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The Income Tax Bill 2025 was tabled in Parliament on Thursday. It will first be reviewed by the Parliamentary Committee, and after approval from both the Rajya Sabha and Lok Sabha, it will become law. A key question arises—why was a new bill needed when the Income Tax Act 1961 already exists? The Income Tax Department has provided an official explanation.

Fixed Tax Collection and Simplified Compliance

The Income Tax Department has clarified that the primary goal of the new Income Tax Bill is to reduce litigation and simplify tax laws. The bill aims to create a system that encourages voluntary tax compliance while ensuring a fixed and predictable tax collection.

One significant change is the size of the bill. The new bill contains 2.6 lakh words, which is almost half of the 5.12 lakh words in the current Income Tax Act 1961. Despite an increase in the number of sections, the total content has been streamlined. The existing law has 819 effective sections, whereas the new law will have only 536.

Structural Changes in the Income Tax Bill

The Income Tax Department has also released a FAQs document to clarify key changes. Some notable revisions include:

  • The original 47 chapters in the 1961 Act have been reduced to 23 in the new bill.
  • Instead of multiple sections, the new bill has 57 schedules or tables for better categorization.
  • The bill removes 1,200 provisions and 900 explanations that were part of the existing tax law.
  • Salary-related provisions have been consolidated into a single section to enhance clarity.

Changes in Salary Taxation Rules

One major change is the restructuring of salary taxation. In the new bill, exemptions like:

  • Gratuity
  • Leave encashment
  • Pension commutation
  • Compensation on voluntary retirement (VRS)
  • Retrenchment compensation

are now classified under salary, reducing the need to refer to different sections while filing tax returns.

Legal Interpretations and Litigation Reduction

The government has also made provisions more precise to reduce legal disputes. The bill retains key words and phrases from previous court rulings with minimal modifications to ensure consistency. This will minimize interpretation ambiguities and help taxpayers understand their obligations more easily.

Next Steps for the Income Tax Bill 2025

Finance Minister Nirmala Sitharaman presented the bill in Lok Sabha and emphasized the significant structural changes. The bill has been referred to the Select Committee of the Lok Sabha, which is expected to submit its report by March 10.

If approved, the new Income Tax Bill 2025 will replace the Income Tax Act 1961, modernizing the taxation system and simplifying compliance for individuals and businesses.

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