The Income Tax Act, 2025 replaces several outdated provisions of the Income Tax Act, 1961 and aligns Indian tax laws with global best practices. Below are some crucial tax concepts that every taxpayer and professional should understand:
1. Basis of Charge & Scope of Income
- Section 4 (Charge of Income Tax): Income tax is levied on the total income of every person for the previous year, assessed in the following assessment year.
- Global Income Taxation: For residents, worldwide income is taxable; for non-residents, only income sourced or accruing in India is taxed.
- Accrual vs Receipt: Income is taxed when it accrues or is received, whichever is earlier.
2. Residential Status & Tax Liability
- Section 6: Defines resident, non-resident, and resident but not ordinarily resident (RNOR).
- Residential status is determined by:
- Number of days present in India during the year and preceding years.
- Expanded rules to cover digital and economic presence, not just physical presence.
- RNORs are taxed only on Indian income and foreign income derived from a business controlled from India.
3. Heads of Income
The Act retains the five major heads of income with some modernized definitions:
- Salaries: Includes perquisites, allowances, stock options.
- Income from House Property: Rental income net of municipal taxes and standard deductions.
- Profits and Gains from Business or Profession: Includes digital economy income and presumptive taxation schemes.
- Capital Gains: Indexed cost rules rationalized; separate treatment for digital assets.
- Income from Other Sources: Residual category, including gifts and winnings.
4. Taxation of Digital Assets & Cryptocurrencies
- A new chapter defines Virtual Digital Assets (VDAs).
- Gains taxed at a flat special rate, with restrictions on set-offs and carry-forward of losses.
- Gifts of VDAs are also taxed in the recipient’s hands if over a specified threshold.
5. Minimum Alternate Tax (MAT) & Alternate Minimum Tax (AMT)
- Companies are subject to MAT on book profits to prevent zero-tax situations.
- AMT applies to non-corporate taxpayers claiming certain deductions.
- Rates and exemptions are streamlined in the new Act.
6. Anti-Avoidance & Transfer Pricing
- General Anti-Avoidance Rule (GAAR): Codified with stricter tests for arrangements lacking commercial substance.
- Transfer Pricing: Arm’s length pricing rules strengthened; significant economic presence (SEP) provisions expanded for cross-border digital businesses.
7. Withholding Tax & Advance Tax
- TDS/TCS provisions rationalized with uniform thresholds and rates.
- Advance tax payment timelines simplified with quarterly installments.
- Refund and interest provisions made more taxpayer-friendly with faster processing.
8. Deductions & Incentives
- Section 80C-equivalent provisions continue with rationalized limits.
- Start-up incentives and R&D deductions extended.
- Green energy and ESG-linked tax benefits introduced.
9. Assessment & Appeals
- Faceless assessment and appeals integrated into the law permanently.
- Time limits for reassessment shortened; stricter conditions for reopening assessments.
- Enhanced penalties for non-compliance but also safe harbor provisions for minor errors.
10. Penalties & Prosecution
- Penalties rationalized, focusing on willful defaults.
- Amnesty-like schemes may be notified for voluntary disclosures.
- Decriminalization of minor offences while retaining strict action against serious tax evasion.
11. International Taxation & BEPS Alignment
- Incorporates OECD’s BEPS 2.0 Pillar Two minimum tax rules.
- Equalization levy integrated into mainstream law.
- Wider source rules for taxation of cross-border digital services.
Conclusion
The Income-tax Act, 2025 modernizes India’s tax regime with clarity, technology-driven compliance, and alignment with global standards. Taxpayers must familiarize themselves with the new concepts, especially on residential status, digital asset taxation, GAAR, and faceless compliance frameworks, to avoid litigation and optimize tax positions.
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