Income Tax (No. 2) Bill, 2025 – Key Changes & Comparison with Existing Law
Date of Presentation in Lok Sabha: 11th August 2025
Proposed Implementation: From Tax Year 2025–26 (subject to passage in both Houses and Presidential assent)
The Government has tabled the Income Tax (No. 2) Bill, 2025 in the Lok Sabha, marking a comprehensive rewrite of the six-decade-old Income-tax Act, 1961.
The Bill seeks to simplify the law, modernise compliance, and enhance taxpayer convenience while retaining the essence of the direct tax framework.
1. Objectives of the New Bill
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Simplification: Reduce complexity and make provisions more understandable to taxpayers and professionals.
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Digitalisation: Align the law with digital-first, faceless compliance.
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Fairness: Remove anomalies, provide clarity, and widen taxpayer-friendly provisions.
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Transparency: Clearly define taxable events, exemptions, and deductions.
2. Major Changes at a Glance
| Area |
Current Provisions (IT Act, 1961) |
Proposed Changes (Bill, 2025) |
Impact |
| Structure & Drafting |
Over 800 sections, complex legal language |
Reduced to 536 sections in 23 chapters, simpler drafting |
Easier navigation and interpretation |
| Tax Year Concept |
“Previous Year” + “Assessment Year” framework |
Unified into Tax Year |
Removes confusion between PY and AY |
| Basic Exemption & Slabs |
Nil up to ₹3 lakh; slabs as per Finance Act 2024 |
₹12 lakh exemption retained; new slab rates introduced in Budget 2025 |
Relief for middle-class taxpayers |
| Faceless Assessments |
Physical interface common |
Mandatory faceless & digital assessments |
Transparency and reduced harassment |
| Refunds |
Late filing forfeits refunds; penalties for late TDS |
Refunds allowed even if ITR filed late; no penalty for late TDS deposit in some cases |
Taxpayer relief and fairness |
| Pensions |
Ambiguity in commuted lump sum taxation |
Clear deduction for commuted pensions from specified funds |
Certainty for retirees |
| House Property Income |
30% standard deduction after municipal taxes; pre-construction interest deductible |
Same provisions, but explicitly clarified for self-occupied and let-out |
Avoids litigation |
| Anonymous Donations |
Restricted deductions; limited clarity |
5% exemption on total donations, not just anonymous |
Encourages charitable giving |
| Penal Interest on Advance Tax |
1% p.m. on shortfall |
Retained at 1%, removing earlier drafting error suggesting 3% |
Prevents undue burden |
| Sovereign Wealth Fund Exemptions |
General provisions for SWFs |
Explicitly includes Saudi Arabia’s PIF and subsidiaries |
Attracts foreign investments |
| LLPs & AMT |
LLPs covered under AMT |
AMT withdrawn for LLPs |
Eases compliance for LLPs |
3. Notable Taxpayer Benefits
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Higher Exemption Limit – Retention of ₹12 lakh limit substantially reduces tax liability for salaried class and small businesses.
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Faceless Assessments – Minimises personal interface, reducing scope for discretion-based harassment.
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Refunds for Late Filers – Addresses hardship where genuine taxpayers missed deadlines.
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Clarity in Property Income – Reduces disputes over pre-construction interest claims.
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Special Pension Provisions – Provides certainty to senior citizens on lump sum receipts.
4. Key Policy Shifts
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From Manual to Digital: Aligns with the government's faceless and paperless compliance initiative.
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From Complexity to Clarity: Reduction in sections and simpler drafting.
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From Restriction to Encouragement: Relaxed provisions for charitable trusts and foreign investment entities.
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From Penalty to Proportionality: Rationalising penal interest and TDS-related penalties.
5. Professional Analysis
From a compliance and advisory perspective:
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Documentation: Clients should prepare for a Tax Year-based accounting cycle, aligning their books and systems accordingly.
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Payroll Adjustments: Employers must update payroll software to accommodate the revised slabs.
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Charitable Institutions: Should restructure donation receipts to maximise the 5% exemption limit.
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LLPs: May re-evaluate their tax strategy in light of AMT withdrawal.
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Property Investors: Can plan acquisition and sale with more certainty on deductions.
6. References
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Lok Sabha Proceedings – 11 August 2025 Presentation of Income Tax (No. 2) Bill, 2025.
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Economic Times – Clarification on penal interest provisions.
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Indian Express – Changes in refunds and charitable trust rules.
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India Today – Impact on taxpayers and pensioners.
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NDTV – Overview of the new Bill.
Disclaimer: This article is for informational purposes only and does not constitute professional advice. Readers should consult their tax advisor for personalised guidance.