THE DIRECT TAX CODE 2025

The Income-Tax (No. 2) Bill, 2025

KEY CHANGES THE NEW BILLS BRING TO THE EXISTING LAWS : 

The newly passed Income-Tax (No. 2) Bill, 2025 is a major overhaul of India’s direct tax laws, aiming to replace the six-decade-old Income-Tax Act, 1961. The government’s objective is to simplify the tax code, reduce litigation, and create a more taxpayer-friendly system. Here are some of the major changes the new bill brings:

1. Simplification and Restructuring

• Replacement of ‘Previous Year’ and ‘Assessment Year’: The bill eliminates the confusing distinction between the two terms and introduces a single, unified concept of a “tax year”. This is a major step toward simplifying tax timelines for both individuals and businesses.

• Reduced Text and Sections: The new bill is significantly shorter, with the number of sections and chapters reduced by nearly half. It also uses simpler language, tables, and structured formats to make the law easier to read, understand, and implement.

• Consolidation of Definitions: Terms that were defined at multiple places in the 1961 Act have now been consolidated in a single section to avoid redundancy and confusion.

2. Changes for Individual Taxpayers

• Flexibility for TDS Refunds: The bill allows individuals to claim a refund of TDS (Tax Deducted at Source) even if they file their income tax return after the statutory deadline. This provides significant relief, especially for small taxpayers.

• Deductions for House Property Income: The new bill explicitly clarifies that the 30% standard deduction on house property income is to be calculated on the net annual value, after deducting municipal taxes. This aligns the law with the current practice and avoids potential disputes.

• Pre-Construction Interest Deduction: The bill extends the deduction for interest on a home loan for the pre-construction period to also include let-out or rented properties, not just self-occupied ones.

• Commuted Pension: The bill provides an explicit deduction for commuted pension for non-employees, aligning the tax treatment with that of employees and reducing ambiguity.

3. Changes for Business and Corporate Taxpayers

• Direct Tax Benefits: The Taxation Laws (Amendment) Bill, 2025, which was passed alongside the new Income Tax Bill, provides for specific direct tax benefits to public investment funds from Saudi Arabia.

• Reduced Time Limit for TDS Corrections: The time limit for filing TDS correction statements has been reduced from six years to two years, which is expected to reduce complaints from deductees and streamline the process.

• Anonymous Donations for Non-Profits: The bill clarifies and restores the provision for tax exemptions on anonymous donations to religious-cum-charitable trusts, aligning it with the provisions of the 1961 Act. The exemption is now allowed for 5% of the total donations, rather than 5% of anonymous donations, which was a point of concern in the initial draft.

4. Broader Powers for Tax Officials

• Access to Digital Information: The new bill significantly broadens the powers of income tax officials during search and seizure operations. It allows them to demand access codes to a person’s “virtual digital space,” including email servers, social media accounts, and other electronic data, and to override these codes if they are not provided.

• Definition of Undisclosed Income: The definition of “undisclosed income” in search cases has been expanded to include “virtual digital assets”, such as cryptocurrencies and NFTs.

LOKSABHA PASSES THE BILLS : 

Dated 11.08.2025  : The Indian government has introduced a new bill today, August 11, 2025, to replace the withdrawn Income-Tax Bill, 2025. This new bill, known as the Income-Tax (No. 2) Bill, 2025, was introduced and passed in the Lok Sabha.

The bill, introduced by Finance Minister Nirmala Sitharaman on August 11, 2025, was passed by a voice vote amid protests from opposition members. This new legislation is intended to replace the outdated Income-Tax Act of 1961 and incorporates most of the recommendations made by a parliamentary Select Committee.

The government’s decision to withdraw the previous draft and introduce a revised one was aimed at ensuring a consolidated and clear piece of legislation that addresses the drafting errors and ambiguities identified by the committee and other stakeholders. The new bill aims to simplify the tax code, reduce litigation, and make the tax system more taxpayer-friendly.

The bill now needs to be passed by the Rajya Sabha before it can receive presidential assent to become a law.

The new bill is a revised version that incorporates the majority of the recommendations made by a parliamentary Select Committee and other stakeholders. The government’s decision to withdraw the earlier bill was to address drafting errors, align phrases, and make other necessary changes to present a consolidated and clear piece of legislation. 

Key features of the new bill include:

• Incorporating Committee’s Suggestions: The new bill reflects most of the 285 recommendations from the Select Committee, which aimed to enhance fairness and reduce ambiguity in the tax code.
• Simplified Language: The bill is designed to be more taxpayer-friendly, with a simplified structure and a shorter text than the existing Income-Tax Act, 1961.
• Reduced Litigation: It is expected to reduce litigation by introducing a “trust first, scrutinize later” approach and removing many outdated provisions.
• Specific Changes: The revised bill includes changes such as clarifying the deduction for commuted pensions for non-employees, extending pre-construction interest deductions to let-out properties, and allowing individuals to claim TDS refunds even after the due date for filing returns.

The new bill will now proceed through the legislative process, requiring the endorsement of the Rajya Sabha before it can be sent to the President for final approval.

Taxation Laws (Amendment) Bill, 2025.

 Another bill related to taxation was passed by the Lok Sabha along with the Income-Tax (No. 2) Bill, 2025.The other bill was the Taxation Laws (Amendment) Bill, 2025. This bill was also passed by a voice vote on August 11, 2025, amidst the same protests from opposition parties.

The key features of the Taxation Laws (Amendment) Bill, 2025, are:

• Amendments to existing laws: It seeks to amend the Income-tax Act, 1961, and the Finance Act, 2025.
• Unified Pension Scheme: The bill’s main purpose is to provide tax exemptions to subscribers of the Unified Pension Scheme (UPS), which was implemented from April 1, 2025.
• Block assessment and direct tax benefits: The bill also incorporates changes to the scheme of block assessments in income tax search cases and provides certain direct tax benefits to public investment funds from Saudi Arabia.

INCOME TAX BILL 2025   WITHDRAWN 

09.08.2025 :  The central government officially withdrew India’s Income Tax Bill, 2025 on August 8, 2025. First introduced in the Lok Sabha (lower house of Parliament) on February 13, 2025, the bill aims to replace the six-decade-old Income-Tax Act, 1961. The primary reason for the withdrawal is to incorporate recommendations and suggestions made by a parliamentary Select Committee and other stakeholders.

The Finance Minister, Nirmala Sitharaman, stated that the withdrawal was necessary to address drafting errors, align phrases, make consequential changes, and incorporate cross-references to ensure the bill conveys the correct legislative meaning.

A new, revised version of the bill, which will include most of the recommendations from the Select Committee, is expected to be introduced shortly. The goal of this move is to prevent confusion that would arise from having multiple versions of the bill and to present a consolidated, updated draft for parliamentary consideration.

Some of the key issues and recommendations that the committee flagged in the initial draft include:

• Drafting ambiguities: The committee identified issues in the wording of several clauses that could lead to incorrect tax treatment for certain types of income, such as from vacant commercial properties or rental income.
• Deductions: Recommendations were made to clarify and extend certain deductions, for example, making it explicit that the 30% standard deduction on rental income is calculated after deducting municipal taxes and extending the benefit of pre-construction interest deductions to let-out properties.
• Pension treatment: The committee proposed a change to ensure equitable tax treatment for commuted pensions for both employees and non-employees.
• Simplified language: While the bill was intended to simplify the tax code, the committee suggested specific wording changes to enhance fairness and reduce ambiguity in certain provisions.

THE DIRECT TAX CODE 2025 :

The Direct Tax Code (DTC) 2025 is a proposed reform of India’s direct tax laws, aiming to simplify the current tax system and make it more efficient and taxpayer-friendly. It is expected to replace the existing Income Tax Act of 1961 and the Wealth Tax Act of 1957.

Beyond replacing two laws, the new direct tax code aims for the following:

• The Direct Tax Code unifies income tax, dividend distribution tax, fringe benefits tax, and wealth tax into a single, streamlined framework, simplifying tax regulations for efficiency and ease of compliance.

• It seeks to expand the taxpayer base from 1% to 7.5% of the population by phasing out various tax breaks and deductions. It also makes tax compliance straightforward to encourage broader participation.

• The code clarifies tax laws to reduce legal disputes, promotes fairness by aligning with international standards, incentives and establishes fair treatment across taxpayer groups.

• Introduces updated reassessment rules and a mediation mechanism between taxpayers and the Central Board of Direct Taxes (CBDT).

• The DTC 2025 is expected to be implemented from the financial year 2025-26. However, the exact timeline and specific provisions may undergo changes during the legislative process.

Finance Minister Nirmala Sitharaman introduced the Direct Tax Code 2025, which aims to modernize India’s tax code with clearer, more straightforward regulations by replacing the Income Tax Act of 1961 and the Wealth Tax Act of 1957. The Direct Tax Code bill started with its first draft in 2009, followed by its Revised Discussion Paper (RDP) introduction in the Lok Sabha, Now Finance Minister has presented the Income tax Bill 2025 to the Lok sabha for discussion and approval . The bill has been drafted to reform the tax laws as envisaged in the Direct Tax code 2025 .

NEW INCOME TAX BILL INTRODUCED IN THE LOKSABHA :

Dated 13.02.2025 : The new income tax bill, officially named the Income Tax Bill 2025, is introduced in the Loksabha by Finance Minister Ms Nirmala Sitharaman. This billl replaces the existing Income Tax Act of 1961, which has been in place for over six decades. The new income tax law is expected to come into effect from April 1, 2026

Key Objectives of the bill :

Simplified Language: The primary goal is to make the tax laws easier to understand for taxpayers by using simpler language and avoiding complex legal jargon.

The simplification exercise by the Finance Ministry was guided by the following three core principles:

1. Textual and structural simplification for improved clarity and coherence.

2. No major tax policy changes to ensure continuity and certainty.

3. No modifications of tax rates, preserving predictability for taxpayers

Consolidation of Provisions: The bill aims to consolidate similar provisions and eliminate redundant sections, making the tax code more concise and user-friendly.

Modernization of Terminology: The bill proposes replacing terms like “assessment year” and “previous year” with the single term “tax year” to align with the financial year.

No Changes to Tax Slabs: The bill does not propose any changes to the existing income tax slabs or tax rates.

Focus on Clarity: The bill aims to enhance clarity in tax laws to reduce ambiguity and potential disputes.

The Government ensured widespread stakeholder engagement, consulting taxpayers, businesses, industry associations, and professional bodies. Out of 20,976 online suggestions received, relevant suggestions were examined and incorporated, where feasible. Consultations were held with industry experts and tax professionals and simplification models from Australia and the UK were studied for best practices.

The bill is expected to undergo reviews in the parliament

Ref : Press Release dated 13.02.2025

To go through the bill , CLICK HERE FAQ RELATED TO THE BILL M CLICK HERE

INCOME TAX CHANGES BROUGHT IN THE BUDGET 2025 :

The FM had earlier promised to bring reforms in Income tax rules and regulations in 2025 . As a part of the tax reform proposed i Direct Tax code 2025 , FM Ms Nirmala Sitharaman announced following changes in income tax rates , rules and regulations in the Union Budget for 2025-26presented on February 1st, 2025.

• No income tax for income up to Rs 12 lakh.

• New tax slabs and rates to reduce taxes for the middle class.

• Increased limit for tax deduction for senior citizens and TDS on rent.

• Increased Rebate Limit: The most significant change is the increase in the rebate limit under Section 87A. This means that individuals with an annual income of up to Rs 12 lakh will not have to pay any income tax under the new tax regime. This is a substantial increase from the previous limit of Rs 7 lakh.

• Revised Tax Slabs: The tax slabs in the new tax regime have been revised to facilitate this change. The new slabs are designed to reduce the tax burden on middle-class taxpayers.

New Tax Regime: The new tax regime has been revised to make it more attractive, especially for middle-income taxpayers. Here are the new income tax slabs:

Income up to Rs 4,00,000: No tax

• Rs 4,00,001 to Rs 8,00,000: 5%

• Rs 8,00,001 to Rs 12,00,000: 10%

• Rs 12,00,001 to Rs 16,00,000: 15%

• Rs 16,00,001 to Rs 20,00,000: 20%

• Rs 20,00,001 to Rs 24,00,000: 25%

• Above Rs 24,00,000: 30%

Key Points about the New Regime:

• Rebate: With the increased rebate under Section 87A, individuals with an annual income of up to Rs 12 lakh will not have to pay any income tax in the new regime.

• Standard Deduction: Salaried individuals can further reduce their taxable income by claiming a standard deduction of Rs 75,000. This effectively raises the tax-free income limit to Rs 12.75 lakh for salaried individuals.

Old Tax Regime:

The old tax regime remains unchanged.

• No Change in Old Regime: The old tax regime remains unchanged. Individuals can choose to continue with the old regime if they find it more beneficial.

TDS (Tax Deducted at Source):

• Increased Limit for Senior Citizens: The limit for tax deduction for senior citizens has been doubled to Rs 1 lakh. This will provide relief to senior citizens who rely on interest income.

• Increased Limit for TDS on Rent: The annual limit for TDS on rent has been raised from Rs 2.4 lakh to Rs 6 lakh. This change will make it easier for landlords to comply with TDS regulations.

TCS (Tax Collected at Source):

• Increased Threshold for Remittances: The threshold for collecting tax at source on remittances under various schemes has been increased to Rs 10 lakh from Rs 7 lakh.

• Waiver for Education Loans: TCS on remittances will be waived if the loan is taken for education purposes.

• Decriminalization of Delay: The delay in the payment of TCS up to the due date has been decriminalized. This will reduce the burden on businesses.

She also promised to present new Income Tax bill 2025 in a week’s time replacing the Income Tax Act of 1961

History : The history of the Direct Tax Code (DTC) in India is marked by several attempts to reform the complex tax system in India :

Initial Proposal and Discussion Paper:

• 2009: The government released a discussion paper outlining the proposed DTC, aiming to simplify the Income Tax Act of 1961.

DTC Bill Introduction and Standing Committee Review:

• 2010: The DTC Bill was introduced in Parliament.

• 2010-2012: The Standing Committee on Finance reviewed the bill and submitted its report.

Delay and Lapse:

• Due to various reasons, including political changes and economic conditions, the implementation of the DTC was delayed.

• The DTC Bill eventually lapsed.

Renewed Efforts and Expert Committee:

• 2017: An expert committee was formed to draft a new DTC.

• 2019: The committee submitted its report to the Finance Minister.

•  

DTC 2025:

• 2024: The government introduced the Direct Tax Code 2025, aiming to implement it from the financial year 2025-26.

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It is expected that there might be many changes to the draft proposal of the bill before it’s implemented.

KEY CHANGES EXPECTED IN THE NEW LAW :

• The bill widens income tax slabs for individuals. Income between Rs 2 to Rs 5 lakh will be taxed at 10%, between Rs 5 and Rs 10 lakh at 20%, and over Rs 10 lakh at 30%.

• Companies will be taxed at 30% of business income. Foreign companies shall pay an additional branch profits tax of 15%. Non-profit organisations are taxed at 15%.

• Removes several tax breaks and deductions currently allowed for companies but retains most deductions available to individuals.

• Removes the distinction between short-term and long-term capital gains for all assets except securities listed on stock exchanges.

• The wealth tax exemption limit is increased from Rs 15 lakh to Rs 1 crore.

• Introduces General Anti Avoidance Rules, which allow tax authorities to classify any arrangement into which one entered for tax avoidance.

Major changes of the Direct Tax Code 2025

1. Simplified residence rule ; Residential status for taxpayers will be classified as either residents or non-residents in the new proposition, removing the RNOR (Resident but Not Ordinarily Resident) category in The Income tax act 1961

2. Unified tax rates for the companies : Domestic and foreign companies will be taxed at the same rate without differentiation .

3. Removal of Assessment Year and Previous Year : The code introduces “Financial Year” as the only term used for income tax return (ITR) filings, eliminating the terms “Assessment Year” / “Previous Year”.

4. Capital gains tax updates : The capitl gains will be taxed as regular income. Short-term gains on financial assets will have a tax rate increase to 20% (up from 15%), while long-term gains is reduced to a rate of 12.5% (down from 20%).

5. New income category names : “Income from Salary“ is renamed to “Employment Income“, and “Income from Other Sources” is called “Income from Residuary Sources”.

6. Simplified and unified structure : The DTC 2025 arranges its 319 sections and 22 schedules in a straightforward, less fragmented format. By refining and consolidating the structure, the DTC 2025 minimises the need for cross-referencing multiple sections, making the tax filing process more straightforward .

7. Tax deduction on most income : Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) will apply to most types of income. The TDS rate for many payments will be reduced from 5% to 2%. For e-commerce operators, the TDS rate is significantly lowered from 1% to 0.1%, providing relief to taxpayers .

8. Expansion of audit roles : Company Secretaries (CS) and Cost and Management Accountants (CMA) will be permitted to conduct tax audits.

9. Reduced deductions and exemptions : Most tax exemptions and deductions will be eliminated to streamline tax filing. However, the standard deduction for salaried employees in the new tax regime has been raised to Rs 75,000.

PRESENT POSITION OF THE PROPOSED CHANGES :

The Central Board of Direct Taxes (CBDT) has established an internal committee to supervise an extensive review of the Income-tax Act, 1961 (Act), following the announcement made in the Union Budget 2024–25 on July 23 by the Finance Minister Nirmala Sitharaman about The Direct tax bill . The public has been asked to contribute to the review of the I-T Act, which has been in place to simplify the language, reduce litigation, minimize compliance, and eliminate outdated provisions. You may submit Suggestions for comprehensive review of Income Tax Act by going to the linked webpage The goal is to make the Act more understandable and clear, leading to decreased disputes and litigation and providing taxpayers with greater tax certainty.
The bill is presented to Loksabha in the budget session 2025 for the discusssion , modifications and approval and to be implemented from 1st , APRIL 2025 for the Financial year 2025-26.