New Income Tax Bill 2025

New Income Tax Bill 2025

Why in News? 

The New Income Tax Bill 2025 was passed in the Lok Sabha on 11 August 2025. It was introduced by Finance Minister Nirmala Sitharaman. The bill focuses on bringing changes to the taxation system and aims to provide relief to taxpayers while addressing new economic priorities.

Key Provisions of the New Income Tax Bill 2025

The Taxation Laws (Amendment) Bill, 2025, passed in August 2025, introduces several important reforms to the existing tax framework. It revises provisions under the Income Tax Act, 1961 and the Finance Act, 2025, with a focus on retirement benefits, foreign investments, and tax administration procedures. 

• Tax Benefits for UPS Subscribers: The Bill introduces specific exemptions for individuals enrolled in the Unified Pension Scheme (UPS). According to the new rules, any distribution made by the NPS Trust to a UPS subscriber will not be taxed, provided the withdrawal does not exceed 60% of the total corpus accumulated during the subscriber’s service period. This provision applies at the time of superannuation or retirement. 

• Deduction Rules for UPS Payments: The Bill clarifies how the remaining amount will be taxed. Any payment from UPS made to the assessee or their nominee after retirement or superannuation will be considered taxable income for that financial year. The rule applies equally to nominees in the event of the subscriber’s death, thereby ensuring consistent taxation treatment.

• Alignment of UPS with NPS Benefits: The government had earlier announced in July 2025 that all tax benefits available under the NPS would also be extended to the UPS. This change came into effect from 1 April 2025. The amendment confirms this decision in law, creating parity between both pension systems. 

• Direct Tax Relief for Saudi Investments: A notable provision in the Bill grants specific tax relief to the Public Investment Fund of Saudi Arabia and its subsidiaries. Under Section 10(23FE) of the Income Tax Act, certain categories of income from investments in India are exempt from direct taxation. This amendment formalises the understanding between the Governments of India and Saudi Arabia. 

• Amendments to Block Assessment Procedures: The Bill updates the process for block assessments in cases where the Income Tax Department conducts search and seizure operations. These changes focus on improving the way pending assessments and reassessments are handled during such operations. 

Benefits of the New Income Tax Bill 2025

• Better Retirement Security: The Bill extends tax benefits to the Unified Pension Scheme (UPS) from 1 April 2025. This makes UPS as attractive as the National Pension System (NPS). This change motivates more workers to save regularly for their old age and ensures they have financial stability after leaving service.

• Clarity in Pension Taxation: The Bill defines how pension amounts will be taxed. Payments from UPS beyond the tax-free limit will be considered income in the year of withdrawal. This clear rule removes confusion for employees and nominees. It helps them plan their finances with accurate tax expectations.

• Encouragement of Foreign Investments: The Bill provides tax relief to the Public Investment Fund of Saudi Arabia and its subsidiaries. This makes India a more attractive destination for strategic investors. Large capital inflows from trusted partners help boost infrastructure, energy, and other key sectors.

• Streamlined Tax Assessment Process: Amendments to block assessment procedures in search and seizure cases will make tax investigations more efficient. This reduces delays and ensures faster resolution of pending assessments. 

Challenges of the New Income Tax Bill 2025

• Complexity in Implementation: The Bill revises multiple sections of the Income Tax Act, 1961 and the Finance Act, 2025. Tax officers will need new training to understand and apply these changes. Pension schemes like UPS and NPS have different structures, and aligning them for tax purposes may cause confusion in the initial years.

• Awareness Gap Among Taxpayers: Many employees may not fully understand the benefits and limits of the new UPS tax exemptions. According to government surveys, awareness about retirement schemes in India is still low, especially in smaller towns and rural areas. 

• Risk of Reduced Tax Revenue: Extending tax exemptions to UPS subscribers and providing relief to foreign investors could reduce immediate government tax collections. The government expects higher compliance and economic growth to make up for this loss over time. In 2024–25, India’s fiscal deficit target was 5.1% of GDP, and any revenue shortfall could affect budget stability.

• Dependence on Foreign Investment: The tax relief to the Public Investment Fund of Saudi Arabia is based on an understanding between both governments. If political or economic relations change in the future, these investment benefits may face challenges. Over-reliance on one major foreign investor also exposes the economy to external risks. 

Way Forward

• Strengthen Public Awareness: The government should launch clear and accessible information campaigns about the Unified Pension Scheme (UPS) and related tax benefits. Simple guides, workshops, and online tools can help them understand how to use the 60% tax-free withdrawal limit effectively. 

• Build Administrative Capacity: Tax officials will need proper training to apply the new rules under the Income Tax Act, 1961. Investing in technology-based assessment systems can reduce errors and speed up case resolution. Strong administrative preparation before the 2026–27 assessment cycle will help avoid disputes and delays.

• Monitor Fiscal Impact: The Finance Ministry should regularly track the revenue effects during the 2025–26 and 2026–27 financial years. Data from the Controller General of Accounts can help measure whether the benefits of higher compliance and investment offset the short-term revenue loss.