The Income-Tax Act, 1961 provides the framework for levying income tax on individuals and companies.[1]  The Ministry of Finance (2009) had observed that the current law has become complex to understand for a tax payer due to factors such as: (i) numerous amendments, (ii) frequent changes necessitated due to increasing sophistication of commerce and attempts to minimise tax avoidance, and (iii) judgements given by courts at various levels.[2] 

In the past, some attempts have been made to replace the 1961 Act.  The Direct Taxes Code Bill, 2010 was introduced in Parliament to replace the 1961 Act.2^,[3]  While the Bill was not passed, the 1961 Act has subsequently been amended to incorporate some provisions contained in the Bill and recommendations by expert committees.  Key changes introduced in the framework include: (i) simplification of personal income tax under the new tax regime, (ii) reduction in corporate tax rate, (iii) introduction of general anti-avoidance rules (to check aggressive tax planning), and (iv) abolition of wealth tax (through amendment to the Wealth Tax Act, 1957).

The Income-Tax Bill, 2025 was introduced in Lok Sabha on February 13, 2025.[4]  It seeks to replace the Income-Tax Act, 1961.  It has been referred to a Select Committee of Lok Sabha (Chair: Mr. Baijayant Panda).  The report of the Committee was tabled in Lok Sabha on July 21, 2025.[5]

Key Features

• The existing framework to continue:  The Bill seeks to replace the Income-Tax Act, 1961.  It retains most of the provisions of the 1961 Act.  It primarily aims to simplify the language and remove redundant provisions.  Some of the measures incorporated in the Bill to simplify the law include: (i) deleting obsolete provisions, (ii) converting explanations and provisos into sub-sections, and (iii) incorporating formulae and tables across different provisions.  Tax rates and regimes for individuals and corporations remain unchanged.  Most definitions have also been retained.  There are no changes in offences and penalties.  The Bill also retains the tax administration structure.  It proposes April 1, 2026 as the date of its commencement.

• Power to frame schemes:  The Act provides for faceless collection of information and assessment of tax cases.  The Bill retains these provisions.  The Act also has specific provisions for faceless mechanism for areas such as: (i) inquiry or valuation, (ii) revision of orders, and (iii) collection and recovery of tax.  The Bill replaces these provisions with general powers for the central government to frame new schemes for greater efficiency, transparency, and accountability.  This may be done by: (i) eliminating the interface with the assessee through technology or (ii) optimising resource utilisation through economies of scale and functional specialisation.  Such schemes must be laid before Parliament.

• Virtual digital spaces:  The Act allows income tax authorities to enter and search buildings and break open locks.  This can be done if certain documents or books of accounts are not produced by a person who has been summoned under the Act.  The Act also empowers the authorities to inspect electronic documents.  The Bill retains these provisions and allows authorities to also gain access of a virtual digital space during search and seizure proceedings.  The authorities will have power to gain access by overriding any required access code.  The Bill defines virtual digital space as an environment, area, or realm that is constructed and experienced through computer technology.  It includes email servers, social media accounts, online investment and trading accounts, and websites for storing details of asset ownership.

• Interpretation of tax treaties:  The Act allows the central government to enter into agreements with other countries to provide relief in cases of double taxation.  It specifies that if a term used in such agreements is neither defined in the agreement nor in the Act, its meaning will be as notified by the central government.  The Bill retains these provisions and adds that if a term in a treaty is not defined in the treaty, the Act, or a notification by the central government, its meaning will be as assigned in any other law.

Issues to Consider

The Bill retains the framework and the structure of the 1961 Act.  It retains most of the provisions such as tax rates and slabs for individuals and corporations, definitions, structure of tax administration, and offences and penalties.  The intent of the Bill is to make the income tax law concise, lucid, and easy to read.  The Ministry of Finance (2009) had observed that a direct tax code should: (i) minimise exemptions to avoid erosion of the tax base, and (ii) reduce ambiguity to curb tax avoidance and aggressive tax planning.2  The Bill may not go far enough in simplifying the income tax framework and meeting these goals.

For instance, the Bill has retained the two tax regimes for personal income tax.  Under the old tax regime, individuals may avail a range of deductions and exemptions, whereas the new tax regime removes most of them.  While introducing the new tax regime, the Finance Minister had observed that various exemptions and deductions had made it burdensome to administer and comply with the old tax regime.[6]  Currently, individuals may choose between old and new tax regimes every year while filing returns.  For 2023-24, 72% of taxpayers had chosen to file their returns under the new tax regime.[7]  This figure may rise further with the increase in tax rebates under the new tax regime, effective from the current financial year.[8] 

Over the years, expert bodies have made certain recommendations to further simplify and improve the income tax framework.  Table 1 lists key recommendations which the Bill has not incorporated.2^{,[9],[10],[11]}

 Table 1: Some key recommendations on amending the income tax framework 

Suggested Change	Proposed by	Rationale
Addressing exemptions
Remove blanket exemption for agricultural income from income tax [Note: Taxes on agricultural income is in the State List (Entry 46)]	Kelkar Committee (2002), Shome Commission (2014)	Agricultural income exemption is prone to be misused as a means to avoid taxes.  Taxing it will promote horizontal equity.  It is under the purview of states as per the Constitution.  No state levies it.
Remove “resident but not ordinarily resident in India” category	Kelkar Committee (2002)	A person in this category can avoid tax on the foreign-sourced income in India as well as abroad; most countries only maintain two categories – residents and non-residents
Move to income-expense model for computing business income instead of the extant profit and adjustment model	Ministry of Finance (2009)	Will reduce disputes, prevent creative accounting, and align with norms in countries such as USA, Canada, and Australia
Address exclusion of exclusion under the definition of capital assets	ICAI (2024)	Capital assets definition does not include personal effects and agricultural land.  However, these exclusions have further exclusions: (i) personal effects exclude items such as jewellery, archaeological collections, and paintings; (ii) agricultural land does not include land in certain areas such as those in the jurisdiction of municipalities or cantonment boards
Maintaining parity in taxation
Eliminate Minimum Alternate Tax (MAT)	Kelkar Committee (2002)	MAT penalises companies with high book profits but low taxable income
Remove distinction of short-term and long-term capital assets based on holding period	Ministry of Finance (2009)	Simplifies compliance
Align tax rate for LLP and partnership firms with that for companies	ICAI (2024)	Firms and LLPs are taxed at a higher rate of 30%, as compared to certain corporate entities which can avail concessional rate of 25%, many businesses may choose firm/LLP model for flexibility in structure, higher rate may disincentive this choice
Provide for automatic adjustment of tax slabs for inflation	Standing Committee on Finance (2012)	Helps preserve real value of tax benefits, avoid bracket creep (inflation pushing a person in a higher tax bracket), and reduce the need for periodic amendments
Improving Tax Administration
Integrate the Central Board of Direct Taxes (CBDT), and the Central Board of Indirect Taxes and Customs (CBIC); Remove the post of Revenue Secretary and assign his functions to the Board; Set up a Governing Council to see the working of the Board and a Tax Council to suggest policy and legislation	Shome Commission (2014)	The Revenue Secretary is at the top of the tax administration and has the final say in terms of tax administration before it reaches the finance minister, despite not being an expert in tax administration; Separation between CBDT and CBIC is artificial and there is a lack of cooperation
Establish Tax Ombudsman in line with the banking sector	Kelkar Committee (2002)	Will provide an independent system for grievance redressal [Note: The income tax ombudsman was established under guidelines by CBDT in 2003 and was subsequently discontinued in 2019.[12]]
Introduce alternate dispute resolution processes such as arbitration and conciliation through the Act	Shome Commission (2014)	Will help reduce disputes reaching the litigation stage
Mandatory time limit for disposal of appeals	ICAI (2024)	Use of the words “where it is possible, may” renders the timeline of one-year non-mandatory, huge pendency exists before the Commissioner (Appeals)
Allow case in favour of taxpayer if the appeal is not finalised within a prescribed timeframe	Shome Commission (2014)	Will help set clearer accountability in terms of timeliness and the quality of decision

Sources: Report of the Task Force on Direct Taxes (Chair: Dr. Vijay L. Kelkar), December 2002; Report of the Tax Administration Reforms Commission (Chair: Dr. Parthasarathi Shome), May 2014; Discussion Paper on Direct Taxes Code, Ministry of Finance, August 2009; 49^th Report: The Direct Taxes Code Bill, 2010, The Standing Committee on Finance, 2012; Suggestions on Comprehensive Review of the Income Tax Act, 1961, Institute of Chartered Accountants of India, 2024; PRS.

The Act allows the authorities to inspect electronic documents during search and seizure proceedings.  The Bill retains this and also allows them access to virtual digital space of an individual.  The authorities will have power to gain access by overriding any required access code.  The Bill defines virtual digital space as an environment, area, or realm that is constructed and experienced through computer technology.  It includes email servers, social media accounts, online investment and trading accounts, and websites for storing details of asset ownership.  The personal information on such virtual digital spaces is protected under the fundamental right to privacy.  The Supreme Court (2017) has held that the right to privacy may be restricted by law if it must be necessary and proportionate to the purpose.[13]  The Bill may lack safeguards against the infringement of this fundamental right. 

The Bill does not require the authorities to establish necessity for such actions.  The authority may undertake such an action if they have the “reason to believe” which could be a lower threshold.  Laws such as the Information Technology Act, 2000 and the Telecommunications Act, 2023 require establishing “necessity” or “expediency” before accessing personal information of individuals.[14]^,[15]  The Rules under them require the authorities to evaluate whether alternative measures exist.[16]^,[17]  The action under the Bill may not be proportionate.  Accounts such as emails and social media will often contain personal communication of individuals, which may be unrelated to any tax-related investigation.  Allowing access to such information may also amount to infringing upon privacy of individuals (with whom the assessee is communicating) who are unrelated to the case.

The Select Committee of Lok Sabha observed some issues with the drafting of the Bill.5  It noted that while the Bill does not aim to make substantive changes, there may be changes in implications due to omissions or changes in the language of the provisions.5  Table 2 on the next page provides an illustrative list of key issues which the Committee has recommended addressing.  It has also recommended clarifying some provisions, including unincorporated provisions of the Finance Acts of 2024 and 2025, and addressing reference and typographical errors.5  The Ministry of Finance has accepted the Committee’s recommendations.5

 Table 2: Illustrative list of drafting issues with the Income-Tax Bill, 2025 

Clauses	Provision	Issue
2(49)	The definition of ‘income’ refers to sections of the 1961 Act	Will require continued reference to the Act which the Bill seeks to repeal
148, 200, 201	Removes deduction for inter-corporate dividends passed on to shareholders in case of some companies	Will lead to double taxation of such income in the hands of the company and the shareholders; the Act provides for this deduction
162	Includes companies as “associated enterprises” for mere participation in control, management, or capital; this applies in case of transfer pricing provisions	Changes the position from the Act that certain thresholds with regard to participation must also be satisfied
9(6)(a)(iii)	Royalty earned by a non-resident for activity outside India may be taxed	Contradicts the general principle in the Act and the Bill that for non-residents, only income sourced from India is taxable
536(2)(n)	Allows long-term capital losses incurred until March 2026 to be set off against short-term capital gains	Contradicts the general principle in the Act and the Bill that long-term capital losses may be set off only against long-term capital gains, as they are taxed at a lower rate
138, 139, 141, 142, 143	Refers to the sections of the 1961 Act with regard to certain profit-linked incentives for specified businesses	Will require continued reference to the Act which the Bill seeks to repeal, the Committee noted that these provisions have sunset clauses and are due to be phased out, hence, it recommended that they should instead be moved to savings clauses

Source:  The Report of the Select Committee of Lok Sabha on the Income-Tax Bill, 2025, July 2025; PRS.