India’s tax laws set for a revamp: What is the new Income Tax Bill? How will it affect you?

Finance Minister Nirmala Sitharaman is set to introduce a new Income Tax Bill in Parliament next week, aiming to simplify the six-decade-old Income Tax Act of 1961.

The proposed bill, which will be nearly half the length of the current legislation, seeks to enhance tax certainty, reduce litigation, and make compliance easier for taxpayers.

Speaking on the bill, Sitharaman stated, “The new bill will be clear and direct in text with close to half of the present law, in terms of both chapters and words. It will be simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation.”

The finance minister highlighted that the bill will uphold the principles of “Nyaya” (justice) and ensure a fair and transparent taxation system.

The Indian tax system has undergone multiple amendments over the years, making the Income Tax Act of 1961 increasingly complex.

The current tax framework involves numerous exemptions, deductions, and overlapping provisions, which often lead to confusion among taxpayers and disputes between the tax department and individuals or businesses.

The government has been working on simplifying tax laws for several years, and the new bill is expected to address many of these concerns.

The review of the Income Tax Act was first announced in July 2024, when Sitharaman committed to completing the overhaul within six months.

An internal committee was set up by the Income Tax Department to assess key areas such as simplifying language, reducing litigation, enhancing compliance, and removing obsolete provisions, reported The Indian Express. Public inputs and expert opinions were also considered during the drafting process.

One of the primary goals of the new Income Tax Bill is to make tax compliance easier for individuals and businesses. The bill aims to reduce unnecessary paperwork, simplify filing procedures, and provide clearer guidelines for taxpayers.

With the introduction of faceless assessment and an increased reliance on technology, the government has already taken steps to modernise the taxation system.

The new bill is expected to further integrate these advancements and make it easier for taxpayers to interact with the tax authorities.

Currently, the tax system categorises taxpayers based on their residential status into three groups: Resident Individual, Resident but Not Ordinarily Resident, and Non-Resident Individual.

These classifications impact the tax obligations of individuals, particularly those with global income sources. The new bill is expected to simplify these definitions, reducing ambiguities and making it easier for taxpayers to determine their status.

Over the years, numerous exemptions and deductions have been added to the tax system, leading to a complex web of tax-saving provisions.

The Direct Tax Code proposed in 2009 suggested doing away with most of these exemptions and deductions to create a more straightforward tax structure.

The new Income Tax Bill is likely to incorporate these recommendations, ensuring a more transparent and predictable tax regime.

Taxpayers often face confusion regarding the distinction between the financial year and the assessment year.

The new bill is expected to provide a more straightforward explanation of these terms, making it easier for individuals and businesses to file their returns accurately.

The middle-class has long sought tax relief, and Budget 2025 introduced significant tax cuts to address their concerns. While Sitharaman’s Budget speech initially left many taxpayers uncertain about immediate benefits, she later announced substantial reductions in tax liabilities.

The new Income Tax Bill will build upon these changes by ensuring that the process of paying taxes is simpler and less burdensome.

Salaried individuals, small business owners, and self-employed professionals stand to benefit from a more transparent tax system that reduces compliance costs and enhances ease of filing.

The new Income Tax Bill will first be referred to the Standing Committee of Parliament for a thorough review and stakeholder consultations. If required, amendments will be made before it is presented for final approval in Parliament.

Sitharaman stated, “If necessary, any more amendments if need to be brought in, we’ll bring it in and take it forward in the House.”

The proposed legislation follows previous attempts to simplify tax laws, including efforts by the UPA government in 2009 and the task force formed in 2018 to draft a new direct tax code. While previous efforts did not materialise into law, the current government appears determined to see this reform through.