A New Era in Taxation: Income Tax Act, 2025 Replaces more than 60-Year-Old Law

On 21-8-2025, the Ministry of Law and Justice notified the Income-tax Act, 2025 to repeal the 6-decade old Income-tax Act, 1961. The new Act consolidates and restructures all the provisions in sequence. The provisions will come into force on 1-4-2026.

On 11-8-2025, the Income- tax (No.2) Bill, 2025 was introduced and passed by Lok Sabha without debate and on 12-8-2025 passed by Rajya Sabha. The President assented to the bill on 21/8/2025.

Structural Reforms:

1. The Income-tax Act, 2025 has reduced the number of Sections from over 800 to 536 Sections, 47 Chapters to 23 Chapters, and has 16 Schedules.

2. It has introduced the concept of Tax year, Digital-first and faceless administration, and faster returns for late filings removing penalty for late filers.

Main effects of repeal of the Income-tax Act 1961:

1. For interpretation purposes, any reference made regarding any tax year in the Income-tax Act, 2025 commencing on or before 1-4-2025 will be deemed to be in the context of the previous year as defined under the Income-tax Act, 1961 (‘Repealed Act’).

2. Irrespective of the repeal:

   • Nothing will affect the previous operation of the Repealed Act and orders which has been done or suffered under it.

   • Nothing will affect any right, privilege, obligation or liability acquired, accrued or incurred under the Repealed Act.

   • The provisions of repealed Act will continue to apply to any proceedings pending on 1-4-2026 and to proceedings initiated on or after 1-4-2026 in respect of any tax year beginning before the 1-4-2026 and the proceedings will be carried out as per the Repealed Act.

   • Any proceedings for imposition of penalty in respect of any tax year beginning before 1-4-2026 will be initiated under the Repealed Act.

   • Any proceeding pending on 1-4-2026 before any income- tax authority constituted under the Repealed Act will continue to enact and dispose the proceedings.

   • In case any proceedings relating to any tax year beginning before 1-4-2026 a refund falls due after 1-4-2026 or default is made after 1-4-2026 in the payment of any sum under such proceeding, the provisions of the Income-tax Act, 2025 will apply for the period after 1-4-2026.

   • Protective clause- In case the deadline for filing any Application, Appeal, Reference or Revision has already expired on or before 1-4-2026, then the Income-tax Act, 2025 will not revive or reopen those expired opportunities just because it allows a longer time period or extension provisions.

All you need to know about Income-tax Act, 2025:

1. Tax Year:

   • This Act introduces the concept of “Tax Year” eliminating the confusion between previous year and assessment year.

   • It will mean a 12 month period of the financial year commencing on 1st of April of every year.

   • In case of a newly set up business/ profession, or a source of income newly coming into existence in any financial year, the tax period will begin on the date of setting up of business/ profession or on the date when the new source of income comes into existence and ending with the said financial year.

2. Charge of Income-tax:

   • In case any Central Act states that income- tax will be charged for any tax year at any rates, it will be charged at those rates which are in accordance with this Act.

   • Charge of income-tax will be on the total income of the tax year of every person.

   • Income-tax will not be limited to the basic tax on income but include any additional income tax.

   • Income-tax can be charged in respect of income for a period other than the tax year i the Act provides for it.

   • Income-tax will be deducted or collected at source or paid in advance.

3. Scope of Total Income: The total income of a tax year of a person, resident or non-resident, includes all income from whatever source derived:

   • Sources of Income of a Resident:

     ✓ is received or deemed to be received in India in that year by or on behalf of that person;

     ✓ accrues or arises, or is deemed to accrue or arise, to such person in India in that year;

     ✓ accrues or arises to such person outside India in that year, but when such person is “not ordinarily resident” in Indias such income will be included only when it is derived from a business controlled in or a profession set up in India.

   • Sources of Income of a Non- Resident:

     ✓ is received or deemed to be received in India in that year by or on behalf of such person;

     ✓ accrues or arises, or is deemed to accrue or arise, to such person in India in that year.

   • Foreign Income will not be taxed unless taken into account in balance sheet prepared in India.

4. Residence in India:

   • Any individual will be resident of India if he in in India for a total period of 182 days or more in a tax year or is in India cumulatively for 60 days or more during that year and has been in India cumulatively for 365 days or more in the 4 years preceding such tax year.

   • The provision of cumulative stay in India will not be applicable on members of crew of an Indian ship and on citizens going for the purpose of employment outside India.

5. Income deemed to accrue or arise in India:

   • The following Income will be deemed to be accrued or arise in India:

     ✓ any asset or source of income in India;

     ✓ any property in India;

     ✓ any business connection in India;

     ✓ the transfer of a capital asset situated in India.

   • Salaries:

     ✓ Income earned in India and any income payable for:

     ♦ services rendered in India;

     ♦ rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment.

   • Income payable by Government to any citizen for services rendered outside India.

   • Dividend paid by any Indian Company outside India.

   • Interest payable by-

     ✓ Government;

     ✓ A resident, except where it is payable in respect of any debt incurred, or moneys borrowed and used for a business/ profession carried on by such resident outside India or making/ earning any income by such resident from any source outside India.

     ✓ Non- Resident, if it is in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried in India.

   • Income by way of Royalty.

   • Income by way of fees for technical services payable by Government, resident and non- resident.

   • Income arising outside India paid by a person who is a resident of India to a non-resident or to a person not ordinarily resident in India.

   • Income out of Business connection

6. Schedules II, III, IV, V and VI enumerate the income that will not be included while computing total income.

7. Section 202 of the Income-tax Act, 2025 lays down tax slab under new tax regime:

   S. No.	Total Income	Rate of tax
   1	Up to Rs. 400000	Nil
   2	From Rs. 400001 to Rs. 800000	5%
   3	From Rs. 800001 to Rs. 1200000	10%
   4	From Rs. 1200001 to Rs. 1600000	15%
   5	From Rs. 1600001 to Rs. 2000000	20%
   6	From Rs. 2000001 to Rs. 2400000	25%
   7	Above Rs. 2400000	30%

8. Heads of Income:

   • Salaries;

   • Income from house property;

   • Profits and gains of business or profession;

   • Capital gains;

   • Income from other sources.

9. Salaries will include:

   • Any salary due from an employer/ former employer to an assessee in the tax year, whether paid or not;

   • Any salary paid or allowed to him in the tax year by or on behalf of an employer though not due or before it became due to him;

   • Any arrears of salary paid or allowed to him in the tax year by or on behalf of an employer/ former employer, if not charged to income-tax for any earlier tax year;

   • If any salary paid in advance is included in the total income of any person for any tax year, it will not be included again in the total income of such person when the salary becomes due.

   • Wages, annuity, pension, gratuity, fees, commission, perquisites, profits in lieu, advance salary, any payment received by an employee in respect of any period of leave not availed of by him.

   • Annual accretion to the balance at the credit of an employee participating in a recognized provident fund;

   • Contribution made by the Central Government to the account of an employee under a pension scheme;

   • Contribution made by the Central Government in any tax year to the Agniveer Corpus Fund account of an individual enrolled in the Agnipath Scheme.

   Exception: Any salary, bonus, commission or remuneration due or received by a partner of a firm from the firm will not be regarded as salary.

10. Chargeable income will be computed after making Deductions from Salaries considering the following:

    • Tax on employment;

    • Standard deduction– in case income-tax is computed under new tax regime then Rs. 75000 or the salary whichever is less/ in any other case Rs. 50000 or the salary whichever is less.

    • Death/ retirement;

    • Retiring Gratuity received under Pension Code/ Regulations (members of defense services)

    • Gratuity;

    • Payment in commutation of pension received;

    • Compensation received by a workman at the time of his retrenchment;

    • Amount received or receivable on voluntary retirement/ termination;

    • Payment received by an employee of Central Government/ State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise;

11. Chargeable Income from house property will be calculated on the annual value of property of any building/ lands appurtenant thereto owned by assessee.

    Exception: portions of land occupied for his business/ profession, the profits of which are chargeable.

12. Chargeable income of Profits and gains of business or profession will include profits/ gains during the tax year, compensation received, income derived by a trade/ profession, profits on sale of import licences/ cash assistance against export, interest, salary, bonus, commission or remuneration received by a partner of a firm, sum received/ receivable in cash or kind, any sum received under a Keyman insurance policy, fair market value of inventory.

13. When calculating chargeable income from Capital Gains, if a person receives money or other assets under insurance from an insurer on account of damage or destruction of any capital asset then it will be chargeable.

14. Some of the heads that will come under the Income from other sources:

    • Dividend;

    • winning from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature;

    • any sum received by the assessee from employees as contributions to any provident fund, superannuation fund, any fund set up under the Employees’ State Insurance Act, 1948, which is not chargeable under the head “Profits and gains of business or profession”;

    • any sum received under a Keyman insurance policy, including the bonus allocated on such policy, if such income is not chargeable to income-tax under the head “Profits and gains of business orprofession” or under the head “Salaries”;

    • any income by way of interest on securities, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession”;

    • any income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession”;

    • anyincome from letting on hire of machinery, plant or furniture, belonging to the assessee and also buildings, where the letting of the buildingsis inseparable from the letting of such machinery, plant or furniture, if the income is not chargeable to income-tax under the head “Profits and gains of business or profession”.

15. Deductions in respect of certain payments:

    • Life insurance premia, deferred annuity, contributions to provident fund;

    • Employer and assessee contribution to pension scheme of Central Government;

    • Contribution to Agnipath Scheme;

    • Health insurance premia;

    • Maintenance including medical treatment of a dependent who is a person with disability;

    • Medical treatment;

    • Interest on loan taken for higher education;

    • Interest on loan for residential house property;

    • Interest on loan for certain house property;

    • Purchase of electric vehicle;

    • Donations to certain funds, charitable institutions;

    • Rents;

    • Donations for scientific research or rural development;

    • Contributions given by companies to political parties;

    • Contributions given by any person to political parties;

    • Profits and gains from industrial undertakings or enterprises engaged in infrastructure development;

    • Profits and gains by an undertaking/ enterprise engaged in development of Special Economic Zone;

    • Special provision in respect of specified business;

    • Profits and gains from certain industrial undertakings;

    • Profits and gains from housing projects;

    • Businesses engaged in collecting and processing of bio-degradable waste;

    • Additional employee cost;

    • Income of Offshore Banking Units and Units of International Financial Services Centre;

    • Certain inter-corporate dividends;

    • Income of co-operative societies;

    • Royalty income of authors of certain books other than textbooks;

    • Royalty on patents;

    • Interest on deposits;

    • Person with disability.

16. The concept of “Faceless Assessment” has been introduced which means the assessment proceedings conducted electronically in “e-Proceeding” facility through registered account of the assessee in designated portal.

    Faceless Assessment aims to:

    • Eliminate the interface between the income-tax authority and the assessee or any other person, to the extent technologically feasible;

    • Optimize utilization of the resources through economies of scale and functional specialization;

    • Introduce a team-based exercise of powers and performance of functions by two or more income-tax authorities, concurrently, in respect of any area, or persons or classes of persons, or incomes or classes of income, or cases or classes of cases, with dynamic jurisdiction.