Income Tax Bill 2025 vs Income Tax Act 1961: What all has changed under the new bill; check FAQs

Finance Minister Nirmala Sitharaman presented the Income Tax Bill for the year 2025 in the Lok Sabha last Thursday. The proposed reforms aim to simplify and modernise the current tax legislation.

The decision to review the Income Tax Act of 1961 was initially announced by FM Sitharaman during her Budget Speech on July 23, 2024. The objective is to streamline the Income Tax Act, making it more succinct, understandable, and user-friendly.

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The overarching goal is to minimize conflicts and legal disputes, offering taxpayers greater certainty regarding their tax obligations. The comprehensive review is slated for completion within six months. In her budget speech on February 1, 2025, FM Sitharaman confirmed that the Income Tax Bill for 2025 would be presented to parliament within the following week.

The upcoming Income Tax Bill, comprising over 600 pages, is set to supersede the longstanding Income Tax Act of 1961 and usher in a new era with the Income Tax Act of 2025.

New Income Tax Bill 2025: What has changed

1. Chapters, sections and words

According to FAQs issued by the Finance Minister, there has been a significant reduction in the text of new Bill, in comparison to the existing
Income Tax Act, as summarised below.
Particulars Income-tax Act, 1961 The proposed Act
Chapters    47                   23
Sections    819*                536
Words       5.12 lakhs          2.60 lakhs
* Effective Sections

Besides, about 1200 Provisos and 900 Explanations have been removed. 

2. Income tax Act, 1961 consists of 819 sections

During the course of numerous amendments to the Income tax Act, 1961, several policy decisions were incorporated as separate provisions. Many a times such provisions were connected to already existing sections and accordingly the new sections were numbered in continuation to the existing sections. For example, several provisions relating to tax on special cases were inserted as sections starting with 115 series viz 115 AC,115AD, 115JB, 115VP etc. As a result of such insertions, effective sections existing in the Income tax Act, 1961 are 819. 

3. New Income Tax Bill 2025's chapters, sections

While the existing Income-tax Act contains 298 numbered sections, effective sections in the current Act are 819. This is because other than numeric section numbers there are large number of sections with alpha-numeric codes such as 115A to 115WM (117 sections) and so on. 
The Income-tax Act not only deals with levy of tax but it is a comprehensive document, which encompasses all aspects of tax administration. It also includes other aspects such as:
(a) laying down the administrative framework, assigning roles and responsibilities for assessing officers, taxpayers, tax deductors, and professionals etc;
(b) setting out the framework for income determination, timelines, appellate procedures, enforcement, assessments, and penalties; and
(c) taking into account the impact of interpretations on economic policy, affecting both domestic and international investments. 

The new Bill proposes 536 sections to meet the above-mentioned requirements. Further, several sections in the new Bill exist primarily to honour the commitments under the existing tax regime, including provisions relating to Minimum Alternate Tax (MAT), various deductions and exemptions, etc. 
These provisions will remain in force until their respective sunset clauses take effect. Therefore, these are required to be part of new Bill to ensure a smooth transition, while maintaining legal and policy continuity. 

4. Tax year

The concept of ‘tax year’ has been introduced replacing ‘previous year’ and ‘assessment year’. The timelines and computation in the Bill are now with reference to the financial year for which the income is liable to be taxed. It is expected that the use of ‘tax year’ will make the new Bill easier to comprehend. 
Further, many of the comparable tax jurisdictions in the world are using one single term, for purpose of denoting the unit period of taxation. ‘Tax year’ is commonly used in many countries.
With the introduction of ‘tax year’, broadly the following principles have been adopted:
i. ‘Tax Year’: Unit period of taxation. This term shall be referred in respect of all transactions and income for that period.
ii. ‘Financial Year’: For purposes of timelines for compliance and for procedural issues.

5. Salaried employees

All salary-related provisions have been consolidated in one place for easier understanding, so taxpayers no longer need to refer to separate chapters when filing their income tax return. Deductions previously allowed under section 10 of the Income Tax Act, 1961, such as gratuity, leave encashment, commutation of pension, compensation for VRS and retrenchment compensation, are now included in the salary chapter. Some allowances, like HRA, are now listed in Schedule II of the new Bill, which is referenced in the salary provisions. The goal was to improve readability by including tables and formulas.

While the chargeability of all perks remains in the Act, their valuation, conditions, and exceptions have been moved to Rules as they do not apply to every taxpayer. Similarly, redundant and repetitive provisions have been removed for better readability.

6. Virtual digital assets

The Income Tax Bill 2025 also contains all amendments proposed in Finance Bill 2025. Therefore, the users are advised to compare the provisions of the Income Tax Act, 1961, as updated with proposed amendments in Finance bill 2025, while reading the Income Tax Bill, 2025. There is, therefore, no change in the scope of ‘virtual digital asset’ under the Income Tax Bill, 2025. The definition under the Bill incorporates the amendment already proposed under the Finance Bill, 2025. 

7. Specific incomes and persons

Schedule II (16 rows)  • Incomes exempt such as agricultural income
Schedule III (39 rows) • Certain persons eligible for exemption on certain income such as partners of firms and HUF etc
Schedule IV (14 rows)  • Exemptions to non-residents
Schedule V (8 rows)    • Exemption to Business trusts, Sovereign Wealth Funds etc
Schedule VI (12 rows)  • Exemptions to IFSC units
Schedule VII (48 rows) • Persons exempt from tax

8. Changes in tax rates 

There are no changes related to rates. Since there have been regular amendments to the  Income Tax Act, 1961 including amendments proposed in Finance Bill, 2025, the Act stands updated from policy perspective. All amendments proposed upto Finance Bill 2025 have been duly incorporated in the new Income tax bill 2025. Therefore, while no major policy related changes have been made in the Bill, the above aspects have led to proposed ‘material’ changes in the existing law. 

9. TDS and TCS

TDS and TCS provisions have been made easier to comprehend by providing tables.
There are separate tables for payment to residents and non-residents, and where no deduction at source is required. For example, the proposed provisions relating to TDS on rent are shown below:

 

Provisions related to Non-Profit Organizations

The provisions related to Non-Profit Organizations were present at different places in the existing Act, in section 11, section 12, section 12A, section 12AA, section 12AB, section 13, section 115BBC, section 115BBI, section 115TD, section 115TE, section 115TF. The provisions related to approval are under the first and second proviso to section 80G (5). These have been simplified and consolidated into one chapter. All the provisions related to registered

Non-Profit Organisations have now been arranged in Part B of Chapter XVII titled “B. ––Special Provisions for Registered Non-Profit Organisation” in the new Bill.