Parliament on 12 August 2025 passed the Income-Tax (No. 2) Bill, 2025, completing the legislative process for a statute that will replace the Income-Tax Act, 1961 — India's foundational direct tax law for over six decades. The Rajya Sabha cleared the Bill on 12 August after the Lok Sabha passed it on 11 August 2025. The new Act, comprising 536 sections across 23 chapters and 16 schedules, is set to take effect from 1 April 2026.
Background
The Income-Tax Act, 1961 had accumulated over 800 sections through decades of amendments, resulting in a statute widely criticised for its complexity, internal inconsistencies, and litigation-generating ambiguities. The government had first introduced an Income-Tax Bill in Lok Sabha on 13 February 2025, which was referred to a select committee. The committee submitted its report on 21 July 2025, following which the original Bill was withdrawn on 8 August 2025 and a revised Income-Tax (No. 2) Bill was introduced incorporating the committee's recommendations.
The objective was not to alter tax rates or substantive tax policy but to simplify the language, remove redundant provisions, reorganise the structure, and reduce the scope for interpretive disputes. Tax rates and regimes for individuals and corporations remain unchanged under the new Act.
Key Provisions
The Income-Tax Act, 2025 introduces several structural reforms:
Reduction in sections: The total number of operative sections has been reduced from over 800 to 536, achieved by consolidating overlapping provisions and eliminating redundant clauses that had accumulated through decades of amendments.
Unified Tax Year concept: The Act introduces a unified "Tax Year" that replaces the dual system of "previous year" and "assessment year" — a distinction under the 1961 Act that was a persistent source of confusion for taxpayers and a frequent trigger for technical disputes in assessments.
Simplified language: Provisions have been redrafted in clearer language, with tables and formulae replacing complex textual descriptions where appropriate. Cross-references have been rationalised to reduce circular or ambiguous statutory pathways.
Faceless assessment framework: The Act provides a statutory basis for faceless assessments and appeals, codifying administrative reforms that had previously been implemented through executive orders and administrative circulars under the 1961 Act.
Reorganised chapter structure: The 23-chapter structure groups provisions more logically by subject matter, separating income computation, deductions, procedural requirements, and penalty provisions into distinct segments.
16 schedules: Technical computations, rate tables, and transitional provisions have been moved to schedules, making the main body of the Act more readable.
Implications for Practitioners
The transition from the 1961 Act to the 2025 Act represents the most significant structural change in Indian direct taxation since independence, even though substantive tax rates remain unchanged. Tax practitioners must undertake a comprehensive section-mapping exercise, as virtually every section number changes under the new Act.
Pending litigation referencing provisions of the 1961 Act will require careful treatment. The transitional provisions and savings clauses in the new Act will determine whether existing assessments, appeals, and references continue under the old numbering or must be re-mapped. This is likely to generate a significant volume of transitional advisory work.
For corporate taxpayers, the immediate action item is updating internal tax compliance systems, ERP configurations, and documentation templates to reflect the new section numbering before 1 April 2026. Tax audit reports, transfer pricing documentation, and advance ruling applications will all need reformatting.
The codification of faceless assessments provides greater legal certainty to a process that has been operational for several years but lacked a clear statutory foundation. Practitioners who had challenged faceless proceedings on jurisdictional grounds may find that avenue narrowed under the new regime.
Notably, the select committee process ensured that stakeholder feedback was incorporated before final passage, suggesting that some of the more contested provisions in the original Bill may have been modified in the revised version.