The Indian government has introduced the Income Tax Bill 2025, aiming to replace the existing tax framework established in 1961. This initiative seeks to simplify tax laws, reduce litigation, and enhance compliance.
Top 25 FAQs Every Taxpayer Should Know
1. What simplification has been carried out in section 2 pertaining to ‘definitions’ in the new Bill?
Following simplifications have been carried out:
The language has been simplified wherever possible, without disturbing the meaning;
All definitions continue to be in alphabetical order;
Terms which have been defined at a number of places in the Income-tax Act, 1961 in
the same manner have now been placed in section 2 itself. For example, the definition of ‘senior citizen’, which was appearing at six places in the 1961 Act, has been now placed in section 2;
2. What is a ‘tax year’? What does it replace? What was the need for introducing it? Why was the term ‘financial year’ not used in place of the term ‘tax year’?
A ‘tax year’ is a period of twelve months contained in a financial year. It replaces the term ‘previous year’ used in the Income-tax Act, 1961. Further, with the discontinuance of the use of the term ‘assessment year’ in the Income-tax Bill, now the term ‘tax year’ will now be used in relation to the rate or rates of income-tax also. In addition, any assessment of the income or total income will also be done for a ‘tax year’.
Use of the terms ‘previous year’ and ‘assessment year’ were creating confusion in the minds of the taxpayers as they represented two different financial years. The rationale for the use of two terms is no longer valid in view of alignment of ‘previous year’ with the financial year or part of the financial year (in specific cases). The term ‘Tax year’ is commonly used in income- tax legislation in comparable tax jurisdictions.
As a tax year can be a period which is less than the financial year in certain cases, the term ‘financial year’ has not been used while doing away with the terms ‘previous year’ and ‘assessment year’. However, many actions are carried out by tax authorities and other stakeholders while implementing the tax law, being procedural actions and compliances, such as time period for filing returns, rectifications etc, which require reference to a financial year. In such cases, the time period denoted by a financial year has more relevance. This means that the term ‘financial year’ is required separately.
3. Is ‘financial year’ also defined in the new Bill? Has the term ‘financial year’ also been used in the new Bill? Why is it still appearing in the Bill if it is the same as a ‘tax year?
The term ‘financial year is not defined in the Income-tax Bill. It is not defined in the Income-tax Act, 1961 also. It is defined in section 3(21) of the General Clauses Act, 1897 as the year commencing on 1st April.
The term ‘financial year’ has been used in the Income-tax Bill. For example, in the proposed section 21(5) of the Bill, reference has been made to a financial year in relation to the completion certificate issued by a competent authority in case of a building held as stock-in- trade. In such cases, the term financial year has relevance instead of the term ‘tax year’.
4. Can a ‘tax year’ be a period which is less than a ‘financial year’?
Yes. This will happen when a business is newly set up during any financial year, or a source of income comes into existence during a financial year. In such cases, the tax year will begin from the date of setting up of the business or the source of income coming into existence, and end on the last day of that financial year.
5. Will the concept of ‘tax year’ conflict with the concept of an ‘assessment year’ at any particular time? For example, if the new Act comes into effect from 1st April, 2026, will the tax year 2026-27 of the new Act conflict with the Assessment Year 2026-27 of the Income-tax Act, 1961?
No. The reasons are as follows:
The Assessment Year 2026-27 of the Income-tax Act, 1961 will pertain to the income of a taxpayer for the previous year 2025-26 and not to the income of the financial year 2026-27;
The tax year 2026-27 of the new Act will pertain to the income of a taxpayer for the financial year 2026-27;
The assessment for income of the previous year (financial year) 2025-26 of a taxpayer shall be done as per the provisions of the Income-tax Act, 1961 for the assessment year 2026-27;
The assessment for income of tax year (financial year) 2026-27 of a taxpayer shall be done as per the provisions of the Bill for tax year 2026-27.
6. Is there any change in the content of the charging section?
Ans. In the Income-tax Act, 1961, the charge of income-tax was on ‘total income’ of the ‘previous year’ of a person. Further, income-tax is charged for an ‘assessment year’ at the rate or rates provided by a Central Act. In the Income-tax Bill, in place of the term ‘previous year’, the term ‘tax year’ has been used. Further, the use of term ‘assessment year’ has been discontinued. Now, the total income also pertains to a ‘tax year’ and the rate or rates of income- tax also pertain to that ‘tax year’.
7. In what way has the charging section been simplified?
In the Income-tax Act, 1961, section 4 has two sub-sections and one proviso. Long sentences have been used in the section. In the Income-tax Bill, there are five sub-sections, explaining the charge of income-tax in smaller and simpler sentences.
8. Whether the Bill has introduced references to ‘Finance Companies’ and ‘Finance Units’ in the context of dividends, which could have implications for financial institutions and investors?
The Income Tax Bill 2025 also contains all amendments proposed in Finance Bill 2025. Therefore, the users are advised to compare the provisions of the Income Tax Act, 1961, as updated with proposed amendments in Finance bill 2025, while reading the Income Tax Bill, 2025. Therefore, no such additional term has been introduced in the Bill. Finance Bill 2025 has proposed exclusion of advance or loans between two group entities where one of the entities is “Finance Company” or a “Finance Unit”, from the definition of the term ‘dividend’. The Bill only incorporates the proposal made in the Finance Bill, 2025.
9. Why have the provisions related to non-profit organisations been revamped in this Bill?
The Income-tax Act provides for exemptions to various entities including Government funded entities engaged in objects which are charitable in nature. In addition to this, specific exemption is also available to entities engaged in certain activities which satisfy social purposes. These entities receive donations, voluntary contributions and have other incomes from activities which are charitable in nature. The total number of electronically filed returns of such entities till 30th November 2024 for the assessment year 2023-24 is 2,50,682. The total amount applied by such entities for charitable and religious purposes during the FY 2022-23 is Rs 10,01,572.04 crores. Therefore, it was considered necessary to simplify and consolidate all the provisions relating to non-profit organisations for ease of understanding and compliance.
10. Where are the provisions related to non-profit organisations contained in the present Income-tax Act?
Ans: The present provisions related to registered non-profit organisations are contained across the following Chapters:
- Chapter I: Charitable Purpose sec 2(15)
- Chapter III: Sections 10(23C), section 11, section 12, section 12A, section 12AA,
section 12AB, section 12AC & section 13 - Chapter VIA: Section 80G
- Chapter XII: Section 115BBC, Section 115BBI
- Chapter XII EB: Section 115TD, Section 115TE, Section 115TF
11. What are the challenges with the present provisions of the Act related to NPOs?
The present provisions related to registered non-profit organisations are difficult to comprehend due to the following reasons:
- Since the provisions are spread across Chapters, there are several cross references.
- Since the provisions related to registered non-profit organisations evolved with time, several amendments have been brought to the present Act in the form of Explanations and provisos which make them difficult to read. In Section 11 itself, there are 13
Explanations and 16 provisos. - The interplay of different provisos and Explanations makes it quite difficult to
understand.
12. What is the approach followed while redrafting the provisions related to registered non-profit organisations?
The following approach has been followed while redrafting the provisions related to non- profit organisations:
- The present Act uses different terms such as trust, institution, university, educational institution, hospital etc. in different provisions. A common term registered non-profit organisation has been used in the Bill in line with the international practices.
- Section 10(23C) uses the term “approval” while section 12AB uses the term “registration”. In order to avoid confusion, “registration” has been used in the Bill.
- All the provisions related to registered non-profit organisations have been arranged in
Part B of Chapter XVII titled “B.––Special Provisions for Registered Non-Profit Organisation” which comprises provisions corresponding to present sections 11, section 12, section 12A, section 12AA, section 12AB, section 13, section 115BBC, section 115BBI, section 115TD, section 115TE, section 115TF, and the provisions related to approval under the first and second proviso to section 80G(5) of the present Income-tax Act. - Redundant provisions have been removed.
- Some of the provisions have been tabulated for lucid understanding of different
scenarios such as the provisions related to:- Application for registration;
- Specified income and the tax year in which it is taxable;
- Computation of tax on accreted income
13. How many words have been reduced as a result of this exercise?
As a result of the exercise, there has been a substantial reduction of the words from the approximately 12,800 words to 7,600 words.
14. What is the structure of the new Part?
The following is the structure of new Part XVII-B
The entire Part related to non-profit organisations has been divided into 7 sub-parts which contain the provisions related to registration, income, commercial activities, compliances, violations, registrations for the purposes of eligibility of donations and interpretations.
15. What is the meaning of ‘registered non-profit organization’ which is not used in the present Act?
The present Income-tax Act uses different terms such as trust, institution, university, educational institution, hospital etc. in different provisions. The term registered non-profit organisation has been defined to mean any person having a valid registration under section 12A, 12AA or 12AB or section 10 (23C) of the Income-tax Act, 1961 and such registration has not been cancelled. The use of common term ‘registered non-profit organisation’ intends tp avoid confusion and for lucid understanding of the provisions of the Bill.
16. What is the meaning of registration under the new provisions? Is the same word registration now used for approval as well?
Section 10(23C) uses the term “approval” while section 12AB uses the term “registration”. In order to avoid confusion, “registration” has been defined in the Bill to include provisional registration, provisional approval or approval, as referred to in the second proviso to sections 10(23C) or 12AB (1) of the Income-tax Act, 1961 and under proposed section 332 of the new Income Tax Bill, 2025. However, it does not include approval under the second proviso to section 80G (5) of Income Tax Act, 1961 or section 354 of the Income Tax Bill, 2025.
17. Will the existing registered non-profit organisations be again required to get themselves registered under the new provisions?
There were two regimes for exemption of registered non-profit organisations. The first regime is contained in section 10(23C) and the second one was contained in section 11 to 13 of the Income Tax Act, 1961. There were certain provisions common to both the regimes that were contained in section 115BBC, 115BBI, 115TD, 115TE, 115TF and section 2(15) of the Income Tax Act, 1961. The Finance (No. 2) Act, 2024 provides that no application can be made under the first regime on or after 01st October, 2024. However, the approvals granted under the first regime shall continue to be valid for the period of their approval. They are eligible to apply for registration, subsequently, under the second regime.
As per the provisions of the Bill, all the registered non-profit organisations are eligible to claim benefits. The registered non-profit organisation has been defined to mean any person having a valid registration under section 12A, 12AA or 12AB or section 10 (23C) of the Income-tax Act, 1961 and such registration has not been cancelled.
Thus, the Bill proposes to protect the eligibility of existing registered non-profit organisations under the first as well as the second regime.
18. Can you provide an example as to how the new provisions will help better understand the provisions?
The provisions of the present Act contained several cross references. The Table in the proposed section 332(3) of the Income Tax Bill, 2025 provides the time limits for furnishing application, time limit for passing the order and the validity of registration in different cases in a very simple and lucid manner.
19. There is a dedicated proposed section 334 on the taxability of income of the registered non-profit organisations. Is there any additional tax proposed to be levied on the income of registered non-profit organisations?
No, Since most registered non-profit organisations apply 85% of their regular income for charitable or religious purposes, the taxable regular income in their cases shall be nil and there shall be no tax liability in their hands. However, if a registered non-profit organisation is not able to apply 85% of its regular income or accumulate the same, then regular income for such tax year as reduced by its application for charitable or religious purposes or accumulation thereof shall be its taxable regular income and chargeable to tax.
20. What is the concept of specified income and does it propose to tax any new income of the registered non-profit organisations?
No, No new income is proposed to be taxed. Present Act provides taxability of income scattered in different provisions such as section 13, section 115BBC and section 115BBI for different violations. The Bill seeks to bring all such provisions at the same place.
21. The provisions related to capital gains under section 11(1A) have been done away with? Can you explain the rationale behind that?
Section 11(1A) of the present Income-tax Act provides that where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent provided under the said section.
Since the cost of acquisition of an asset for the objects of the registered non-profit organisation is considered as application of income, these provisions were redundant and therefore removed.
22. Provisions related to deemed application have also been done away with the Bill. Can you explain the reason for the same?
There are two types of accumulations allowed to the registered non-profit organisations. First, as per the provisions of section 11(2) accumulation is allowed for a period of five tax years. Second, deemed application is allowed as per the provisions of Explanation 1(2) to section 11(1) for certain specified reasons (generally accumulation for one year on account of non-receipt of the income). The dual provisions for accumulation were creating difficulties in implementation and interpretation.
The provisions related to deemed application under Explanation 1(2) to section 11(1) of the present Income-tax Act have been rationalised. This will help reducing litigation and ease the compliance. Accumulation under proposed section 342 of the Bill can be for any purpose stated in the prescribed Form.
23. Can you briefly explain the provisions related to exemptions provided in the present section 10 of the Income Tax Act, 1961?
The provisions related to exemptions are contained in section 10 of the present Income- tax Act, 1961. There are around 140 clauses in said section 10, providing exemption to different persons and incomes. Section 10 evolved into its present shape with changes being made in different years to either provide exemption to a class of persons or income or their withdrawal, as the case may be.
24. What are the difficulties in comprehending the existing provisions?
Since section 10 of the Income Tax Act,1961 starts with an opening sentence and different exemptions provided therein are in the form of clauses, there were inherent limitations in the drafting. Clause 23C of section 10 contains 15 sub-clauses with numbers such as 10(23C)(i), (ii), (iii), (iiia), (iiiaa), (iiiaaa), (iiiaaaa), (iiiab), (iiiac), (iiiad), (iiiae), (iv), (v), (vi), and (via). Clause (23C) has 24 provisos. The 3rd proviso to clause (23C) has 7 Explanations and Explanation 2 to the 3rd proviso has again 8 provisos. Thus, there are provisos within clauses, Explanations to these provisos and again provisos to the Explanations making it difficulte to comprehend the provisions!
25. What is the approach followed while considering the provisions of section 10 presently in the Income Tax Act, 1961, writing the Bill?
The following approach has been followed while redrafting the provisions:
i. All the provisions related to exemptions have been drafted in 6 different schedules related to specific category of taxpayers as mentioned below.
ii. Redundant provisions have been removed.
iii. Income eligible for exemption, eligible persons and the applicable conditions have been provided in different columns of the Table under each of these Schedules for the ease of understanding.
