Income Tax Bill, 2025 – Simple and Lucid

The Hon’ble Finance Minister of India has introduced the Income Tax Bill, 2025 (the ‘Bill’) to consolidate and amend the law relating to the existing Indian Income Tax Act, 1961 (‘existing law’).

Below are the key highlights of the bill as introduced[1].
Overview

• Simplification – Reduction in legal jargon and obsolete provisions
• Structural changes – Fewer chapters, sections, and words, but more clarity with structured tables
• Introduction of ‘tax year’ – ‘Assessment year’ and ‘previous year’ replaced with ‘tax year’
• No substantive changes – No change in tax rates, tax residency or other income deeming provisions
• Effective date – The Bill is proposed to be effective from April 1, 2026
• Reduced litigation: The Bill aims to reduce litigation
• Repeal and savings clauses – Provided for continued applications of existing rights, obligations, certain provisions, etc., under the existing law

Key aspects for stakeholders (including foreign investors)

• Long-term capital gains by non-residents: The revised provision allows non-residents investors to claim foreign exchange fluctuation benefits on the long-term capital gains accruing on sale of shares / debentures in an Indian company (subject to satisfaction of certain conditions). This is likely to be altered before the Bill receives the final approval. However, if this is not changed, then the investors may be able to reduce their effective tax rate considering the recent depreciation in the Indian rupee.
• Clarifying the definition of Associated Enterprise (‘AE’) : The proposed legislation clarifies the definition of AE beyond the current law.  While the existing law defines AE in two parts — Part 1 broadly covers enterprises with shared management, control, or capital, and Part 2 lists specific “deemed” AE relationships, the new draft explicitly states that these two parts are mutually exclusive and independent. This removes potential ambiguity and broadens the scope of AE classification.
• Safe harbour for transfer pricing: The tolerance range of +/-3 percent has also been extended to cases where only a single comparable price is available.

Oversight

• Tax neutrality on fast-track demerger: The Bill grants tax neutrality to only court approved demergers, overlooking fast-track demergers.
• Issue with dividend tax benefit under the new tax regime: Indian companies which have presently opted for concessional tax regime (tax rate of 22 percent[2]) can claim a deduction of the dividend received while upstreaming such dividends to its shareholders. However, this benefit seems to be omitted in the present draft of the Bill.

Further, there are few drafting inconsistencies, including royalty payable by a non-resident to another non-resident deemed to accrue or arise in India, the definition of company in which ‘public are substantially interested’ etc., which are expected to be addressed.

Additionally the government could have addressed long-standing investor expectations by clarifying that anti-abuse provisions do not apply to the acquisition of listed shares. This issue typically arises in off-market acquisitions where the traded price on the closing date exceeds the commercially agreed price due to factors such as open offer obligations and regulatory approvals, leading to adverse tax implications. Given the regulated nature of listed shares, investors had anticipated that such bona fide transactions would be excluded from anti-abuse provisions. However, the Bill remains silent on this matter, potentially giving rise to unnecessary disputes and litigation in legitimate M&A transactions.

The Bill aims to streamline the existing tax framework by making it more concise, clear, and user-friendly. Redundant sections, explanations, and provisos have been removed to enhance readability and simplify compliance. Additionally, the Bill allows for the introduction of necessary income-tax rules to facilitate the implementation of its provisions.

To ensure a smooth transition, a provision has been included to address any challenges arising from the new framework for a period of three years. This reflects the intent to identify and rectify anomalies through ongoing consultations with stakeholders.

[1] Please note that the bill is subject to changes as recommended by the Select Committee and public comments from various stakeholders prior to its approval.

[2] plus applicable surcharge and cess