Income Tax Act 2025 - Key Changes, Features, Provisions, and Objectives

The Income Tax Act, 2025 marks a significant shift in India’s taxation system, as it will take effect from 1st April 2026 and replace the long-standing Income Tax Act of 1961. The new legislation has been designed to remove outdated rules, adopt clearer language, and align tax procedures with today’s economic and technological landscape. Its main purpose is to make tax provisions easier to understand and follow, ensuring that both taxpayers and authorities can navigate the system with greater clarity.

Key takeaways:

• Introduces the idea of a single ‘tax year’, eliminating confusion between the previous and assessment years.
• Groups and reorganises various provisions—such as placing all TDS-related sections into one consolidated table—to improve structure and sequence.

What is the Income Tax Act 2025?

The Income Tax Act 2025 is a wide-ranging law that covers the entire system of direct taxation in India, including how taxes are imposed, managed, collected, and recovered. Stretching over more than 600 pages, it contains 536 sections, 23 chapters, and 16 schedules, making it a complete guide to the country’s tax rules. The Act officially came into effect on 21st August 2025, following the approval of the Income Tax Bill 2025 in Parliament. It serves as the updated legal framework through which the government ensures fair and consistent tax administration across the country.

Understanding the Income Tax Act, 2025

The introduction of the Income Tax Act, 2025 represents a major step towards building a tax system that is simpler, more transparent, and better suited to today’s economic realities. Passed by Parliament after extensive debate, the Act reflects India’s commitment to revamping its tax structure so that it aligns with global standards while meeting domestic needs. By simplifying tax slabs, reducing unnecessary exemptions, and incorporating digital tools for smoother compliance, the Act aims to lower administrative hurdles and encourage taxpayers to comply willingly.

The journey towards this new law began with the government’s decision to reassess the Income-tax Act, 1961, which had become outdated after six decades. This led to the drafting of the Income-tax Bill, 2025, which was then examined by a Select Committee for detailed review. After receiving wide-ranging feedback from experts, industry bodies, and the public, the government chose to withdraw the initial draft and present an improved version known as the Income-Tax (No. 2) Bill, 2025. This revised Bill incorporated most recommendations from the committee and introduced clearer, better-structured legal language. Both Houses of Parliament approved the Bill during the monsoon session, making it the cornerstone of India’s modern tax framework.

Main objectives of Income Tax Act 2025

Simplified tax provisions with clearer language

The Act aims to create a tax code that is far easier to read, interpret, and apply. By simplifying legal wording and removing unnecessary sections, taxpayers can understand their obligations without confusion.

Reduced tax rates and higher rebate benefits

One of the major goals is to lower income tax rates so that individuals have more disposable income. With more money in hand, taxpayers may spend or save more, boosting demand for goods and services and supporting overall economic growth.

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Fewer legal disputes through better clarity

By eliminating vague provisions and streamlining the system, the Act intends to reduce the number of tax-related disputes. It also strengthens the resolution process, making it easier for taxpayers to seek clarifications or solutions.

Improved ease of compliance

With reduced content and a cleaner structure, the Act makes it simpler for individuals and businesses to file returns and follow tax rules. This is expected to encourage timely filings and discourage practices that lead to tax evasion.

Recognition of Virtual Digital Assets (VDAS)

The Act expands the definition of Virtual Digital Assets to cover cryptocurrencies and similar digital instruments. This broader definition aims to bring clarity and consistency to the taxation of such assets in a rapidly evolving digital economy.

Features of the Income Tax Act 2025

• Income tax is a direct tax that must be paid by the person earning the income and cannot be passed on to someone else.
• The authority to regulate and enforce income tax rests entirely with the Central Government of India.
• The definition and scope of Virtual Digital Assets have been widened to include more forms of digital holdings.
• Stronger mechanisms for digital compliance and improved dispute resolution systems have been introduced.
• Income tax slabs have been made more relaxed for many taxpayers.
• A progressive tax structure ensures that individuals with higher incomes pay tax at higher rates.
• Certain deductions are available only up to a specified limit each financial year.

Income Tax Act 2025 key changes

The Income Tax Act, 2025 introduces a refreshed and more organised approach to tax law, aiming to make the rules easier for people to read, understand, and follow. The table below outlines how the new law differs from the long-standing Income Tax Act, 1961:

Aspect	Income Tax Act, 1961	Changes made in the Income Tax Act, 2025
Effective date	Active since 1 April 1962	Expected to come into force from 1 April 2026 after approval
Overall structure	The law is long, detailed, and contains complicated wording, which often makes navigation difficult	The structure has been reorganised with clearer language, shorter sentences, and more methodical grouping of sections; although the number of sections has increased, each one is easier to understand
Concept of year	Uses “Previous Year” (year of earning) and “Assessment Year” (year of taxation)	Introduces a single expression, “Tax Year”, which runs from 1 April to 31 March; removes the need for separate references by bringing in the term “Succeeding Tax Year”
Default regime	The new tax regime under Section 115BAC was introduced as default in recent years	The new tax regime—now referred to under Section 202—continues to remain the default option for taxpayers
TDS provisions	Spread across a wide set of sections from 192 to 194T, making it hard to locate all related rules	All TDS-related rules have been combined under Section 393 for ease of reference, while keeping rates and thresholds exactly the same
Complexity level	High, due to many cross-links between provisions and multiple terms that no longer match current usage	Reduced significantly through clearer drafting, updated terminology, and removal of overlapping language

Chapters of the new Income Tax Act 2025

The table below outlines the 23 chapters of the Income Tax Act. It is important to note that some of these chapters have subparts.

Chapter	Overview
Chapter I	Preliminary
Chapter II	Basis of Charge
Chapter III	Incomes which do not form part of Total Income
Chapter IV	Computation of Total Income
Chapter V	Income of other persons, Included in the Total Income of the Assessee.
Chapter VI	Aggregation of Income
Chapter VII	Set off, or Carry Forward And Set Off of Losses
Chapter VIII	Deductions to be made in Computing Total Income
Chapter IX	Rebate And Reliefs
Chapter X	Special Provisions Relating to Avoidance of Tax
Chapter XI	General Anti-Avoidance Rule
Chapter XII	Mode of Payment in Certain Cases
Chapter XIII	Determination of tax in Special Cases
Chapter XIV	Tax Administration
Chapter XV	Return of Income
Chapter XVI	Procedure for Assessment
Chapter XVII	Special tax provisions for certain persons.
Chapter XVIII	Appeals, Revision and Alternate Dispute Resolution.
Chapter XIX	Collection and Recovery of Tax
Chapter XX	Refunds
Chapter XXI	Penalties
Chapter XXII	Offences and Prosecution
Chapter XXIII	Miscellaneous

Scope of Income Tax Act 2025

The Income Tax Act, 2025 defines the taxability of different types of income based on the taxpayer’s residential status. The table below explains how income is taxed for Residents, Resident but Not Ordinarily Residents (RNOR), and Non-Residents (NR):

Income type	Resident and ordinarily resident (ROR)	Resident but not ordinarily resident (RNOR)	Non-Resident (NR)
Income received or deemed to be received in India	Taxable	Taxable	Taxable
Income accrued in India	Taxable	Taxable	Taxable
Income earned outside India where the business or profession is set up in India or controlled from India	Taxable	Taxable	Non-taxable
Income earned outside India where the business or profession is set up or controlled from outside India	Taxable	Non-taxable	Non-taxable
Un-taxed foreign income brought back to India	Non-taxable	Non-taxable	Non-taxable

This framework ensures clarity on how global and domestic income is treated for each category of taxpayer.

Treatment of capital gains

The Income Tax Act, 2025 maintains the core concepts of Capital Gains taxation but rewrites the provisions in simpler, clearer language. The rules are now located under Clauses 67, 196, 197, and 198. The table below provides a quick overview of these clauses:

Clause	Description
Clause 67	Defines what qualifies as Capital Gains
Clause 196	Covers short-term Capital Gains on equity shares, equity-oriented mutual funds, and units of business trusts
Clause 197	Covers long-term Capital Gains from non-equity assets held for the required period
Clause 198	Covers long-term Capital Gains from equity shares, equity mutual funds, and units of business trusts

In addition, the earlier Section 47 (from the 1961 Act) has been redrafted, and certain older exemptions—such as those related to transfers of land from industrially sick companies or stock exchange demutualisation—have been removed from the list of exceptions.

A major clarity-enhancing change is the formal categorisation of cryptocurrencies and other virtual digital assets as taxable capital assets. This removes earlier uncertainties and ensures that gains arising from digital assets are taxed in a structured manner.

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Slab rate in Income Tax Act 2025

The table below highlights the slab rates provided under Section 202 of the Income Tax Act 2025 for the new tax regime.

Income tax slabs	Tax rate
Up to Rs. 4 lakhs	NIL
Rs. 4 lakhs - Rs. 8 lakhs	5%
Rs. 8 lakhs - Rs. 12 lakhs	10%
Rs. 12 lakhs - Rs. 16 lakhs	15%
Rs. 16 lakhs - Rs. 20 lakhs	20%
Rs. 20 lakhs - Rs. 24 lakhs	25%
Above Rs. 24 lakhs	30%

The old tax regime (optional tax regime)

Here are the slab rates provided in the Income Tax Act 2025 under the old tax regime:

Income tax slabs	Aged above 60 years and NRI	Aged 60 - 80 years (resident individuals)	Age above 80 years (Resident Individuals)
Upto Rs. 2,50,000	NIL	NIL	NIL
Rs. 2,50,001 - Rs. 3 lakhs	5%	NIL	NIL
Rs. 3 lakhs - Rs. 5 lakhs	5%	5%	NIL
Rs. 5 lakhs - Rs. 10 lakhs	20%	20%	20%
Above Rs. 10 lakhs	30%	30%	30%

From complexity to clarity: Rationale behind the new Income Tax Act

The Income Tax Act, 1961 replaced the 1922 law and was shaped by the recommendations of the Law Commission (1958) and the Direct Tax Administration Enquiry Committee. Over time, however, several factors made the Act difficult for the average taxpayer to interpret. Key reasons for its complexity include:

Repeated amendments over several decades

The 1961 Act has been amended almost 65 times through Finance Acts and numerous Taxation Laws Amendment Bills. These frequent updates—more than 4,000 individual changes—expanded the legislation considerably, leaving taxpayers navigating a vast and scattered collection of provisions.

Large number of exemptions and incentives

To fulfil social and economic goals, a variety of deductions and exemptions were added over time. These included benefits for export earnings, incentives for investments in targeted sectors, and provisions promoting rural development, savings, and equitable growth. While necessary, they made the law increasingly complex.

Shrinking tax base and growth in litigation

Multiple incentives reduced the overall tax base, which ultimately contributed to higher litigation, increased paperwork, and greater administrative effort for both taxpayers and tax authorities.

Traditional legal drafting style

The Act relied heavily on dense legal phrasing, long sentences, frequent provisos, and elaborate explanations. This language style made it challenging for ordinary taxpayers to interpret rules without expert help.

Outdated and fragmented structure

Over several decades, many provisions became outdated or duplicated. With additions layered over older language, the Act became structurally fragmented and harder to navigate.

The new Income Tax Act, 2025 aims to resolve these issues by offering a cleaner, logically arranged, and more user-friendly framework.

Reform process for the new tax legislation

In July 2024, the Finance Minister announced a complete restructuring of the Income Tax Act, 1961, focusing on simplification, clarity, and removal of outdated provisions. To carry this forward, the Central Board of Direct Taxes (CBDT) set up an internal committee to review the Act thoroughly. The committee consulted industry groups, tax professionals, and departmental officers, while also studying global tax models such as those in the UK and Australia. The reform was guided by three principles: simplifying language and layout, avoiding significant policy changes, and keeping tax rates intact. The drafting centred on clearer wording, removal of repetitive clauses, and logical reorganisation.

Rebate limit in the Income Tax Act 2025

The rebate limits available under the Income Tax Act, 2025 are:

New tax regime

Individuals choosing the New Tax Regime can claim a rebate if their total income does not exceed Rs. 12 lakhs. The maximum rebate available is up to Rs. 60,000.

Old tax regime

Individuals following the Old Tax Regime can avail a rebate when their taxable income is not more than Rs. 5 lakhs. The maximum rebate allowed in this case is up to Rs. 12,500.

Conclusion

The Income Tax Act, 2025 marks a major step towards creating a clearer, more efficient, and citizen-friendly tax structure in India. By reorganising complex rules, introducing wider digital systems, and keeping pace with global practices, the Act aims to make tax compliance far easier for individuals and businesses. It supports the government’s broader mission of strengthening transparency, boosting economic activity, and improving institutional accountability. Inspired by Prime Minister Narendra Modi’s vision for a progressive and inclusive nation, the new framework is designed to ensure smoother processes, fewer disputes, and a modern approach to managing direct taxes.

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