New Income Tax Bill 2025 proposes 'tax year' concept, easier terminologies

The new Income Tax Bill, expected to be introduced in the Lok Sabha on Thursday, introduces a new concept of ‘tax year’—a 12-month period starting from April 1. This replaces the existing term ‘previous year’ used in the Income Tax Act, 1961, and removes the concept of the assessment year. If passed, it will take effect from April 2026.

 

According to the Bill shared with Members of Parliament, businesses and newly set-up professions will have a tax year that begins from the date they are established and ends with that financial year. This means income tax will be applied based on economic activity and earnings within that period.  

 

Currently, income tax follows an assessment year system, where tax is assessed on income from the previous financial year. For example, income earned in the financial year 2024-25 (April 1, 2024, to March 31, 2025) would be assessed in the assessment year 2025-26 (starting April 1, 2025).  

 

Replacing a 60-year-old law  

 

The new legislation will replace the Income Tax Act of 1961. Once passed, it will be called the Income Tax Act, 2025, and is expected to take effect from April 2026.  

 

The bill consists of:  

536 sections  

16 schedules  

23 chapters  

622 pages  

 

The Union Cabinet approved the bill on February 7. After it is passed in the Lok Sabha, it will be sent to Parliament’s Standing Committee on Finance for further discussion.   

"A notable change introduced by the bill is the shift from the ‘Assessment Year’ to the ‘Tax Year.’ This reform is a significant step towards modernising India's tax framework, bringing greater clarity and efficiency. However, its success hinges on smooth implementation and how well taxpayers adapt to the changes," said Rohinton Sidhwa, Partner, Deloitte India.

 

Consultations and previous attempts at reform  

 

In October last year, the Income Tax department set up an internal committee to review the Income-tax Act and invited public input on four areas—simplification of language, reducing litigation, easing compliance, and removing obsolete provisions. The department received around 6,500 suggestions from the public.

 

This is not the first attempt to simplify tax laws. In 2018, the government formed a task force to draft a new direct tax law, which  submitted its report in 2019. 

"At first blush, the code does not present any policy changes. As promised, the new tax law seems to focus primarily on simplification and consolidation such as Introducing the concept of tax year in place of assessment year in line with international parlance.

 

Multiple concepts of financial year, previous year and assessment year often caused confusion amongst taxpayers because of the semantics: this impacted the readability of tax law. A single concept of a tax year is easy to understand and in line with international practice (even though there may not have been any substantive change)," said Gouri Puri, Partner, Shardul Amarchand Mangaldas & Co.