Income Tax Bill, 2025

Parliament has passed a new Income Tax Bill, 2025, which will replace the six-decade-old Income Tax Act, 1961, from April 1, 2026. The new legislation is designed to simplify and modernize India’s tax laws by reducing complexity and eliminating archaic provisions.

Key Changes and Simplifications

The new bill significantly streamlines the tax code by:

• Reducing the number of sections from 819 to 536 and chapters from 47 to 23.
• Cutting the total word count from 5.12 lakh to 2.6 lakh.
• Replacing dense text with 39 new tables and 40 new formulas to enhance clarity and ease of understanding.
• Simplifying the taxation timeline by replacing the confusing “assessment year” and “previous year” with a single “tax year.”

The bill also makes provisions for a faceless mechanism for tax administration and empowers authorities to access a taxpayer’s “virtual digital space” during search and seizure proceedings.

Pension-Related Tax Relief

The new bill introduces important tax relief measures, particularly for pension schemes:

• Unified Pension Scheme (UPS): Subscribers to the Unified Pension Scheme, an option under the National Pension System (NPS), will receive a tax-free lump sum of up to 60% of their total pension corpus at retirement. This benefit is contingent on the conditions laid out in a government notification from January 24, 2025.
• Commuted Pension: The entire amount of a commuted pension—a lump-sum withdrawal of future pension installments—is now eligible for a full tax deduction. This benefit, which was previously only available to salaried employees, has been extended to all individuals who have invested in an approved pension scheme, ensuring equitable tax treatment for a broader range of pensioners, including self-employed individuals and nominees of deceased pensioners.