Lok Sabha Passes New Income Tax Bill to Replace 1961 Act

12 August, 2025

The Lok Sabha has passed the Income Tax (No. 2) Bill, 2025, which will replace the six-decade-old Income Tax Act of 1961. The new legislation, which incorporates most recommendations from a select committee, aims to simplify tax laws, ease compliance for taxpayers, and modernise the legal framework. Key changes include streamlining sections and eliminating the separate concepts of "previous year" and "assessment year." However, it also grants authorities new powers to access taxpayers' digital accounts during searches.

Unpacked:

When will the new Income Tax law actually take effect, and what happens in the transition period for filings and assessments?

According to reports, the new framework is proposed to take effect from April 1, 2026, replacing the 1961 Act thereafter. Until then, filings and assessments continue under the existing Act and Budget 2025 rates, with taxpayers choosing between the old and new regimes as before.

What specific simplifications will ordinary taxpayers notice beyond shorter language—e.g., deductions, refunds, and house property rules?

Changes include clearer deduction rules for income from house property (standard 30% after municipal taxes; pre-construction interest allowed for let-out and self-occupied where applicable), correction of anomalies enabling refunds for belated returns, and clarified nil TCS for certain LRS education remittances.

How does unifying “previous year” and “assessment year” into a single “tax year” change compliance or timing for taxpayers?

The Bill introduces a single “tax year,” so income is taxed in the same year it is earned, reducing confusion between earning and assessment years and aiming to simplify compliance and reduce litigation through a leaner, aligned framework.

What new powers do tax authorities gain over digital accounts, and how are privacy and procedural safeguards addressed?

The Bill adopts a digital-first approach with greater reliance on faceless assessments and paperless processes. Coverage notes expanded digital access during searches, but detailed procedural safeguards aren’t fully specified in summaries; expect rules/notifications to clarify scope, authorization, and audit trails as implementation guidance is issued.

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