Syllabus: GS-III: Government budgeting

Why in the News?

The Income Tax Act, 2025, recently passed by the Lok Sabha, seeks to replace the Income Tax Act of 1961 — a law that had governed India’s taxation system for over six decades.
The new Act, effective from April 1, 2026, aims to simplify the language, structure, and compliance framework of income tax administration in India. It is a landmark fiscal reform that reflects the government’s commitment to clarity, fairness, and digital-era efficiency in taxation.

Background and Evolution

The Income Tax Act, 1961, enacted on April 1, 1962, has been amended 65 times and has become lengthy, complex, and difficult for ordinary taxpayers to interpret.
During the Union Budget 2024 session, the Ministry of Finance announced the need to overhaul the Act to make it more reader-friendly and concise.
Following this, a new Income Tax Bill (2025) was introduced on February 13, 2025, and referred to a 31-member Parliamentary Committee for detailed scrutiny.

The committee submitted a 4,575-page report with 285 recommendations in July 2025, leading to the final revised version passed by Parliament.

Key Highlights of the Income Tax Act, 2025

• Structural Simplification
  • Sections reduced from 819 to 536.
  • Chapters reduced from 47 to 23.
  • Number of words reduced from 5.12 lakh to 2.6 lakh.
  • Introduced 39 new tables and 40 formulas for clarity.
• Simplified Language
  • Removal of archaic terms and redundant clauses.
  • Uniform terminology across sections to reduce ambiguity.
• Ease of Compliance
  • The Act focuses on reducing litigation and promoting voluntary compliance.
  • Taxpayers can approach a Dispute Resolution Panel (DRP) in case of dissatisfaction with assessment orders.
• Revised Tax Regime
  • Section 202 replaces the old Section 115BAC, offering a streamlined tax structure for individuals, HUFs, and small entities.
  • Focus on lower tax rates, fewer exemptions, and simplified computation.
• Digital and Virtual Assets
  • Expands definition of ‘Virtual Digital Assets’ to include crypto-assets, NFTs, and other digital investments.
  • Assessees must now provide access to digital accounts, servers, and online investment data to tax authorities.
• Alignment with Bharatiya Nyaya Sanhita
  • Emphasizes fairness (nyaya) and transparency, aligning with broader legal reforms in India’s governance system.
    

Significance of the Reform

• Simplifies compliance for individual taxpayers and businesses.
• Reduces legal disputes and administrative burden on tax authorities.
• Reflects modern fiscal governance suited to digital economies.
• Encourages taxpayer trust, aligning with “Ease of Doing Business” and Ease of Living principles.
• Strengthens India’s capacity for data-driven tax enforcement against evasion and benami holdings.
  

Challenges Ahead

• Smooth transition for taxpayers and professionals used to the 1961 framework.
• Need for capacity building within the Income Tax Department.
• Digital data compliance may raise privacy and cybersecurity concerns.
• Balance must be maintained between simplicity and comprehensiveness.
  

Way Forward

• Conduct nationwide taxpayer awareness drives for understanding the new Act.
• Develop AI-based compliance tools and digital filing aids.
• Establish fast-track tax tribunals to resolve pending disputes.
• Regularly review the Act to keep it responsive to evolving financial instruments.
  

Conclusion

The Income Tax Act, 2025, marks a historic fiscal reform that replaces an outdated structure with a concise, transparent, and citizen-centric framework.
It seeks to make taxation simpler, fairer, and more adaptive to India’s 21st-century economic realities — where digital income, global investments, and ease of compliance define fiscal governance.

In essence, it revives Kautilya’s vision — “Kosha moolo dandaha” — that revenue is the backbone of administration, but strengthens it with modern efficiency and justice.

Prelims Practice MCQ

Q. With reference to the Income Tax Act, 2025, consider the following statements:

1. It replaces the Income Tax Act, 1961, and will come into effect from April 1, 2026.
2. The number of sections has been reduced from 819 to 536.
3. The Act introduces a new Section 202 that simplifies taxation for individuals and HUFs.
4. It removes all provisions related to taxation of digital assets.

Which of the statements given above are correct?

(a) 1, 2 and 3 only
(b) 2 and 4 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4

Answer: (a)

Mains Practice Question

1. “The Income Tax Act, 2025, reflects India’s shift towards a simplified, transparent, and technology-driven tax regime.” Discuss the key features of the new Income Tax Act, 2025, and critically analyse how it addresses the challenges of compliance, litigation, and digital-era taxation in India. ( 250 words)

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