Income Tax Bill 2025-Key Changes in Income Tax Act

Income Tax Bill 2025

·        As part of the Union Budget 2025, the FM announced tabling of the new bill in Parliament in the current budget session. Accordingly, The Income Tax Bill, 2025 (ITB 2025 or New IT Bill or new Bill) was tabled in the Lok Sabha on 13 February 2025. The Central Board of Direct Taxes (CBDT) also issued two sets of FAQs and a navigator for mapping of comparable provisions of the ITA 1961 with the new version.

·        The ITB 2025 is proposed to be brought into effect from 1 April 2026.

·        The ITB 2025 preserves the familiar 23-Chapter structure, heads of income, substantive provisions, and the assessment and appeal procedures. The annual Finance Act will continue to set tax rates for a particular year.

Key changes of ITB 2025:

Shift from "Previous Year" and "Assessment Year" to "Tax Year"

 Presently, ITA 1961 recognizes the concept of "Previous Year" and "Assessment Year“. "Previous Year" refers to the financial year in which income is to be taxed. Whereas “Assessment Year” refers to a 12- month period starting from 1 April immediately succeeding the “Previous Year”. For instance, for financial year 2025-26, “Previous Year” is 2025-26 whereas “Assessment Year” is 2026-27.

 ITB 2025 now proposes to eliminate the reference to two different concepts and seeks to introduce a single concept of "Tax Year", which aligns directly with the financial year. In the above illustration, Tax Year would be 2025-26 which begins from 1 April 2025, or in case of new business or a source of income newly coming into existence, from the date of business setup or income generation, and ends on the same date on which the relevant financial year ends.

Income from business connection in India

 Any income derived from a business connection in India is regarded as income deemed to accrue or arise in India under the ITA 1961. However, if all operations are not undertaken in India with reference to such business connection, then only so much of the income that is “reasonably” attributable to operations carried out in India is deemed to accrue or arise in India.

 ITB 2025 specifically provides that the term business connection in India shall include business carried out in India. Further, it now provides that only so much of the income that is attributable (and not reasonably attributable) to operations carried out in India shall be deemed to accrue or arise in India from a business connection in India.

Depreciation on intangible assets

Presently, only intangible assets (being know-how, patent, copyright, trademark, license, franchise or any other business or commercial right of similar nature other than goodwill) acquired on or after 1 April 1998 are eligible for depreciation. Under ITB 2025, it is proposed to delete reference to such acquisition date. Therefore, depreciation on intangible assets is proposed to be allowed irrespective of its date of acquisition.

 Further, as per ITA 1961, depreciation is allowed if an asset (tangible or intangible) is being put to use for the purposes of business or profession. Further, with respect to tangible assets, ITA 1961 provides that the tangible assets should be exclusively used for the business of the taxpayer, failing which the depreciation shall be restricted to the fair proportion as determined by the tax authority. A similar restriction is not prescribed under ITA 1961 with reference to intangible assets.

 ITB 2025 proposes to extend the exclusive use condition even with respect to use of intangibles, failing which only proportionate depreciation will be allowed as determined by Tax Authority by bringing it at par with depreciation on tangible assets.

Capital expenditure of specified businesses

 Presently, ITA 1961 provides for 100% deduction on capex incurred in specified business such as development / operation of infrastructure facilities, set-up of cold chain facilities, building and operation of hotels, hospitals, etc. The provisions contain specific reference for filing prescribed form and deals with powers given to the tax authority to recompute profit of eligible business in specified cases.

The corresponding provision proposed in ITB 2025 provides for deduction on capex incurred in such specified businesses. However, the corresponding provision under ITB 2025 does not refer to relevant sub-section which provides for filing prescribed form and powers to assessing officer to recompute profit of eligible business in specified cases.

Taxes paid on Income shall not be allowed as an expense under ITB 2025

 Presently, under ITA 1961, any tax which is levied on the “profits or gains of any business or profession” or is assessed basis such profits or gains is not allowed as a deduction under the head PGBP.

There exists ambiguity as to whether taxes paid on income other than profits or gains from business or profession would be allowed as deduction.

 ITB 2025 proposes to address this ambiguity by providing that any tax paid on “income” shall not be allowed as a deduction while computing income under the head PGBP.

Tax Audit: Rationalizing scope of aggregate of receipts and payments for evaluating applicability of tax audit of businesses

 Presently under ITA 1961, tax audit is applicable for businesses where (i) the total sales, turnover or gross receipts of business exceeds INR10 crores and (ii) the aggregate of all receipts and payments including receipts and payments does not exceed 5% in cash. For the purpose of measuring aggregate receipts and payments dealt in cash, all receipts and payments are considered even if the same is not related to business.

 Under ITB 2025, the corresponding provision states that the aggregate receipts and payments arising from “business” (as opposed to all receipts and payments whether or not arising from business) should be considered for evaluating the threshold of 5%. In other words, proposed provisions state that tax audit is applicable to businesses where i) the total sales, turnover or gross receipts of business exceeds INR10 crore and (ii) 95% of aggregate of all receipts and payments from business are made through specified banking and online mode.

Thus, under the proposed provisions, the threshold for applicability of tax audit remains unchanged, but the requirement of undertaking receipts and payment through online mode is applicable only to receipts and payments qua business and not all receipts and payments.

Presumptive taxation for non-residents

All non-resident related presumptive taxation sections are clubbed under one section in ITB 2025.

 Key comparison of changes applicable for non-residents engaged in providing services/ providing plant and machinery on hire for prospecting, extraction, or production of mineral oils or executing turnkey power projects are as under:

ITA 1961	ITB 2025
Prohibits set off of unabsorbed depreciation and brought forward business loss	Prohibits set-off of any loss and claiming of any deduction / allowance (e.g., section 80G of ITA 1961) against deemed profits
Where taxpayer claimed profits lower than the deemed profit percentage, section specified for an assessment to be conducted as per the provisions of ITA 1961	No specific mention of conducting an assessment, where taxpayer claims profits lower than the deemed profit percentage
Taxpayer claiming profits lower than the deemed profit percentage, had to compute written down value of assets in accordance with provision of ITA 1961	Manner of computing written down value of the assets is now specifically inserted in the proposed section of ITB 2025

Coverage of non-residents (NRs) under presumptive tax regime providing services to electronic manufacturing business in India within the scope of tax audit

Finance Bill 2025 (FB 2025) proposed introduction of a presumptive taxation regime for non-residents who are engaged in providing services or technology in India to resident companies satisfying certain conditions. The proposal deems 25% of the total amount a non-resident receives or is due to receive for providing services or technology as profits or gains of such non-resident.

 Under FB 2025, there is no corresponding amendment in provisions relating to tax audit for granting relaxation to such NR taxpayers offering income under presumptive basis.

 Under ITB 2025, it is proposed to provide that the provisions of maintenance of books of account and tax audit are applicable to such NR taxpayers. Hence, such NR taxpayers are subjected to the requirement of tax audit despite offering income under presumptive tax scheme.

Certain non-resident taxpayers provided an option to maintain books to opt out of presumptive taxation 

Presently, ITA 1961 provides for presumptive taxation for NR taxpayers engaged in shipping business (including operation of cruise ships) or operation of aircraft. Such taxpayers are not allowed to offer lower income than the rate prescribed under presumptive basis by maintaining books and getting them audited.

 By way of relief, ITB 2025 proposes to give an option to such taxpayers to offer income lower than the presumptive rate provided they maintain books of accounts in a prescribed manner and get their accounts audited.

Undisclosed Virtual Digital Assets (VDA) to also trigger higher tax at 78%

 Presently, under ITA 1961, a tax of 78% (including cess and surcharge) is levied in a case where the taxpayer is found to be the owner of a specified asset which is undisclosed (partly or wholly). Such taxation arises in the year in which the specified asset is found. For this purpose, ITA 1961 defines specified assets to include money, bullion, jewelry, or other valuables. It is presently ambiguous whether VDA falls within the ambit of other valuables and hence whether it would be covered within the definition of specified assets.

 ITB 2025 proposes to retain the afore-mentioned provision in respect of money, bullion, jewelry, or other valuables. Further, it also specifically proposes to include VDA in the scope of specified assets. This clarifies that the levy of 78% tax in respect of undisclosed VDA found to be owned by a taxpayer.

Forex fluctuation benefit for non-resident on transfer of certain shares

 Currently, long-term capital gain (LTCG) arising for a non-resident from the transfer of shares of an Indian company is taxable at 12.5% without foreign exchange fluctuation benefit.

It is proposed that LTCG arising to a non-resident (other than FIIs) from the transfer of unlisted shares of an Indian company or unlisted securities shall be taxable at 12.5% with foreign exchange fluctuation benefit.

Brought forward long-term capital loss (LTCL) can be set off against short term capital gains (STCG) as well

Currently, brought forward LTCL is allowed to be set off against LTCG only. This continues under the ITB 2025.

 However, savings clause of ITB 2025 appears to allow carry forward and set off of brought forward LTCL incurred up to 31 March 2026 against all future capital gains (including STCG) from tax year 2026-27 onwards.

Personal tax

With an objective to simplify the salary provisions, exemptions related to salary income like gratuity, HRA, leave encashment, commuted and uncommuted pension, retrenchment compensation, etc., are now consolidated under the specific head that addresses salary provisions.

 ITA 1961 mentions that use of any vehicle provided by a company or an employer for journey by the assessee from employee’s residence to employee’s office or other place of work, or from such office or place to employee’s residence shall not be treated as a taxable perquisite. However, ITB 2025 proposes to change the language to suggest that the expenditure incurred by the employer for use of any vehicle by the employee for such travel shall not be treated as a taxable perquisite.

 ITA 1961 offered exemptions from perquisite taxation for amounts paid by an employer to an employee for medical treatment related to COVID-19 illness of the employee or their family member, as well as for ex gratia payments made to the family of an employee in the event of their death. However, these provisions are proposed to be deleted in ITB 2025.

 In order to claim the sum paid by employer to the employee for self/family members’ medical treatment as a non taxable perquisite, there is a requirement under ITA 1961 to attach a certificate from the hospital along with the receipt of the amount paid to the hospital. This requirement is proposed to be deleted by ITB 2025.

While providing for vacancy allowance for computing the annual value of house property which was let but vacant for the whole or any part of the year, an additional condition of 'let in normal course' is proposed to be inserted by ITB 2025, which creates ambiguity.

Revamping of provisions dealing with Non-profit Organisation (NPOs)

Key changes in the structure of the provisions are:

 The expressions trust or institution or university or hospital or religious trust are substituted by the single expression “Non-profit Organization” (NPO).

Under ITA 1961, the provisions applicable to registered NPO are scattered across different chapters. The new law attempts to bring all provisions under a single chapter divided into seven sub-categories.

While the existing provisions are in the nature of “exemption provisions”, the ITB 2025 places it under separate Chapter XVII dealing with special provisions relating to certain persons. Scheme of exemption for NPO

 Broadly, the scheme of exemption for NPOs continues to be application based, wherein no income tax shall be levied if registered NPOs apply 85% of their income or accumulate their income for application in the next five years for charitable purposes. Similarly, the corpus donation received by registered NPOs remains exempt. Such exemption continues to be subject to fulfillment of relevant conditions (e.g. registration, compliance, etc.). Key proposed changes relating to registered NPOs in ITB 2025

 Taxation of NPOs appears to be on cash basis. The provisions of ITA 1961 consider only application on cash basis.

In relation to capital gains on sale of NPOs assets, ITA 1961 provides the option to registered NPOs to reinvest such gains for acquisition of another capital asset or follow normal 85% application rule. The ITB 2025 proposes to remove the option of such reinvestment on the reckoning that application rule will factor in such reinvestment.

The ITB 2025 specifically prohibits NPOs from carrying out any commercial activity except for activity which is incidental to the attainment of the objects of NPOs. The implications of such a change will need deeper evaluation.

 Pre 2021 registered NPOs which have not transitioned to new registration regime operative since 1 April 2021 till date for any reason are granted another opportunity to apply for registration under ITB 2025. If Tax Authority condones the delay because of reasonable cause, such registration shall have retrospective effect from tax year 2021-22.

 Under ITA 1961, certain NPOs6 enjoy blanket tax exemption. While such NPOs continue to enjoy such exemption under new law without any additional condition, there appears to be a requirement to obtain NPO registration, which makes tax exemption subject to fulfillment of onerous conditions. The intent of extending registration requirement to such NPOs is not clear and also creates overlap.

 Under ITA 1961, the NPO’s registration can be canceled by the Tax Authority in specified circumstances. Now, cancellation of registration includes its withdrawal.