Tax Reform 2025: How Will the New Income Tax Bill Affect You?

The Union Cabinet, led by Prime Minister Narendra Modi, has approved the New Income Tax Bill, paving the way for its introduction in Parliament during the ongoing Budget session, according to a PTI report. The proposed legislation aims to replace the Income Tax Act of 1961, bringing clarity, simplification, and a reduction in legal disputes to direct tax administration.

Key Features of the New Income Tax Bill

Finance Minister Nirmala Sitharaman, who announced a comprehensive review of the existing Income Tax Act in her July 23, 2024, Budget speech, confirmed its completion within six months. She reiterated the bill’s introduction in Parliament during her February 1, 2025, Budget speech.

Objectives of the New Tax Law

• Simplification: The new tax code aims to significantly shorten the current tax law, using clear and precise language to reduce taxpayers' reliance on professional consultation.

• Minimizing Legal Disputes: By removing outdated provisions and resolving ambiguities, the government aims to enhance tax certainty and lessen the burden of contested tax demands.

• Modernization: The law will align with technological advancements and socio-economic changes, ensuring seamless compliance in the digital taxation era.

How Will Your Taxes Change Under the Revised Regime?

Compare what you paid under the previous New Tax Regime and what you will pay under the revised New Tax Regimeintroduced in the Budget.

If your income is above Rs 12 lakh, you will pay 5% tax on income between Rs 4 lakh and Rs 8 lakh; 10% on income between Rs 8 lakh and Rs 12 lakh; and 15% between Rs 12 lakh and Rs 16 lakh. Therefore, an individual earning Rs 15 lakh will pay Rs 1,05,000 in tax.

What is the Benefit for Those Earning Above Rs 15 Lakh?

The Finance Minister announced significant savings for those earning above Rs 15 lakh by implementing sharp tax rate reductions for incomes between Rs 15 lakh and Rs 24 lakh.

Previously, in the new tax regime, incomes above Rs 15 lakh were taxed at 30%. Now, under the revised structure:

• Income between Rs 12 lakh and Rs 16 lakh is taxed at 15%.

• Income between Rs 16 lakh and Rs 20 lakh is taxed at 20%.

• Income between Rs 20 lakh and Rs 24 lakh is taxed at 25%.

• The 30% rate will apply only to income above Rs 24 lakh.

The Finance Minister announced that those earning above Rs 24 lakh will save up to Rs 1.1 lakh under the new tax regime.

Why is a New Income Tax Act Necessary?

The Income Tax Act of 1961 was designed for an economic landscape vastly different from today’s digital economy. Numerous amendments over the decades have made the law complex and cumbersome. Key reasons for the overhaul include:

• Redundant tax structures: Taxes such as wealth tax, gift tax, and fringe benefit tax have been abolished, making parts of the old law obsolete.

• Advancements in digital taxation: New pre-populated ITR forms leverage data from TDS statements, employers, banks, and property transactions, simplifying tax filing.

• Evolving economy: Both personal and corporate taxation require an updated framework that is efficient, transparent, and user-friendly.

Will the New Tax Law Increase the Tax Burden?

The New Income Tax Bill is expected to be revenue-neutral, focusing on simplification rather than increased taxation. Changes in tax rates will still be determined through the Finance Act, presented annually during the Union Budget on February 1.

Next Steps

With Cabinet approval secured, the bill will be introduced in Parliament, where it will undergo discussions and review by the Standing Committee on Finance before its final passage. The government’s push for a modernized, streamlined tax code is expected to enhance compliance, reduce litigation, and improve transparency for both individuals and businesses.