A comparative analysis of the Income Tax Bill 2025 and the Income Tax Act 1961:
1. Concept of ‘Tax Year’ vs. ‘Previous Year’
Income Tax Act, 1961
The Income Tax Act of 1961 followed the concept of Assessment Year (AY) and Previous Year (PY). Under this framework, the income earned in a given financial year (Previous Year) was assessed and taxed in the subsequent year (Assessment Year). This led to confusion among taxpayers, especially those unfamiliar with tax terminologies, as they had to calculate their tax based on the previous year rather than the current one.
Income Tax Bill, 2025
To eliminate confusion, the Income Tax Bill 2025 introduces the concept of a “Tax Year” (Clause 3). The tax year refers to the same period in which the income is earned and taxed, replacing the Previous Year and Assessment Year structure. This change aims to align India’s tax system with international best practices and enhance clarity for taxpayers.
2. General Anti-Avoidance Rule (GAAR)
Income Tax Act, 1961
GAAR was introduced under Chapter X-A (Sections 95 to 102) to curb aggressive tax avoidance practices. However, it had several limitations, including difficulties in enforcement and interpretation.
Income Tax Bill, 2025
The 2025 Bill strengthens GAAR provisions through Clauses 178-184, which include:
- Definition of Impermissible Avoidance Arrangements (Clause 179): Ensures that transactions structured solely to avoid tax are invalid.
- Lack of Commercial Substance Test (Clause 180): Introduces new parameters to assess whether a transaction has a legitimate business purpose or is structured only for tax benefits.
- Enhanced Tax Authority Powers: Authorities now have broader discretion to investigate and scrutinize tax avoidance schemes, ensuring better enforcement.
3. Tax Administration and Compliance
Income Tax Act, 1961
The administration of tax laws was spread across multiple provisions, leading to complex compliance procedures. Taxpayers and businesses had to navigate several layers of paperwork and face-to-face interactions with tax officials, often resulting in delays and inefficiencies.
Income Tax Bill, 2025
- Faceless Tax Administration (Clauses 245-247):
- The Bill expands faceless assessment and appeal mechanisms to reduce corruption and streamline tax procedures.
- Tax assessments will be handled digitally, using AI-driven case selection.
- Reduces litigation by enabling online submission of tax records.
- Advance Pricing Agreements (Clauses 168-169):
- Enhances mechanisms to prevent disputes over transfer pricing.
- Pre-agreed pricing frameworks will be established between businesses and tax authorities to ensure clarity.
4. Digital Compliance and Electronic Record Access
Income Tax Act, 1961
The 1961 Act did not have provisions for digital records, as it was designed for a manual tax administration system.
Income Tax Bill, 2025
- Clause 187: Makes electronic payment modes mandatory for prescribed categories of taxpayers.
- Clause 247-251: Grants tax authorities enhanced access to digital records, emails, and online transactions for tax enforcement, making it easier to track evasion.
5. Capital Gains Taxation
Income Tax Act, 1961
- Capital gains were taxed under Sections 45 to 55.
- The taxation structure was complicated, with different rules for different assets and exemption conditions.
Income Tax Bill, 2025
- Clauses 196-198: Introduces a more streamlined framework for capital gains taxation. The Income Tax Bill 2025 (Clauses 196-198) introduces a streamlined capital gains taxation framework by refining the computation rules and aligning them with modern financial practices. It provides a clearer categorization of assets, simplified exemptions, and updated tax rates for various types of capital assets. Additionally, it removes ambiguities in cost indexation rules, making compliance easier for taxpayers. These clauses also ensure better incentives for long-term equity investments and startup funding by allowing preferential tax rates on venture capital investments, boosting economic growth while ensuring tax fairness
- Incentives for Startups & Long-Term Investors:
- Lower tax rates for equity investments and long-term holdings.
- Special provisions for venture capital funds to encourage investment.
6. TDS (Tax Deducted at Source) and TCS (Tax Collected at Source)
Income Tax Act, 1961
TDS and TCS provisions were scattered across multiple sections, making compliance difficult.
Income Tax Bill, 2025
- All TDS and TCS provisions are consolidated under a single chapter.
- Updated TDS tables simplify deduction rates and thresholds, making compliance easier for taxpayers and businesses.
7. Taxation of Digital & Crypto Transactions
Income Tax Act, 1961
- Section 115BBH taxed Virtual Digital Assets (VDAs) like cryptocurrencies and NFTs at a flat 30% rate, with a 1% TDS on transfers.
- Losses from crypto transactions could not be offset against other gains.
Income Tax Bill, 2025
- Clause 194: Establishes a dedicated tax framework for VDAs.
- Retains 30% tax rate with no loss set-off provision (same as the 1961 Act).
- Provides clearer compliance requirements for crypto traders and exchanges.
8. Special Provisions for Real Estate & REITs
Income Tax Act, 1961
- Section 115UA governed Real Estate Investment Trusts (REITs) taxation.
Income Tax Bill, 2025
- Clauses 223-224 introduce detailed provisions for REITs and Infrastructure Investment Trusts (InvITs), improving clarity on tax obligations for real estate investors.
9. Changes in Taxation of Manufacturing Companies
Income Tax Act, 1961
- Companies could opt for concessional tax rates under Sections 115BA, 115BAA, and 115BAB.
Income Tax Bill, 2025
- Clauses 199-204 retain concessional tax rates but introduce new incentives for manufacturing investments to boost industrial growth.
10. Penalties & Prosecution
Income Tax Act, 1961
Penalty provisions were covered under Sections 270A, 271, and 271A, but enforcement was not stringent.
Income Tax Bill, 2025
- Clause 250-251 introduces higher penalties for tax evasion cases involving digital assets and undisclosed foreign income.
11. Repeal of Income Tax Act, 1961
Income Tax Bill, 2025 (Clause 536)
- The 2025 Bill completely repeals the 1961 Act.
- Old tax laws will apply only for tax years before April 1, 2026.
Conclusion
The Income Tax Bill 2025 modernizes India’s tax laws by simplifying compliance, introducing digital enforcement, and enhancing transparency. It retains existing tax rates but strengthens anti-avoidance provisions, digital asset taxation, and faceless assessments.