The Income Tax Act, 2025 will replace the decades-old Income Tax Act, 1961 and is structured to simplify and streamline the country’s direct tax framework. The Act is set to come into effect from 1 April 2026.
Agrawal said the income tax rules to be issued this month under the new statute, will have simpler procedures and forms that capture data efficiently.
Penalty relief
The amendments proposed under Finance Bill 2026 seek to eliminate minimum imprisonment for offences under the Income Tax Act and reduce maximum imprisonment from seven years to two, the chairperson said. The Bill also proposed a shift in penalty provisions from “imprisonment and fine” to “imprisonment and/or fine”, giving greater discretion to courts to impose only a fine, he explained.
Agrawal said the time given for taxpayers to update their tax returns was enhanced from two to four years in the last budget, and this has now been further liberalized.
“Now, we have further expanded this. Even after we issue a notice, if the taxpayer feels that the mistake ought to be corrected, the return can still be updated; pay some additional tax and the matter can be taken care of,” he explained, adding that merging assessment/re-assessment and penalty proceedings into a single process will cut the time taken for proceedings.
“You see, these are fundamental and structural changes along with procedural changes and in totality, the Income Tax Act 2025 will now be simple, better presented, having decriminalized provisions, consolidated with re-engineered forms and processes, and giving more opportunity for taxpayers to come clean or comply at each stage,” the chairperson said.
Between 2009 and 2017, India made multiple attempts to roll out a new Direct Tax Code (DTC) that did not fructify, although the preparations threw up new ideas, many of which eventually made it to Income Tax Act, 1961 through annual Finance Bills over the years. The latest effort to revamp the law, starting with the simplification of language, public consultation, parliamentary select committee review, enactment and subsequent decriminalization through the Finance Bill 2026 and the revamped rules effectively results in a new tax code, said Agrawal.
The chairperson also had a word for investors, a section that he said was looking for more clarity and certainty for business.
“These provisions have been introduced in law in view of the concerns expressed by both domestic and foreign businesses. Their input indicated that they wanted more certainty and clarity in some areas,” he said, highlighting government’s response by way of proposals in the new Finance Bill to give greater certainty to businesses.
The Bill offered tax incentives as well as attractive safe-harbour provisions that prevent audits of cross-border transactions of multinational corporations and their Indian subsidiaries, subject to riders.
“This is the best approach that has been taken by the tax department and the government to boost the manufacturing sector and data centre activities in the country, which have tremendous potential,” Agrawal said. “My appeal would be that now that we have brought these changes, you are welcome to participate in India’s growth.”
He said that through his department’s nudge approach of writing emails to taxpayers about the information it already has, additional ₹8,800 crore tax revenue had been collected, and ₹1,750 crore of refund claims were dropped by taxpayers in the last two years.
Smart forms
Agrawal said the soon-to-be rolled out ‘smart’ forms will help capture certain data in one form and make use of it in other forms, without having to reenter the details. Process re-engineering in rules will help taxpayers save time and effort by cutting down on procedures with the help of technology.
For instance, if a taxpayer wants to avoid tax deduction at source, he has to apply separately to every bank, mutual fund, etc. This meant filling out the same form and visiting multiple institutions many times.
Now, the system has been redesigned using technology. The taxpayer will need to submit just one form to a depository that will automatically share it with all relevant banks, mutual funds, and companies, and they in turn will report the information to the tax department. The form will be generated through the department’s website, so everything will be connected in one system, Agrawal said describing the use of technology to bring ease of use.