Lok Sabha Passes Income-tax (No. 2) Bill, 2025

Legislative Background

The initial Income-tax Bill was presented on February 13, 2025, and subsequently referred to a Select Committee led by MP Baijayant Panda. The Select Committee submitted its report in July, offering 285 recommendations, including 84 substantive suggestions and 201 drafting corrections. In light of this, the February Bill was withdrawn on 8 August, 2025, and the revised Income Tax (No. 2) Bill, 2025 was introduced and passed on 11 August, 2025.

On August 12, 2025, the Rajya Sabha sent the Income-tax (No. 2) Bill, 2025, back to the Lok Sabha, marking the completion of Parliament’s approval for a complete replacement of the Income-tax Act, 1961. This represents the first comprehensive rewrite of India’s direct tax legislation in sixty years. The new law is scheduled to take effect from April 1, 2026 (FY 2026-27).

Why this overhaul?

The stated goals are to simplify language, remove redundancies, keep the administrative architecture intact but cleaner, and provide better cross-referencing without springing surprises on tax rates this year. In short: modernize the law’s structure and clarity first keep rates and regimes steady for now.

The Bill is built around the SIMPLE framework—Streamlined, Integrated, Minimized Litigation, Practical & Transparent, Learn & Adapt, Efficient Tax Reforms—intended to make tax laws clearer and more accessible. Section consolidation: Reduced from around 819 sections to 536, spread across 23 chapters and 16 schedules, aiming for clarity and ease of navigation.

What changed for Taxpayers?

1. Provisions related to Salaried Taxpayers (Clause 16, 19 of Income-Tax (No. 2) Bill, 2025)
   • The standard deduction under the new tax regime has been increased from Rs. 50,000 to Rs. 75,000.
   • Under Section 87A (as applied via Section 115BAC(1A)), the rebate has been raised so that salaried individuals have zero tax liability up to Rs. 12.75 lakh taxable income, including the Rs. 75,000 deductions—but excluding special-rate incomes like STCG.
   • Non-employees can now claim full commuted pension deduction, extending clarity across taxpayers.
2. House-property income—ambiguity removed (Clauses 20-25 of Income-Tax (No. 2) Bill, 2025)
   • Status quo on computation retained: Fears that rental income rules were shifting (e.g., treatment of municipal taxes, standard deduction, pre-construction interest) have been addressed. The passed Bill clarifies that there is no adverse change to the way rental income and associated deductions work.
   • Standard Deduction: The existing 30% standard deduction on the net annual value (after deducting municipal taxes) remains unchanged.
   • Pre-construction interest: Deduction for pre-construction interest is explicitly available not only for self-occupied property but also for let-out/deemed-let-out property—removing the anomaly spotted in the initial draft.
   • Vacant commercial property: Updated rules minimize interpretive gaps on notional income or valuation approaches when premises are vacant—an area with frequent disputes.
3. Corrections and Transition for Specified Business Deductions (Clauses 26 of Income-Tax (No. 2) Bill, 2025)
   • Minor drafting corrections—replacing “named” with “name” and “input” with “import”—and advised aligning Clause 26(2)(k) with Section 35AD of the 1961 Act.
   • Proposal in respect of sale proceeds of specified business assets, for which full deduction was earlier claimed, should be taxed as business income under the new regime if sold post-transition.
4. Anonymous donations clean up and consistency (Clauses 332, 335, 337 of Income-Tax (No. 2) Bill, 2025)
   • The Bill originally proposed a flat 30% tax on anonymous donations received by all registered NPOs under Clause 337, granting exemption only to trusts “established wholly for religious purposes.” This excluded religious-cum-charitable trusts from any relief, marking a regressive departure from existing provisions.
   • The Select Committee recommended reinstating a framework similar to Section 115BBC of the 1961 Act, which exempts religious-cum-charitable trusts from taxing anonymous contributions—recognizing practical challenges in identifying donors.
   • Additionally, the Committee flagged the misuse of the term “receipts” (Clause 335) instead of “income”, which deviates from the principle of taxing only net income—not gross receipts. They recommended the return to “income” to preserve fairness and consistency.
5. TDS friction Nil TDS certificates
   The passed Bill restores/clarifies the framework enabling taxpayers to obtain Nil/Lower TDS certificates in defined situations—plugging a gap that would have otherwise led to excess TDS and avoidable refund cycles. Freelancers, professionals, and businesses that rely on Nil/Lower TDS orders to manage cash flow can breathe easier.
6. Consolidated TDS/TCS Provisions (Clauses 393, 394 of Income-Tax (No. 2) Bill, 2025)
   • Section 393: Merges TDS provisions across various categories (e.g., commission, rent, interest), presented in easy-to-understand tables.
   • Section 394: Similarly, consolidates TCS provisions with tabular summaries including thresholds, collectors, and rates.
   • Specifically, 43 sections of TDS provisions have been consolidated into three tables, categorizing them by “residents,” “non-residents,” and “any person.”
7. Single ‘Tax Year’ System (Clause 3 of Income-Tax (No. 2) Bill, 2025)
   The bill does away with the complex dual system of “Previous Year” and “Assessment Year,” introducing a single, streamlined “Tax Year” instead. This simplification is expected to make tax filing and financial planning significantly easier for taxpayers.
8. Revised Taxation Framework for LLPs (Clause 44 of Income-Tax (No. 2) Bill, 2025)
   • Bill continues to treat Limited Liability Partnerships (LLPs) as separate taxable entities, but introduces simplifications in loss set-off and carry-forward rules for LLPs to align with companies.
   • Losses from one business activity carried by LLPs can now be offset against income from another business activity without restrictions.
   • This flexibility aims to ease compliance and encourage LLPs as a preferred business vehicle.
   • The alternate minimum tax (AMT) regime remains applicable but with clearer thresholds and streamlined computations.
   • Both LLPs and companies will benefit from faceless assessment procedures and easier return filing via a unified portal, reducing administrative burden and increasing transparency.
9. Simplified Returns & Audits (Clauses 63 of Income-Tax (No. 2) Bill, 2025)
   • New simplified income tax return (ITR) forms targeted at small taxpayers, especially salaried individuals, pensioners, and small businesses with straightforward income sources, thereby reducing, the number of schedules and disclosures required, making filing easier and less time-consuming.
   • Exempt persons with turnover less than Rs. 10 crores, provided their cash receipts are less than 5% of total receipts, and Non-residents under the presumptive taxation scheme (Section 44BBD), from maintaining books and tax audit because they cannot claim profits lower than prescribed limits.

What did not change?

Conclusion

This is a structural reset, not a rate-tweaking exercise. Parliament has delivered a cleaner statute that keeps the economic impact neutral for now resisting the temptation to bundle slab overhauls into the codification phase to ensure a seamless switchover by April, 2026.

Disclaimer

The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.