The Income Tax Bill, 2025, recently passed and published in the Official Gazette, replaces the Income Tax Act, 1961. Coming into force from April 1, 2026, the new law aims to simplify, modernize, and make India’s direct tax regime more transparent and compliance-friendly. Below are the most significant changes introduced.
1. Introduction of the “Tax Year”
- The ITB, 2025 replaces the concepts of “previous year” and “assessment year” with a single, simpler concept called the “tax year”.
- This change reduces confusion and streamlines compliance.
2. Income Deemed to Accrue in India
- Royalty payable by a non-resident is now deemed to accrue in India even if linked to income from a source outside India.
- Experts note this could be an inadvertent drafting issue, as the intent was likely “income from a source in India.”
3. Clarification on Non-Deductible Taxes
- Any tax paid on income, including surcharge and cess, is not deductible while calculating business income.
- This closes earlier ambiguities and prevents misuse.
4. Presumptive Taxation for Non-Residents in Electronics Manufacturing
- A new presumptive taxation regime applies to non-residents providing services or technology for India’s electronics manufacturing sector.
- 25% of receipts will be deemed as taxable income.
- However, the formula in ITB, 2025 could potentially double-count amounts, creating future litigation risks.
5. Mandatory Books of Accounts and Tax Audit
- Non-residents opting for presumptive taxation must now maintain books of accounts and undergo audits, which was not mandatory earlier.
6. Presumptive Taxation for Shipping, Aircraft, and Turnkey Projects
- Non-residents in cruise ships, aircraft operations, and turnkey construction can now declare lower income than presumptive rates, provided they maintain books and get audited.
- Previously, this flexibility was not available.
7. Restrictions on Set-off of Losses
- Earlier, unabsorbed depreciation and carried-forward losses could not be set off against presumptive income.
- ITB, 2025 further restricts deductions—no allowance or deduction (e.g., Section 80G donations) can be claimed against deemed profits.
8. Capital Gains Exemptions Modified
- Section 85 (earlier 54EC) restricts exemption to long-term capital gains from land/building only.
- This excludes certain depreciable assets which earlier qualified.
- However, Section 86 (54F) remains unchanged for long-term capital gains from other assets.
9. Carry Forward of Capital Losses
- Taxpayers can carry forward capital losses up to March 31, 2026.
- From tax year 2026–27, long-term capital losses (LTCL) can also be set off against short-term gains (STCG), offering relief to investors.
10. Tax Treaties and Undefined Terms
- If a tax treaty term is undefined, ITB, 2025 allows interpretation from:
- Any other tax law in India, or
- Failing that, any other Central Act.
11. Shareholding Change and Loss Set-off
- Once shareholding in a company changes beyond 49%, carry-forward losses cannot be set off, even if the original shareholding is restored later.
- This tightens rules around corporate restructuring.
12. LTCG for Non-Residents
- Non-residents selling unlisted shares/securities of Indian companies will now get the benefit of foreign exchange fluctuation adjustment on LTCG (12.5% tax rate).
- This aligns with international norms.
13. Refund Claims Linked to ITR Filing
- Refund claims can now only be made if Income Tax Returns are filed within the original due date.
14. Corporate Taxation (22% & 15% Options)
- Domestic companies opting for the 22% concessional rate can no longer claim 80M deduction (inter-corporate dividend relief).
- The deduction remains available under the 15% concessional regime (for new manufacturing companies).
15. Dispute Resolution Panel (DRP) Changes
- DRPs must now issue reasoned orders, but they are no longer required to consider taxpayer evidence or remand reports explicitly.
16. Lower Deduction Certificates (LDC) for TDS/TCS
- Expanded to all types of income/expenses covered under TDS and TCS.
- However, nil deduction certificates are no longer available.
- Assessing officers now have explicit powers to cancel certificates after hearing the assessee.
