On Monday, August 11, the Lok Sabha approved two significant pieces of legislation aimed at modernizing India’s direct tax framework: the Income Tax (No. 2) Bill, 2025, and the Taxation Laws (Amendment) Bill. These bills together mark a major overhaul, replacing the existing Income Tax Act of 1961 and simplifying tax laws to create a more transparent and efficient system.

The bills will next be presented to the Rajya Sabha for approval before being sent to the President for final assent. Upon becoming law, the reforms promise to reshape tax administration across the country.

SIMPLE Principles Underpin New Tax Code

The Finance Ministry highlighted that the new Income Tax Act is designed around the acronym SIMPLE, which stands for:

• Streamlined structure and language

• Integrated and concise provisions

• Minimized litigation

• Practical and transparent rules

• Learn and adapt mechanisms

• Efficient tax reforms

The legislation emphasizes clarity by rewriting tax provisions in straightforward language and consolidating them into a single comprehensive act. Supporting FAQs and guidance notes are included to reduce ambiguities and help taxpayers better understand their obligations.

Key Highlights and Reforms

• Simplification and Streamlining: The new act removes redundant clauses, simplifies cross-references, and incorporates global best practices while maintaining India’s fundamental tax principles.

• Procedural Changes: The deadline for correcting Tax Deducted at Source (TDS) statements is cut from six years to two, aiming to reduce compliance burden. Additionally, professionals with high receipts will be mandated to use specified digital payment channels.

• Enhanced Taxpayer Relief: Taxpayers who file returns late can still claim refunds, and penalties on late TDS submissions have been relaxed to ease compliance.

• Restoration of Important Exemptions: Certain exemptions removed in earlier drafts have been reinstated. These include provisions related to anonymous donations to mixed-object trusts and the flexibility to claim TDS refunds without rigid filing deadlines.

• Updated Deductions and Valuations: Deductions for commuted pensions and inter-corporate dividends are restored, and property valuation rules have been revised to consider the higher of expected or actual rent.

• New Tax Year and MSME Alignment: The dual system of financial and assessment years will be replaced by a single ‘tax year’ to simplify calculations. The definition of Micro, Small, and Medium Enterprises (MSMEs) will be aligned with the MSME Act.

• Foreign Investment Incentives: The accompanying Taxation Laws (Amendment) Bill provides additional tax relief to foreign sovereign wealth funds, including public investment funds from Saudi Arabia, to encourage investment in India.

Continuity in Tax Slabs and Legal Terms

While the reforms introduce sweeping changes, the existing tax slab rates remain unchanged, and key legal terms, as defined by the courts, will continue to be recognized to ensure consistency in tax law interpretation.