On February 1, 2025, Finance Minister Nirmala Sitharaman presented the Union Budget for the fiscal year 2025-2026, introducing the Finance Bill 2025. This landmark legislation aims to overhaul India’s tax framework, replacing the six-decade-old Income Tax Act of 1961 with a more streamlined and transparent system. The new bill seeks to simplify tax laws, reduce litigation, and make compliance more accessible for taxpayers.
Key Highlights of the Finance Bill 2025
1. Simplification of Tax Laws
The Finance Bill 2025 reduces the existing tax law from over 800 pages to 622 pages, eliminating redundant sections and clarifying complex provisions. This effort aims to make the tax code more user-friendly and reduce the scope for disputes.
2. Revised Income Tax Slabs
A significant feature of the new bill is the restructuring of income tax slabs under the new tax regime. Individuals earning up to ₹1.2 million annually are now exempt from income tax, with a standard deduction of ₹75,000, effectively making income up to ₹1.275 million tax-free. The revised tax rates for income above this threshold are as follows:
- ₹1,275,001 to ₹1,600,000: 15%
- ₹1,600,001 to ₹2,000,000: 20%
- ₹2,000,001 to ₹2,400,000: 25%
- Above ₹2,400,000: 30%
This restructuring aims to boost middle-class consumption and savings.
3. Introduction of a Unified Tax Year
The bill proposes a standardized ‘Tax Year,’ replacing the dual financial year (April to March) and assessment year system. This change is designed to simplify tax filing and align the tax system with international practices.
4. Enhanced Powers for Tax Authorities
The new legislation grants tax authorities broader powers during searches, including access to taxpayers’ email servers, online investment accounts, trading and bank accounts, social media accounts, and digital application servers. This measure aims to curb tax evasion and ensure comprehensive compliance.
5. Focus on Reducing Litigation
By condensing the law and removing ambiguous provisions, the bill seeks to reduce the volume of income tax disputes, which had escalated to ₹13.4 trillion by March 2024. The clearer language and consolidated sections are expected to minimize interpretational issues and legal challenges.
6. Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) Provisions
The bill outlines specific TDS and TCS rates for various transactions to ensure timely tax collection and compliance. Non-compliance will attract penalties, including a 1% monthly interest on outstanding amounts.
7. Support for Agriculture and Rural Development
The budget introduces a six-year program to boost pulses and cotton production, aiming to reduce import dependency and enhance domestic output. This initiative includes setting up a new urea plant and increasing subsidized farm loan limits to support farmers.
8. Incentives for Startups and Innovation
To foster entrepreneurship, the bill proposes new funds and incentives for startups, along with enhanced research and development initiatives. This move is expected to stimulate innovation and job creation in emerging sectors.
9. Measures for the Gig Economy
Recognizing the growing gig workforce, the bill includes provisions for the registration and welfare of gig economy workers, ensuring they have access to social security benefits and health insurance.
10. Promotion of Clean Energy
The budget allocates funds for the Nuclear Energy Mission, targeting 100 GW of nuclear energy capacity by 2047. This initiative underscores India’s commitment to sustainable and clean energy sources.
11. Foreign Direct Investment (FDI) Reforms
To attract more foreign investment, the bill raises the FDI limit in the insurance sector to 100%, aiming to deepen market penetration and enhance the sector’s growth.
12. Capital Expenditure Plans
Despite the tax reliefs, the government plans a modest increase in capital spending, focusing on infrastructure development and public services to stimulate economic growth.
13. Fiscal Deficit Target
The budget sets a fiscal deficit target of 4.4% for the 2025-2026 fiscal year, balancing the need for economic stimulus with fiscal prudence.
14. Customs Duty Adjustments
To promote domestic manufacturing and make essential goods more affordable, the bill proposes reducing duties on specific products, including certain electronics and raw materials.
15. Implementation Timeline
The Finance Bill 2025 is slated to take effect from April 1, 2026, allowing taxpayers and businesses ample time to adapt to the new regulations.
Frequently Asked Questions (FAQs)
1. What is the primary objective of the Finance Bill 2025?
The main goal is to simplify India’s tax laws, reduce litigation, and make compliance easier for taxpayers by replacing the outdated Income Tax Act of 1961.
