disputes.
4.4 Pensioners
- Full exemption for commuted pensions offers better retirement planning.
- Simpler filing process reduces the need for professional help.
4.5 Businesses
- Reduced number of sections makes the law more readable.
- Digital-first approach saves time and operational costs.
- Predictable timelines improve financial planning.
4.6 Non-Resident Indians (NRIs)
- The bill will apply from April 1, 2026, giving NRIs time to adapt to the new system.
- Rules have been kept consistent to avoid sudden compliance shocks.
5. Implementation Timeline
- The new Income Tax Bill, 2025 will come into effect from April 1, 2026.
- Until then, the Income Tax Act, 1961 will remain applicable.
- The bill has been passed in the Lok Sabha and will move to the Rajya Sabha for approval, followed by Presidential assent.
6. Significance of the Reform
6.1 Modernisation
The shift to digital-first taxation represents a massive step towards a modern and efficient tax system. By removing outdated provisions, the government is aligning tax law with the needs of a growing digital economy.
6.2 Improved Transparency
Faceless assessments and mandatory notices reduce the chances of arbitrary actions. Taxpayers can now feel more secure in their dealings with the department.
6.3 Accessibility
With clearer language and fewer sections, even individuals without professional tax consultants will find it easier to comply with the law.
6.4 Common-Sense Relief
By retaining key exemptions and deductions, the bill balances reform with taxpayer relief.
7. Potential Challenges
- Lack of Debate: The bill was passed without formal parliamentary debate, raising questions about adequate public consultation.
- Digital Divide: Faceless assessments require strong internet connectivity, which could pose challenges in rural areas.
- Adaptation Period: Tax professionals, businesses, and individual taxpayers will need to adapt to the new provisions before April 2026.
8. Conclusion
The Income Tax (No. 2) Bill, 2025 is a bold attempt to simplify and modernize India’s tax system. With its focus on transparency, digital-first processes, and taxpayer rights, the bill has the potential to transform how taxes are administered in the country.
By retaining key relief measures and simplifying compliance, it ensures that taxpayers are not overburdened while the government strengthens its revenue systems. The coming year will be crucial as both taxpayers and the administration prepare for the law’s rollout from April 2026.
If implemented effectively, this reform could mark the beginning of a more trust-based, efficient, and transparent tax regime in India.
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