Income tax act 2025 - Finance Ppl

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Income tax act 2025

The Income Tax Act, 2025 has been passed by the Parliament and received the President's assent on August 21, 2025. It has been officially notified and is now enacted law, but it is not yet in force. The Act will come into effect from April 1, 2026, replacing the six-decade-old Income Tax Act, 1961.

The changes can be grouped under into multiple categories for the sake of easier understanding.

  1. Structural Simplification
    1. Tax Year: concept of Previous Year (when income is earned) and Assessment Year (when it is taxed) are replaced by a single unified term called "Tax Year", which is same as financial year (April 1 to March 31).
      Meaning, Income earned in a Tax Year will be taxed in the same year, removing the PY/AY distinction.
      For Income earned up to 31-03-2026, the old (AY format) system continues. For Income earned from 1st April 2026 onwards, new "Tax Year" system shall apply.
    2. Reduced Sections and Chapters: The Income Tax Act, 1961 , which has over 800 sections across 47 chapters, has been condensed into 536 sections across 23 chapters, dropping the obsolete and redundant provisions from the 1961 Act.
      All provisos (about 1200) and explanations (about 900) have been removed. Relevant text are shifted to sections or schedules.
    3. Sequential Numbering: Sections are numbered sequentially in the new Act (1, 2, 3...) without alphabetic sub-sections (like 80C, 80D), making it easier to read and remember.
    4. Consolidated Provisions: TDS/TCS provisions that were spread across Sec 192 to 196D and 206C, are consolidated a single section, (Section 392 to 394).
    5. Digital residency: The new Act expands residency rules to cover digital nomads and entities with virtual management.
      • Recognizes individuals (referred to as digital nomads) who may not be physically present in India but maintain digital or economic ties with India, as deemed residents for tax purposes. (ie earn income from India while residing abroad).
      • And also Introduces the concept of ‘virtual management’ for companies. if strategic decisions are made online by directors located in India, the companies are treated as resident entities under the Act.
  2. Digital Administration and Enforcement
    1. Virtual Digital Assets (VDAs): VDA is now explicitly defined, covering cryptocurrencies, NFTs, and tokenized assets.
    2. Search and Seizure Powers: Tax authorities are empowered to access "virtual digital spaces" (email servers, social media accounts, cloud servers, etc.) during search and seizure operations if tax evasion is suspected, overriding access codes where necessary.
    3. Codified provisions Faceless assessment and digital compliance, which were handled in 1961 Act through separate executive notifications, are now fully incorporated in the main Act (e.g., Section 532).
  3. Compliance and Dispute Resolution
    1. Extended Time for voluntary disclosure: The concept of Updated Return (ITR-U) replaces and expands the earlier voluntary disclosure mechanism under Old Act. The time limit for filling updated return has been extended from two years to four years from the end of the relevant assessment year.
    2. More Detail Required in ITR Forms Revised ITR forms under the new Act require enhanced disclosures, including detailed reconciliation of Form 26AS and AIS data, and item wise details of major deductions (e.g., HRA, home loan interest).
  4. Changes to provisions under Various Heads of Income

      5. Income from House Property

    1. Deemed let-out rule While 1961 Act already allowed two properties to be treated as self-occupied, the key change in New Act is removal of the condition that 2nd property must be vacant only due to employment elsewhere. Meaning, now vacancy for any reason is accepted. The "deemed let-out" rule only applies to a third or subsequent house property.
    2. Interest on loan taken for HP Under 1961 Act, for self occupied property, interest on loan taken for property construction, both pre and post construction interest, is merged under one ₹2 lakh ceiling, while the 2025 Act separates them, giving extra relief by allowing pre‑construction interest (over 5 annual installments) in add to the ₹2 lakh annual eligibility limit for post‑construction interest.

      3. Income from Salary

    3. Perquisite exemption Under 1961 Act, exemption was provided wrt any expenses incurred by the employer relating to vehicle provided by the employer for home‑to‑office travel. Simple cash reimbursements or allowances were taxable.
      The 2025 Act broadens the scope, it now covers any expenditure incurred by the employer for commuting in a vehicle, even if the vehicle is not directly provided by the employer. This can include fuel, maintenance, leasing etc and covers documented reimbursements also.
    4. Retrenchment Relief: The 1961 Act had specific limits (least of 3 limits) for retrenchment exemption granted to employee and anything beyond was taxable. the 2025 Act fully exempts compensation received under any Central Government notified scheme (The earlier “least of three” formula are no longer applicable.

      5. Income from Business/Profession

    5. Electronics Manufacturing: Introduces Section 44BBD for non‑residents providing services/technology in electronics , where 25% of receipts are deemed as profit and taxed at corporate rate. No set‑off for carried‑forward losses or unabsorbed depreciation.
    6. Stock-in-Trade Homes: In case of builders engaged in business of selling houses, in case they had unsold houses, the 1961 Act taxed builders on "deemed rent" after one year; the 2025 Act extends this tax holiday to two years post-completion.
    7. Limit enhancements in PGBP: There are enhancements in the turnover-based criteria for businesses to be eligible for taxation under the presumptive taxation system. Under the 2025 Act, the revised turnover limits are ₹3 crore for businesses and ₹75 lakh for professionals, compared to the existing limits of ₹2 crore for businesses and ₹50 lakh for professionals under the 1961 Act.

      8. Income from Capital gains

    8. Holding Period: Under 1961 Act, Capital gains classification depended on three tiers of holding period: 12, 24, and 36-month tiers. 2025 Act simplifies the rules into two tiers only.
      --> 12 Months for listed securities (shares, mutual fund units, etc.)
      --> 24 months For all other assets.
    9. Exemption on re-investment u/s 54EC: To claim Exemption from the capital gains arising on the transfer of land or building or both, the requirement was to invest the sale proceeds in specified bonds. Under 2025 Act: only the capital gain from the sale needs to be invested in specified bonds in order to be eligible for exemption u/s 54EC and not the whole sale proceeds, so that the balance funds aren’t unnecessarily locked.
    10. GST portion in Asset cost:Under the 1961 Act, Assessees had a choice to either claim ITC on the GST paid or include the GST in the asset's cost and claim depreciation. The 2025 Act removes all ambiguity by explicitly stating that GST is excluded from the actual cost.
    11. Slump Sale Period: The 1961 Act required 36 months holding period for LTCG on business undertakings. The 2025 Act reduces this to 24 months. A shorter holding period makes it easier for businesses to reorganize without facing short‑term capital gain tax (which is higher)
  5. Non-profit organizations:
    1. Taxing the NPOs Under the 1961 Act, NPOs were taxed on a presumptive basis, where a fixed % of their gross receipts was treated as taxable income after allowing only limited deductions. In contrast, the 2025 Act eliminates presumptive taxation for charitable organizations. Instead, they are taxed on their actual net income, calculated after deducting eligible expenses incurred for charitable or non‑profit activities.
    2. Anonymous Donations: Under the 1961 law, anonymous donations received by all charitable and religious trusts/institutions were taxed at MMR, without any distinction. The 2025 Act now grants 100% exemption for AD when received by religious trusts engaged in social services like education, healthcare, and relief work. Note that, other charitable trusts (without religious affiliation) remain subject to tax on anonymous donations.
    3. Non-Specified Investments: when a trust invested in non‑specified assets (ie assets that are not covered under 11(5) of the Act, 1961 Act trusts imposed outright penalty by imposing tax at MMR on such income and loss of exemption for that year. The 2025 Act instead of harsh penalty system, taxes such investments at Fair Market Value if held over a year, at tax rate applicable for that trust