The Income Tax Bill 2025 introduces five key changes that every taxpayer should be aware of. These adjustments aim to streamline the tax process and impact various aspects of income taxation. Staying informed on these changes is essential for compliance and effective financial planning.
1. Transition from Assessment Year (AY) and Previous Year (PY) to Tax Year
The newly proposed income tax legislation introduces the term “tax year” to eliminate confusion associated with the previous terms, assessment year (AY) and previous year (PY). The tax year is defined as the twelve-month period starting from April 1.
For businesses or professions newly established, or income sources emerging in any financial year, the tax year will commence from either:
(a) the date of the establishment of the business or profession, or
(b) the date when the income source comes into existence, concluding with the respective financial year.
2. Enhanced Penalties for Violations under Section 276CCC
Under the existing Income Tax Act, Section 276CCC addresses the failure to submit a return of income in search situations. The new bill, outlined in clause 480, proposes that this issue will be treated as a non-cognizable offence, necessitating prior authorization from the appropriate authority to initiate action.
Additionally, a repeat conviction for the same offence will incur severe penalties ranging from a minimum imprisonment of six months to a maximum of seven years, alongside a financial penalty.
3. Clarification on Tax-Exempt Gifts for Individuals
According to section 56(2)(x) of the current Income Tax Act, gifts received by an individual from their lineal ascendants or descendants (including those of their spouse) are exempt from income tax. The new bill clarifies that both maternal and paternal relations are considered lineal ascendants or descendants.
4. Elimination of Entertainment Allowance Deductions for Government Workers
Starting April 1, 2026, the forthcoming income tax bill will revoke the ability of government employees to deduct entertainment allowance from their salary. Previously, this deduction was limited to government personnel. The deduction amount was determined by the least of the following:
- One-fifth of the basic salary
- ₹5,000
- The actual entertainment allowance received
5. Expanded Authority Granted to CBDT (Central Board of Direct Taxes)
The new income tax bill omits a provision similar to the seventh proviso of the Income Tax Act. This earlier provision outlined conditions, such as foreign travel or exceeding turnover or gross receipts, under which an Income Tax Return (ITR) must be submitted, even if the individual’s annual income was below the basic exemption threshold.
The Central Board of Direct Taxes (CBDT) is now empowered to define the specific situations in which filing a return will be obligatory. Furthermore, CBDT can request information regarding the assessee’s credit cards, expenditures exceeding specified limits, and details related to their principal business location, among others.