In a landmark development for India’s fiscal framework, the Income Tax Act 2025 has officially received Presidential assent and has been published in the Gazette of India, which will come into force on April 1, 2026.
The Act aims to consolidate and amend the law relating to income tax, replacing and modernizing provisions of the erstwhile Income-tax Act, 1961.
Key Features of the New Law
- Effective Date and Scope
The Act will come into force on April 1, 2026, and will extend to the entire territory of India, including its territorial waters and airspace. - Clear Definitions and Digital Integration
The legislation provides an expanded set of definitions for terms like “assessee,” “capital asset,” “amalgamation,” “demerger,” and virtual digital assets, reflecting the evolving financial landscape.
Notably, “books of account” now include digital and cloud-based records, aligning tax compliance with India’s digital economy. - Residency Rules Simplified
Residential status criteria have been redefined to address issues faced by global citizens and high-net-worth individuals. Individuals staying in India for 182 days or more remain residents, but special provisions apply for those with significant foreign income or Indian-origin citizens visiting India. - Taxation of Digital Assets
The Act formally recognizes virtual digital assets such as cryptocurrencies and NFTs. It defines them clearly and empowers the government to notify or exclude certain digital assets, signaling India’s intent to regulate this space. - Comprehensive Income Definition
“Income” now explicitly includes digital asset gains, subsidies, Keyman insurance policies, winnings from games and lotteries, and certain perquisites, closing earlier loopholes. - Focus on Ease of Doing Business
The law modernizes rules around mergers, demergers, slump sales, and cross-border taxation, providing clarity to corporates and investors. Provisions relating to “place of effective management” determine tax residency for companies with foreign control. - Inclusion of Charitable and Social Objectives
The Act retains exemptions for entities engaged in charitable purposes, education, and environmental preservation, balancing revenue needs with social welfare.
Significance of the Reform
This Act is being dubbed as “GST 2.0 for direct taxes” due to its attempt to simplify and rationalize India’s direct tax regime. Experts believe the law’s digital-friendly framework and recognition of modern financial instruments will boost investor confidence and improve compliance.
The Finance Ministry stated that the new law is aimed at reducing litigation, broadening the tax base, and ensuring that India’s tax system is in sync with global business practices and technological innovations.
Way Forward
The government is expected to notify the Income Computation and Disclosure Standards (ICDS) and specific tax rates via the annual Finance Act before April 2026. Transitional provisions will ensure a smooth migration from the old law to the new regime.
Conclusion
The Income-tax Act, 2025 marks a pivotal shift in India’s taxation system. With its comprehensive scope and forward-looking approach, it is poised to strengthen the nation’s revenue base while promoting transparency and ease of compliance.
