Contents
- ↪ Introduction
- ↪ Basic Structural Changes
- ↪ Individual Tax
- ↪ Business & Profession
- ↪ Tax Deduction at Source (TDS)
- ↪ Return of Income
- ↪ Return & Assessment
- ↪ Re-assessment Proceeding
- ↪ Search & Undisclosed Income
- ↪ Non-Profit Organization
- ↪ Transfer Pricing
- ↪ General Anti-Avoidance Rules (GAAR)
- ↪ International Taxation
- ↪ Merger & Acquisition
- ↪ International Financial Services Centre
- ↪ Miscellaneous Provision
Introduction
The Income tax Bill, 2025 (Draft ITB, 2025) was first introduced in February to replace the six-decade-old Income Tax Act, 1961 (ITA, 1961), and then sent to a Parliament Select Committee.
ITA, 2025 has been formulated to streamline provisions by removing redundancies and simplifying complex language and is scheduled to come into force on April 1, 2026.
On 11th August 2025, the government introduced a new version, the Income Tax Act, 2025 (ITA, 2025) incorporating most recommendations of the Committee, which was passed on 21st August 2025 in the Rajya Sabha.
Basic Structural Changes
Individual Taxation
Salary
Clause 17 of Draft ITB, 2025 proposes to remove threshold, empowers CBDT for determination of certain perquisites as per section 17(2) of ITA, 1961. Deduction for entertainment allowances not allowed anymore.
House Property
Clause 21 of Draft ITB, 2025 (corresponding to section 23 of ITA, 1961), prescribes for only the actual rent be considered for taxability, even if expected rent is higher than actual rent.
Clubbing of Income
Clause 99 of Draft ITB, 2025 (corresponding section 64 of ITA, 1961) provides for no clubbing of income where spouse possesses technical/professional qualifications.
Other Sources
Clause 92 of Draft ITB, 2025 (corresponding Sec 56(2)(x) of ITA, 1961) explicitly mention a lineal ascendant/descendant can be maternal/paternal for gifts received.
Capital Gains
In Draft ITB, 2025, certain transactions are removed from list of “transactions not regarded as transfer”
Business & Profession
Business and Profession/ Presumptive Taxation Scheme
Applicability of AMT
ITA, 1961 provides Alternate Minimum Tax ('AMT’) for LLP only if deductions claimed.
Draft ITB, 2025 removed condition, exposing all LLPs to AMT of 18.50%.
ITA, 2025 reinstated condition, avoiding blanket AMT burden on LLPs not availing deductions.
Cascading Dividend Taxation Averted
ITA, 1961 allows deduction to Assessee for dividends received from subsidiary company, when distributed to shareholders by Assessee, eliminating cascading effect of dividend taxation.
Draft ITB, 2025 omitted deduction for such inter-corporate dividends for companies opting for the concessional 22% tax regime.
ITA, 2025 restores this deduction prevents cascading taxation impact.
Presumptive Taxation for resident transport operators
ITA, 1961 provides for resident transport operators owning less than ten goods carriages can pay tax under presumptive taxation scheme or on the basis of actual income, whichever is higher.
Draft ITB, 2025 was aligned with ITA, 1961 .
ITA, 2025, replaces term 'income' with 'profits', now reading as "profit claimed to have been actually earned.
Special provisions for resident transport operators under presumptive taxation
ITA, 1961 provides for presumptive taxation regime determined as follows:
a.6% of total turnover or gross receipts by specified banking or online modes
b.8% of the total turnover for all other receipts
Draft ITB, 2025, for computation of taxable income at 6% did not include receipt of funds through banking channels/online mode post the tax year but before due date of filing the return.
ITA, 2025 has included the original ITA, 1961 provisions.
Restriction on declaration of lower profits in case of presumptive taxation for non-resident taxpayers
In Draft ITB, 2025, Non-Resident (“NR”) taxpayers had option to declare lower profits by maintaining books of account, as compared to profits computed at presumptive rates under Section 61(2) Engaged in the certain businesses.
In ITA, 2025, benefit has been restricted to only NR engaged in in the business of exploration, etc., of mineral oils and foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects
Tax Deduction at Source (TDS)
General Provisions
Draft ITB, 2025 proposes following changes in TDS provisions:
TDS Provisions categorized into three main heads-
- TDS on payments to resident
- TDS on payments to non-resident, and
- TDS on payments to any person (i.e. resident/ non-resident or both)
All TDS sections from 193 to 196D have consolidated in clause 393 of the Draft ITB, 2025.
Payment to Contractors
In ITA, 1961, tax is required to be withheld on payment made to contractors if:
a.single payment exceeds INR 30,000; or
b.aggregate payment made exceeds INR. 1,00,000 in a Financial Year.
Draft ITB, 2025 proposed no changes in this provision.
ITA, 2025 amends the existing provisions by replacing the term 'or' 'and' thereby requiring cumulative satisfaction of both the conditions.
Fees for Professional and technical Services
As per the ITA, 1961, persons other than individual or HUF, requires to deduct taxes on fees for professional or technical services which included payments for royalty, directors' remuneration and non compete fees.
In Draft ITB, 2025, tax deduction with reference to royalty, directors' remuneration and non compete fees omitted.
The ITA, 2025 has rectified this omission and has aligned the section with the existing provisions of the ITA, 1961
Salary and accumulated balance due to an employee
Section 192A of ITA, 1961 contains a non-obstante clause, effectively requiring trustee or authorised person to deduct TDS at 10% rather than at the average rate prescribed under Rule 9, Part A of the Fourth Schedule to the Act.
Draft ITB, 2025 did not contain such non-obstance clause
The ITA, 2025 now incorporates the non-obstante clause, thereby aligning with the corresponding provision of the existing Income-tax Act.
Lower Deduction Certificate
Section 197 of the ITA, 1961, allows Tax Officer to issue Lower/ Nil TDS certificate.
Draft ITB, 2025 introduced clause 395(1)(a)(b), empowering tax officers to issue Lower TDS certificates, with no reference to Nil TDS certificates for all payments/ receipts including non-residents
ITA, 2025 now allows Assessing Officer to issue Nil as well as lower TDS certificates, aligning with the provision of existing ITA, 1961.
Compliance and Reporting
The time period for filling TDS correction return as per the ITA, 1961 is for 6 Years.
Draft ITB, 2025 curtails the time period for filing TDS correction statement from 6 years (as provided in the ITA) to 2 years.
Return of Income
Refund Claim
Clause 263(1)(a)(ix), introduced in Draft ITB, 2025, mandated return of income must filed before the due date for refund.
Leading to disallowance legitimate refund claims through belated returns
ITA, 2025 appropriately omits this clause, aligning with ITA, 1961, ensuring taxpayers remain eligible to refund even where return is filed after due date
Specified persons to file return of income on or before the due date
ITA, 2025 introduces a new provision under Clause 263(1)(b), mandating specified persons to file return of income before due date, whether earned income or incurred loss.
Amendment applies to specified categories of persons such as companies, firms, and similar entities, mandating timely return filing regardless of income levels or loss. Provision removes ambiguity previously existed under ITA, 1961, where, in absence of income, the obligation to file return not explicitly stated. This led to prolonged litigation concerning non-filing of returns.
Return & Assessment
Re-assessment Proceedings
Search & Undisclosed Income
Non-Profit Organization
Replacement of Regular “Receipts” by “Income’’
Draft ITB, 2025 replaced concept of 'Income' by 'Receipt’ to determine taxable income in case of Non-Profit Organization (NPO).
However, "receipts" (on gross basis) contravenes the principle of real Income-Taxation, as "receipts" can include capital recoveries or gross inflows, which not necessarily represent net income
ITA, 2025 restores the concept of Income aligning with the ITA, 1961
Specified Income
Draft ITB, 2025 notably overlooked religious-cum-charitable trusts, an omission that could e had serious negative consequences for a substantial portion of India’s non-profit sector
ITA, 2025 expands definition of Specified Income to cover investments in non-specified modes. This amendment ensures alignment with the traditional approach to NPO operations in India, prevents unintended tax burdens on legitimate organizations, and reinforces the commitment to supporting both religious and charitable activities, in line with the objectives of the ITA, 1961
Transfer Pricing
Arm’s Length Price
Clause 165 of Draft ITB, 2025 2025 (corresponding section 92C of the ITA, 1961) removes concept of arithmetical mean in determination of Arm’s Length Price (ALP) in more than one prices.
If multiple prices determined by the most appropriate method, ALP determined in manner prescribed by board
Criteria of Management/Control restricted to voting rights
In ITA, 1961, section 92A(2), the phrase ‘at any time during the previous year’ was used specifically to cover all conditions required for triggering Associated Enterprise (‘AE’) relationship mentioned therein
In ITA, 2025 , ‘at any time during the tax year’ has been used only in relation to voting power, whether direct or indirect. However, for other conditions, the above phrase has not been used which may lead one interpreting the conditions to checked only on last date of the tax year not during any time of the tax year, hence, resulting in an ambiguity. Hence a circular/notification may be issued later to address such ambiguity
General Anti-Avoidance Rules (GAAR)
- Clause 181 of ITA, 2025 dealing with GAAR have amended to include phrase ‘In the circumstances of the case’.
- The phrase ‘In the circumstances of the case’ ensures that Tax Authorities consider the specific facts of each arrangement before declaring any arrangement as Impermissible under GAAR.
- This inclusion ensures that Assessment or conclusion in case of one transaction of a company is not blindly applied to another transaction of the same company or to a similar transaction by another company without looking into the specific circumstances of those transactions.
- This aligns with the existing provisions of the ITA, 1961
International Taxation
Salary Income deemed to accrue or arise in India
In ITA, 1961, Salary income is considered to accrue or arise in India if it is earned for services rendered within India. There is no condition for such income to be payable in India
However, Draft ITB, 2025 proposed that income must be payable for such services in order to be deemed as accruing or arising in India.
ITA, 2025 restores the original position.
Income deemed to accrue or arise in India by way of fees for technical services payable
In ITA, 1961, for both residents & non-residents, income in the nature of fees for technical services is taxable in India if it is payable for services utilized in India.
In Draft ITB, 2025, the phrase "in respect of services utilized" was removed in the, thereby broadening the scope of deemed income.
ITA, 2025 restores the original position
Clarificatory Amendments Regarding Taxability of Royalty Income in India
Deeming provisions treats royalty as income from “any right, property, or information used, or services utilized”. For a NR, such royalty income must be payable for the purpose of making or earning income in India in the ITA, 1961
The phrase quoted above was removed in the Draft ITB, 2025
ITA, 2025 reinstate the phare aligning with the ITA, 1961, eliminating ambiguity.
Applicability of Indirect transfer provisions to other sources
Indirect transfer provisions in ITA, 1961 apply to transfer of a capital asset situated in India, subject to certain conditions.
Draft ITB, 2025 retained provision, covering only sub-clause (d) of section 9.
ITA, 2025 expands the scope to cover all of the following under the indirect transfer provisions,
- any asset or source of income in India; or
- any property in India; or
- any business in connection; or
- the transfer of a capital asset situated in India
Attribution of income in case of indirect transfer of asset and Business Connection in India
Under ITA, 1961, only that portion of income which is reasonably attributable to assets located in India is deemed to accrue or arise in India
This term was omitted in the Draft ITB, 2025
The term “reasonably” plays a vital interpretative role, ensuring income attribution based on fairness and proportionality which is key for both clarity and equitable application of the law. The ITA, 2025 reinstates the term in respect of indirect transfer as well as business connecting in India.
Merger & Acquisitions
Definition of Company in which the public are substantially interested
In ITA, 1961, a company in which a public is substantially interested stated two conditions:
- the company's shares must be listed on a recognized Indian stock exchange as of the last day of the tax year, or
- at least 50% of voting shares must be beneficially held throughout the year by the Government, a statutory corporation, or a qualifying company or its wholly-owned subsidiary.
Draft ITB, 2025 had substituted the term 'or' with 'and' requiring both conditions to be met cumulatively.
ITA, 2025 revised the original intent, requiring either of the conditions to be met for the above.
Carry forward and set-off of losses not permissible in certain cases
ITA, 1961 allows carry forward and set off of losses of closely held companies when shares carrying not less than 51% of the voting powers are beneficiary held by the same persons who are holding the shares of the company in the year in which loss was incurred.
In Draft ITB, 2025, states 'beneficial owner of the shares’ to determine shareholding change of closely held company for the above benefit
ITA, 2025 discards this language and uses the term ‘beneficially held’ consistent with the present ITA, 1961. This removes ambiguity as the concept of ‘beneficial owner’ may have required testing at the ultimate owner level.
International Financial Services Centre (IFSC)
Granting Tax Exemption on OTC Derivatives for Non-Residents Transacting via IFSC-Based FPIs
ITA, 2025 extends tax exemption for NR for income derived from the distribution of OTC derivatives" provided such transactions are conducted with Foreign Portfolio Investors (FPIs) based in IFSC.
No exemption was provided in Draft ITB, 2025 but is introduced in the ITA, 2025, eliminates ambiguity and ensuring alignment with the ITA, 1961, enhancing the global competitiveness of IFSCs as financial hubs for cross-border transactions and encouraging participation from NR investors via the IFSC route.
IFSC-Located Funds Now Eligible For Tax Benefits as “Specified Funds”
In ITA, 1961, a "specified fund" is broader, covering funds established or incorporated in India, with the requirement located in (IFSC) embedded as sub-clause (C) of clause (i). This makes IFSC location one of several cumulative conditions under clause (i), alongside regulatory and unit-holder-related requirements
The ITA, 2025 altered the "located in IFSC" requirement to the main part of the definition. This change makes it explicitly mandatory for a fund to simultaneously:
- be registered & regulated under the relevant SEBI or IFSCA frameworks;
- be located in an IFSC; and
- meet the non-resident unit-holding condition. This narrows scope of the term "specified fund", impacting all references in the ITA, 2025, restricting eligibility and benefit to those fund located in IFSC
Miscellaneous Provisions
The meaning of expressions “electronic mail” and “electronic mail message” have been defined under clause 501 of Draft ITB, 2025 itself.