The Lok Sabha on Monday, August 11, passed the modified Income-Tax (No. 2) Bill, 2025, a landmark piece of legislation poised to replace the six-decade-old Income-Tax Act, 1961.
The bill, introduced by Finance Minister Nirmala Sitharaman, follows the government's official withdrawal of the previous Income-Tax Bill, 2025, which had been presented earlier this year.
The government's decision to withdraw the initial draft and introduce a revised version was a direct response to a comprehensive, 4,575-page report submitted by a 31-member Parliamentary Select Committee. The new bill, according to a statement from the Finance Minister, incorporates almost all of the committee's 285 recommendations, with the goal of creating a more streamlined, clear, and dispute-resistant tax code.
"There are corrections in the nature of drafting, alignment of phrases, consequential changes and cross-referencing," Sitharaman stated in the bill's objectives and reasoning section. The withdrawal was described by officials as a necessary step to avoid confusion from multiple versions and to present a single, consolidated draft to Parliament.
Key amendments and how they impact taxpayers
The new legislation is not a radical overhaul of tax policy, but rather a significant effort to simplify and clarify the existing framework. While tax rates and rebates remain unchanged, the bill addresses several key areas that were identified as sources of ambiguity and potential litigation.
For individual taxpayers:
Refunds on delayed returns: One of the most critical changes is the removal of a provision that could have restricted taxpayers from claiming a refund if their return was filed after the statutory due date.
This move restores the long-standing legal principle and is expected to provide significant relief, particularly for small taxpayers.
Income from house property: The bill provides much-needed clarity on deductions for house property income. It explicitly states that the standard 30% deduction should be calculated on the annual value after deducting municipal taxes. Furthermore, it extends the deduction for pre-construction interest to include let-out properties, a modification that aligns with the existing law.
Pension exemptions: The new bill introduces income-tax exemptions for specific payouts under the new Unified Pension Scheme. It extends similar tax exemptions for commuted pensions to non-employees who receive them from an approved fund, a change that rectifies an earlier disparity in tax treatment.
Liberalised Remittance Scheme (LRS): The bill incorporates a provision for a 'NIL' Tax Collected at Source (TCS) on LRS remittances for education purposes financed by any financial institutions. This change rectifies an omission from the earlier draft and aligns the bill with existing law.
For businesses and companies:
Corporate dividend deduction: The committee's recommendation to reinstate the inter-corporate dividend deduction, which was notably absent in the initial draft, has been accepted. This is a significant relief for corporations.
Beneficial owner definition: The bill includes a revised definition of "beneficial owner," which will enable individuals to carry forward losses when they receive direct or indirect share benefits during the tax year, a move designed to simplify loss accounting.
Transfer pricing provisions: In a move to reduce ambiguity and potential disputes, the new bill removes the phrase "without affecting the generality of sub section (1)" from the Transfer Pricing provisions.
According to experts, this simplification of language aims to render easier interpretation for taxpayers while keeping the essence of the definition of Associated Enterprises unchanged.
LLPs and AMT: The updated bill rectifies a drafting error from the previous version by aligning the applicability of the Alternate Minimum Tax (AMT) for Limited Liability Partnerships (LLPs) with the existing provisions of the 1961 Act. This removes the expanded scope that would have included LLPs not claiming specific tax benefits.
Non-profit organizations: The legislation provides clearer definitions of "parent company" and re-establishes provisions for non-profit and religious-cum-charitable trusts. It also ensures that anonymous contributions will not affect their eligibility for tax exemptions, a recommendation aimed at reducing the compliance burden on these organizations.
TDS and TCS: The new bill explicitly reintroduces the provision for both "Nil" and "lower" tax deduction certificates, a clarification that will prevent ambiguity and operational challenges. The previous draft had omitted the explicit reference to "Nil" deduction, but the revised version reinstates the established language of Section 197 of the old Act.
MSME alignment: The bill provides a clear alignment of the definitions for micro and small enterprises with the MSME Act, 2006, ensuring consistency across different statutes.
Expert analysis: A pragmatic step towards a transparent tax environment
The new bill has been largely welcomed by tax experts and industry leaders for its focus on simplification and its responsiveness to stakeholder feedback.
Gouri Puri, Partner at Shardul Amarchand Mangaldas & Co, stated that the withdrawal and introduction of the revised bill "demonstrate the government’s responsiveness to stakeholder feedback and the Select Parliamentary Committee’s recommendations."
Puri noted that the original draft had raised concerns about ambiguities related to house property taxation, pension deductions, and the refund process, which risked increased litigation. "The revised bill addresses these gaps to simplify interpretation, reduce disputes, and promote fairness," she said.
Puri views this recalibration as a "pragmatic effort to balance administrative efficiency with investor and taxpayer confidence," which is crucial for sustaining domestic consumption and attracting foreign investment.
Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, provided a detailed overview of the incorporated changes.
He noted that the bill "demonstrates the Government’s receptiveness to Parliamentary recommendations, incorporating targeted amendments to enhance clarity, ease of compliance, and consistency with existing legislation."
He specifically highlighted the inclusion of NIL TCS for LRS education remittances, the provision for NIL-TDS certificates, and the reinstatement of inter-corporate dividend deductions as key improvements. Jhunjhunwala concluded that by enabling refunds for belated returns and harmonising definitions, "the Bill reflects a balanced, pragmatic, and taxpayer-oriented approach."
Amit Maheshwari, Tax Partner at AKM Global, a tax and consulting firm, highlighted the bill's focus on aligning tax laws with new pension reforms and international investment agreements. "A central feature of the bill is the introduction of income-tax exemptions for specific payouts under the new Unified Pension Scheme," he said. Maheshwari also praised the decision to omit the restrictive clause on refunds for belatedly filed returns, calling it a move that "will bring considerable relief to the taxpayer community."
Dinesh Kanabar, CEO of Dhruva Advisors, called the changes "very welcome." He noted that many of the provisions against which representations were made to the select committee have now been accepted. "To give a few examples, the provisions of levying Alternate Minimum Tax on LLPs has been done away with, the rigours placed on Charitable Trusts have been removed," Kanabar stated.
Rajesh Gandhi, Partner, Deloitte India, offered specific commentary on the provisions related to pension funds. He noted that the proposals for tax benefits on investments by foreign pension and sovereign funds in the infrastructure sector "are similar to the existing tax law though the provisions have been drafted in a more structured and concise manner." However, Gandhi also pointed out areas where the government could have gone further. "The Government could have considered industry suggestions while drafting the proposals including extension of tax benefits to holding companies setup prior to 2021, allowing reinvestment of dividend income within the group without triggering double taxation of dividend income," he said.
Sachin Garg, Partner, Nangia & Co LLP, provided specific insights into some of the crucial amendments. He noted a significant change for non-profit organizations, where the revised bill aligns with the 1961 Act by allowing a 5% exemption for anonymous donations based on the total donation, rather than just the anonymous donations themselves. This amendment, he said, addresses an "inadvertent drafting anomaly in the original bill" that could have materially increased the tax burden on these organizations.
Regarding TDS certificates, Garg highlighted that the new bill reinstates the established language of Section 197 of the old Act. The initial draft had omitted the explicit reference to a "Nil" deduction certificate, creating potential for ambiguity.
"While it was possible to contend that 'Nil' is subsumed within 'lower' deduction, there was scope for interpretation which could have led to ambiguity and operational challenges," Garg stated. He said this clarification will provide "much-needed relief and avoid unnecessary and unintended litigation."
The consensus among experts is that the new bill is a positive, albeit corrective, step. While it doesn't introduce any major policy shifts or changes in tax rates, its meticulous corrections and clarifications are expected to significantly reduce future litigation and make the tax code more accessible and easier to understand for all taxpayers.
The new law is a testament to the government's commitment to creating a "dispute-resistant" and modern tax system for a new era.
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