How Did The New Income Tax Bill Replace The Decades-Old Income Tax Act Of 1961?

The Income Tax Bill 2025, which is set to be tabled in the Lok Sabha tomorrow, will mark a monumental shift in India’s tax system.

Set to replace the 1961 Income Tax Act, a law that has governed the country’s tax structure for over six decades, this new Bill proposes sweeping changes that could redefine how the Indian tax system operates.

The proposed Income Tax Act of 2025 is not just a revision, but it is a complete overhaul of an outdated system to simplify the tax process and provide greater clarity to taxpayers.

The current Income Tax Act of 1961 has been a cornerstone of India’s financial infrastructure, but as the country’s economy and social dynamics evolved over the years, the Act started showing signs of wear and tear.

Numerous amendments and updates were made over the decades, but the core structure of the Act remained largely the same.

Also, read| Income Tax Bill 2025 Set To Transform Taxation System: Expert Insights

Over time, the complexity of the provisions, an ever-expanding list of exemptions, and a labyrinth of legal jargon made the system difficult to navigate for both individuals and businesses alike.

In this context, the Union Finance Minister, Nirmala Sitharaman, announced during the 2025 Budget Speech that the government would introduce a new Income Tax Bill .

With nearly half of its provisions being new, the Bill is set to carry forward the spirit of ‘Nyaya’ (justice), an ethos the Indian government also embraced with the Bharatiya Nyay Sanhita that replaced the Indian Penal Code in 2024.

Sitharaman emphasised that the new tax laws would be clear and direct, aiming to provide certainty, reduce litigation, and offer a more user-friendly framework for tax compliance.

The proposed Bill introduces the following key changes:

One of the primary goals of the Bill is to make tax laws more accessible to ordinary citizens. The current Act, laden with complex terminologies and legal jargon, often requires specialised knowledge to interpret.

The new Bill replaces this with clearer, straightforward language that aims to ensure easier compliance. Citizens will no longer need a legal expert to understand the basic provisions of the tax laws.

Another major change proposed is a reduction in the number of tax slabs, with new, lower tax rates across different income levels.

This shift is designed to provide relief to the common taxpayer and boost disposable income. The move also aims to foster higher compliance and discourage tax evasion by making the tax burden more reasonable for the average citizen.

Perhaps one of the most notable changes is the abolition of the confusing Previous Year and Assessment Year concept.

Also, read| Union Budget 2025: Key Highlights And Takeaways

Under the 1961 Act, the tax system divided income tax filings into these two categories, which often created confusion among taxpayers. The new Bill streamlines this into a single Tax Year system, simplifying the entire process.

The new Bill proposes a “Trust First, Scrutinise Later” approach, focusing on fostering trust between taxpayers and the government.

This will allow taxpayers to assess their tax liabilities without immediate scrutiny from authorities as long as they adhere to the legal requirements. This shift in mindset seeks to make the system more efficient and less intrusive.

Unlike previous reforms that introduced new taxes to boost government revenue, the 2025 Bill does not propose any new forms of taxation.

Instead, it focuses on simplifying the existing tax framework, removing redundant exemptions, and creating a more predictable environment for both individuals and businesses.

The new Bill also integrates several important announcements from the 2025 Union Budget, including revisions to income tax rates and changes to Tax Deducted at Source (TDS) provisions.

This ensures that the new tax system aligns with the government’s overarching fiscal policy and provides a unified framework for tax administration.

Under the previous law, businesses with an annual turnover of less than ₹1 crore were exempt from tax audits.

However, the new Bill has raised this threshold to ₹5 crore. This change means that many smaller businesses, which were previously required to undergo audits, will now be exempt from this cumbersome process, thus reducing their compliance costs and allowing them to focus on growth.

Additionally, the Bill increases the limit for businesses engaging in bank transactions. Previously, businesses with a turnover of ₹10 crore or more were subject to an audit if they engaged in such transactions.

The new threshold has been increased to ₹25 crore, meaning businesses under this limit will no longer face audits, thereby simplifying the process for thousands of smaller businesses.

The new Income Tax Bill also addresses the issue of tax exemptions. Under the 1961 Act, numerous exemptions existed, some of which were not only confusing but also opened avenues for tax evasion.

The 2025 Bill seeks to reduce these exemptions and provide a more streamlined approach, where the tax system is based on straightforward deductions, making compliance easier for salaried individuals, pensioners, and business owners alike.

The introduction of the New Income Tax Bill 2025 is expected to have significant ramifications for various sectors across India.

For instance, real estate developers, particularly in states like Kerala, may see changes in their tax liabilities due to the reduction of exemptions and the restructuring of capital gains provisions.

This could have a ripple effect on property prices, investments, and even the job market within the real estate industry. The corporate sector will benefit from simplified tax audits, a clearer framework for compliance, and more.