Income Tax

Income Tax Act, 2025: A ‘Reform’ Comes to Life 

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The Income Tax Act, 2025 (IT Act, 2025) – after almost a decade of attempts to redraft income tax law – comes into force on 1 April 2026 and replaces the Income Tax Act, 1961 (IT Act, 1961). It’s a unique legislative achievement for various reasons. Two noteworthy reasons are: (a) there was no widespread or pressing demand for enacting a new income tax law; (b) the IT Act, 2025 does not effectuate any major change in tax policy. No other comparable ‘legislative replacement’ comes to mind where a new law was implemented without intending to change the previous policy. Instead, the IT Act, 2025 is an attempt ‘simplify’ the income tax law, remove redundant provisions and overall change the sequence and arrangement of various provisions. A rewriting of the income tax law, if you may.      

The attempt at simplification required the Income Tax Department (‘IT Department’) to devote a significant time – 75,000 person hours – but some of the re-drafted provisions have raised concerns. Until now, the most notable concern has been about the scope of search and seizure powers and their impact on digital privacy of taxpayers. A pre-mature Public Interest Litigation challenging constitutionality of Section 247, IT Act, 2025 – which contains search and seizure powers – was filed before the Supreme Court. But the Supreme Court did not entertain the petitioner’s plea and allowed the petition to be withdrawn. 

In this article, I attempt to provide a descriptive account of three aspects of the IT Act, 2025: origin of the reform, the lack of legislative scrutiny, and a brief comment on the expanded scope of search and seizure powers.    

Forgotten (and Opaque) Roots 

In November 2017, the Union of India constituted a Task Force to draft a new income tax law. The Task Force was mandated to draft an income tax law in consonance with the economic needs of India and that aligned with international best practices. The Task Force was not constituted because of any major or specific concerns about the IT Act, 1961. In fact, major concerns were about the IT Department’s propensity to amend the IT Act, 1961: frequently and retrospectively. And this propensity was fuelled by an intent to overcome loss in courts. The Press Information Bureau’s communication dated 22 November 2017 only states that there was a concern that the IT Act, 1961 was more than five decades old. And there is need to draft a new income tax law. A generic and weak concern that triggered the mammoth exercise of drafting a new income tax law. 

In July 2019, the Finance Minister Ms Nirmala Sitharaman informed the Rajya Sabha that there was no proposal under consideration regarding the Direct Taxes Code, but a task force had been constituted to draft a new income tax law. This statement, in my view, was an attempt to distinguish the NDA government’s attempt to rewrite the income tax law with the UPA government’s previous attempt of overhauling the IT Act, 1961 via a Direct Taxes Code. Nonetheless, she also informed that the remit of Task Force had been expanded and it will now provide suggestions on faceless assessments, reducing litigation, making compliance burdens less onerous, and examine sharing of information with indirect tax departments.  In August 2019, there were sporadic news reports that the Task Force had submitted its report. But the report and recommendations of the Task Force were never made public. The report, its recommendations, and its draft of income tax law – if any – remain a blackhole in India’s income tax law reform history. A Task Force on income tax law, funded by taxpayers, but whose final recommendations and work remain beyond the taxpayers’ access. Irony sometimes visits Indian tax reform, only to mock us taxpayers.      

Any reports or information on the Task Force’s recommendations died a natural death after 2019. There is no public record of any progress or discussion on income tax reform. And, then, after 5 years of silence, in her Budget Speech of 2024, Finance Minister Ms Nirmala Sitharaman announced a ‘comprehensive review’ of the IT Act, 1961. She informed the Parliament that the purpose was to make the statute more lucid, easy to read, and reduce disputes and litigation. She added that the entire exercise was to take six months. But there was no reference to the recommendations or work of the Task Force constituted in November 2017 or whether the ‘comprehensive review’ was an extension of their work. Or whether Union of India had decided to reject all recommendations of the Task Force. Since the Task Force was mandated to draft a new income tax law, presumably its draft was unacceptable to the Union of India necessitating the need to initiate a complete review five years after the Task Force had submitted its report. 

Nonetheless, first draft of the IT Bill, 2025 was introduced in the Lok Sabha in the Budget Session of 2025. It is anyone’s guess as to whether the draft is based on, similar to, or a complete variation from the one drafted by the Task Force in 2019. Anyhow, the introduction of first draft unleashed the vocabulary of ‘simplification’ of income tax law. The Union of India – under the NDA government – wanted that the IT Bill, 2025 be examined on the touchstone of leanness and simplification. And not whether the IT Bill, 2025 was necessary in the first place. Thus, one question that slipped through the cracks: what made the IT Act, 1961 cumbersome? One vital reason: tendency of the IT Department to amend the law each time they lost a major case. The most dramatic and popular amendment is the retrospective amendment made in 2012 in aftermath of the Vodafone case. But, in my view, amending the IT Act, 1961 as an annual ritual – during the Budget- contributed to making it cumbersome. In short, it is not solely the age of IT Act, 1961 that made it cumbersome and complicated. Tax administration was also responsible to making the law unwieldly.   Unless the IT Department’s habit of effectuating annual amendments – to overcome a loss in courts – is brought to a halt, the IT Act, 2025 will suffer the same fate. 

Quick Legislative Passage and Amendments 

The Select Committee on the IT Bill, 2025 submitted its recommendations in July 2025 and, one month later, the IT Act, 2025 was passed by both Houses of the Parliament in the Monsoon Session of 2025. I’ve remarked elsewhere – of course, in jest – that the hurry with which the IT Bill, 2025 was passed should not lead courts to ascribe any ‘legislative wisdom’ to drafting of its provisions. The legislative hurry ensured that there was no meaningful legislative scrutiny of various provisions by either the Lok Sabha or the Rajya Sabha. Thus, it is not a stretch to say that the IT Act, 2025 is a law conceived and drafted by the executive and the Parliament merely rubber stamped it. While the Parliament rubber stamping various laws has been an increasing trend for various laws, in the context of income tax law such a practice brings into focus the idea of no taxation without representation. Elected representatives – especially in the Lok Sabha – should ideally scrutinise the quantum and methods with which the Union of India wishes to extract income tax from the taxpayers. But income tax policies are hardly the subject of any legislative debates and scrutiny. Executive fiat is determining our income tax burdens.   

Which brings me to, what I suggest, is a related issue. Frequent amendments to income tax laws. The IT Act, 2025 possesses the rare distinction of being amended before its implementation. The IT Act, 2025 comes into force on 1 April 2026 and in February-March of 2026, the Budget of 2026 proposed to amend some of its provisions. One reason for amendments to a law that was yet to be implemented was partially tied to the swiftness of its legislative passage. If the IT Bill, 2025 was never examined by either the Lok Sabha or the Rajya Sabha, there were bound to be some errors and oversights. While it is true that the IT Department spent a considerable time in drafting the law, the Select Committee prepared a gargantuan report detailing its observations and views of various stakeholders; there is no replacing a meaningful legislative debate.   

Of course, I don’t mean to say that if a meaningful and substantive legislative debate takes place, it cannot stop errors from creeping in the statute. Neither does it mean that the law will not be frequently amended. However, legislative debates – at the very least – can serve as useful insights into legislative intent. And this can be particularly useful because the IT Department frequently reasons that a particular provision is being amended because courts misunderstood legislative intent. In the absence of a legislative debate, what was the legislative intent remains only in the executive’s knowledge. Taxpayers only find out about the legislative intent if and when the executive chooses to reveal it. And while, in courts, the IT Department does frequently cite legislative intent to support its interpretation of the provision it is not supported by any legislative debates. The closest source we get are some statements by the Finance Minister in the Parliament while introducing or clarifying the amendments. Or if the amendments were made as part of the Finance Act, then the accompanying Memorandum might contain some brief explanations. But that is not true for all amendments as several provisions are amended via the Finance Act but no corresponding explanation for the amendment is found in the Memorandum. 

A quick-paced legislative passage, no meaningful legislative debate or scrutiny of the relevant provisions means that the income tax law becomes the site of back and forth between the IT Dept and courts. That is what frequently happened with the IT Act, 1961. And unless there is a serious change in the tax administration’s approach and the Parliament becomes more robust, we are likely to witness a similar scenario with the IT Act, 2025.  

Powers of Search and Seizure 

This brings me to third aspect of the IT Bill, 2025 that has caught attention in some quarters. To begin with, there is need to clarify that the IT Dept possessed search and seizure powers under the IT Act, 1961 too. Section 132 of the IT Act, 1961 empowered income tax officers to enter any building or place, seize any books of account or documents, place marks of identification on books of account or make copies. The corresponding provision in the IT Act, 2025 – Section 247- makes a crucial addition and extends the powers to electronic records. 

Section 247 states that where the competent authority has reason to believe that any person to whom summons have been issued has omitted or failed to produce any documents any books of account or documents are may be required by summons or notice; it may authorise relevant officers to enter and search a building, vessel or aircraft where it has reason to suspect that such books of account or documents are kept. Section 247(1)(a)(II) extends this power to ‘any information in an electronic form or a computer system’ which will be relevant to proceedings under the IT Act, 1961 or IT Act, 2025. Section 247(b)(ii) takes this power even further and states if a person is found in possession of an electronic record, information in electronic form or a computer system; the officer may require such person to:

such reasonable technical and other assistance (including access code, by whatever name called) as may be necessary to enable the authorised officer to inspect such books of account or other documents or such information;  

Thus, the officer can demand the person whose electronic record it is trying to access to provide technical assistance for accessing the record. 247(b)(iii) further states that if the access code to a computer system is not available, the officer can override it. Thus, the extension of powers to access computer systems and electronic records is comes with the power to obligate the person to provide access, and on refusal override the access codes. The extension of search and seizure powers to electronic records and computer systems can be justified by pointing towards ubiquitous nature of digitalisation. If the income tax officers had similar powers in respect of physical books of accounts and documents, their extension to digital sphere is an example of the law keeping abreast of contemporary practices. Equally, the threshold of ‘reason to believe’ needs to be satisfied, and the powers of search and seizure contain in-built safeguards.  

I’ve expressed my preliminary views on the interface of privacy and tax previously. But, two quick points on widening of search and seizure powers under Section 247 of the IT Act, 2025. First, extension of search and seizure powers to computer systems has a high probability of bringing personal devices within their scope. If not, personal devices per se, the IT Dept can gain access to a taxpayer’s personal data on an official computer system. In fact, the IT Department – even before implementation of the IT Act, 2025 – has confiscated mobile phones and laptops raising concerns of privacy and potential leak of personal data on these devices. The IT Department’s assurance that the device and data will be used in accordance with the law is effectively lack of any legal protection against invasion of privacy. Second, it is worth examining if the threshold of ‘reason to believe’ is sufficient protection vis-à-vis computer systems and electronic records. The courts have consistently upheld that reason to believe is a subjective standard and requires a speaking order detailing reasons. But, have refrained from scrutinising the material or information that led to the concerned officer arriving at the belief. But, with the Supreme Court endorsing right to privacy and introduction of personal data laws, it is worth examining if reason to believe provides adequate protection in the emerging landscape on privacy. My tentative view is: reason to believe is insufficient.    

There needs to be a safeguard, that if the computer system especially a mobile phone/laptop is used for personal and professional purposes, the income tax officer cannot seize or access it without any prior restrictions. An additional filter, on a priori basis, is necessary to provide a meaningful safeguard. Else, an officers’ reason to believe is sufficient for them to gain access to a taxpayers’ social media accounts, personal communication, financial records, and other personal data. The kind of information that is likely to be on mobile phone or laptop if it is also used for personal purposes. Reason to believe may be sufficient for income tax officers to gain access to business premises of a taxpayer, and conduct search for physical books of account; but extending it computer systems is fraught with the risk of violation of privacy.                

The Future Beckons   

Indian income tax  – and its reform – has a long history. The latest addition to it – IT Act, 2025 – has its roots in the Task Force constituted in 2017. But, since 2019, the Union of India has avoided any reference to recommendations and report of the Task Force. The second wind for replacing the IT Act, 1961 caught momentum in 2024 and will reach its conclusion on 1 April 2026. We can only speculate how much of the efforts to simplify the law are attributable to the Task Force. Nonetheless, what we do know is that the IT Act, 2025 is leaner and shorter with fewer provisions. I’m tempted to analogise it with being lean, but not healthy. But, it is difficult to say with certainty if the change in language and use of alternate vocabulary will create less litigation, free up capital caught in pending court cases, or otherwise contemporise India’s income tax law. What we do know is that there are two major trends that are almost contemporaneous to simplification of the income tax law: first, a movement to new tax regime as the default regime; second, a push, even if marred with controversies, towards faceless assessment. A third crucial aspect remains uncertain: India’s stance on digital taxation. While the equalisation levy has been made redundant, what follows its removal is not entirely certain.  

When A Princess Worried About Tax on Alimony

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All things in life have a tax angle, including alimony payments. In this article I elaborate on tax treatment of alimony payments under the Income Tax Act, 1961 (‘IT Act, 1961’). Upfront, these are the three takeaways from this article: 

first, a lump sum payment of alimony amount is not taxable in the hands of recipient, since it is a capital receipt.

second, the monthly payment of alimony amount is taxable in the hands of recipient, since it is an income from a particular source. 

third, the payer receives no tax deductions for alimony payments, even if the payments are made under a decree of court. 

The law on all three above aspects was laid down by the Bombay High Court in Princess Maheshwari of Pratapgarh v Commissioner of Income Tax. This case is the focus of my article below. 

Decree of Nullity Sprouts Tax Questions  

(i) Decree of Nullity of Marriage 

In September 1963, Princess Maheshwari Devi of Pratapgarh obtained a decree of nullity of her marriage with Maharaja of Kotah. The Bombay City Civil Court (‘civil court’) pronounced the decree of nullity under Section 25, Hindu Marriage Act, 1955. As part of the proceedings, the Princess had claimed monthly alimony and a gross sum as permanent alimony from the Maharaja. The Civil Court ordered the Maharaja to pay the Princess an amount of Rs 25,000 as permanent lump sum alimony and a sum of Rs 750 per month as monthly alimony. The Maharaja was obligated to pay the latter until her remarriage, if and when, it took place.    

(ii) Two Tax Questions 

I will spare you details of assessment years and focus on the broader issue: the Princess claimed tax exemption on the lump sum alimony amount as well as the monthly alimony amounts. Her claims were rejected by the Income Tax Office and Appellate Tribunal, and against the said decisions she appealed to the Bombay High Court.

The High Court had to answer two questions: 

First, whether the monthly alimony of Rs 750 was income in hands of the Princess and liable to tax? 

Second, whether the lump sum alimony of Rs 25,000 was income in hands of the Princess and liable to tax? 

The framing of questions is crucial, from an income tax viewpoint. A receipt of money is only taxable if it constitutes ‘income’ as defined under the Income Tax Act, 1961 (‘IT Act, 1961’). Else the receipt falls outside the ambit of IT Act, 1961 though given the current and expansive definition of income, rarely if ever is a receipt of money not subjected to income tax. 

Monthly Alimony is Taxable in Hands of Princess  

The Bombay High Court answered the first question in favor of the Income Tax Department and held that the monthly alimony payment to the Princess constituted her income and was taxable in her hands. The arguments from both sides were as follows.  

(i) Arguments 

The advocate for the Princess rested her case for tax exemption of the monthly alimony on various grounds. Some of them were: 

First, alimony is merely an extension of husband’s obligation to maintain his wife and Section 25, Hindu Marriage Act merely enlarges that obligation. The advocate was implying that the husband is obligated to maintain his wife, whether they continue to remain married or not.  

Second, the alimony payment to the Princess did not emerge from a definite or particular source and in fact, the payment would cease on her remarriage. 

Third, monthly alimony is a personal payment from her ex-husband and not a consideration for any services performed – past or future. 

The counsel for the State though argued that the decree of Civil Court had created a legal right in favor of the Princess. The right to receive a monthly alimony amount had a definite source, i.e., the decree of court, and should be taxed as income in hands of the Princess.   

(ii) High Court Applies the Law

The Bombay High Court scanned through the previous cases to state judicial understanding o the term ‘income’. For example, one notable case, the Privy Council had observed that income is something that is ‘coming in’ with some sort of regularity from a definite source. The High Court after scanning various other precedents, succinctly stated the judicial definition of income as: 

a periodical return for labour/skill that a person receives with some regularity, and from a definite source. But an income excludes a ‘windfall’ gain. 

The above definition would squarely cover a monthly alimony payment. The only point then in the Princess’s favor was her claim that the monthly alimony was not a result of application of any labour or skill on her part. But the High Court rejected this point and held that even voluntary payments can constitute income in hands of recipient if they come with regularity from a definite source. The High Court though further pointed out that the monthly alimony was paid to the Princess because of the civil court decree which was obtained by her by expending effort and labour. And the civil court decree is the source of her right to claim monthly alimony as minus the decree she would have no right to alimony. The High Court concluded: 

Although it is true that it could never be said that the assessee entered into the marriage with any view to get alimony, on the other hand, it cannot be deneid that the assessee consciously obtained the decree and obtaining the decree did involve some effort on the part of the assessee. The monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be “income” within the meaning of the said term in the said Act.

The monthly alimony amount was something the Princess would receive regularly because of the decree, because of her efforts to obtain to same from the civil court and thus it would constitute her income under IT Act, 1961 and be subjected to income tax. 

Lump Sum Amount Received as Alimony: Exempt from Tax  

As regards the taxability of lump sum amount of Rs 25,000 received as alimony, the Bombay High Court decided that it amounted to a capital receipt and was not taxable as income in the hands of the Princess. The High Court observed: 

It is not as if the payment of Rs. 25,000 can be looked upon as a commutation of any future monthly or annual payments because there was no pre-existing right in the assessee to obtain any monthly payment at all. Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, in our view, the receipt of that amount must be looked upon as a capital receipt.

Capital receipt, in income tax law, is only taxable if there is an express charging provision in income tax law to that effect. Else, not. Only revenue receipt is charged to income tax by default. Thus, the above distinction of revenue and capital receipts was in favor of the Princess. Also, because the High Court took the view that the lump sum payment did not ‘commute’ any monthly or periodical payments that the Princess would have received since she had no pre-existing right to receive the monthly alimony payment. To be clear, the lump sum alimony amount could be taxable if it ‘commutes a part of the future alimony’. However, the High Court said there was nothing in the civil court decree that indicated that the lump sum amount commuted her monthly payments. At the same time, the High Court did acknowledge that ‘beyond doubt that had the amount of Rs. 25,000 not been awarded in a lump sum under the decree to the assessee, a larger monthly sum would have been awarded to her on account of alimony.’ Thus, leaving a window ajar to tax lumpsum alimony amounts in future cases.     

No Tax Deductions for Alimony Payments

The unfairness of IT Act, 1961 is that it does not allow deduction for alimony payments. Typically, husbands pay alimonies to their ex-wives. Presuming that the alimony payment is from a portion of husband’s already taxed income, such payment should ideally qualify for a deduction. It can be viewed as an expense. If not the entire amount, a deduction with an upper cap can be provided. And for monthly alimony payments anyways the wife is liable to pay income tax, so providing the husband income tax deduction on such payments may not be too harmful from a revenue perspective. Currently, the husband pays income tax on his income, pays a portion of such income as monthly alimony to his ex-wife, and the ex-wife is liable to income tax for the monthly alimony as it constitutes her income. A bountiful for the revenue, unless the spouses are smart and rich enough to agree only to a one-time alimony amount, circumventing the uneven tax consequences of IT Act, 1961.   

In fact, the Bombay High Court described the above position of law as ‘unfortunate’. It heeded the legislature to pay attention to this aspect and noted: 

It is clearly desirable that a suitable amendment should be considered to see that in cases where the payments of alimony are made by a husband from his income and are such that they cannot be claimed as deductions from the income of the husband, in the assessment of his income, they should not be taxed in the hands of the wife. That, however, is not for the courts but for the Legislature to consider.

The Bombay High Court made the above observations in 1982. Since the IT Act, 1961 has been amended several times to include various capital receipts within the realm of taxability. But not lump sum alimony payments categorized as capital receipts have not been made taxable. Neither have deductions on alimony payments been included. Our lawmakers seem busy ‘simplifying’ the income tax law, rather than introducing substantive and meaningful policy changes that acknowledge new social realities. 

Conclusion 

Neither the Income Tax Act, 1961 and unfortunately nor does the Income Tax Bill, 2025 provide a clear answer about taxability of alimony payments. Tax lawyers typically advice their clients based on above discussed judgment of the Bombay High Court. Any legislative clarity on this front seems a bit distant for now.    

Regardless, I would like to conclude with a normative question: 

Who SHOULD pay the tax on alimony payments? 

Depending on your gender biases, views on divorce, necessity of alimony payments, your perception of divorce settlements as fair or otherwise, your answers would vary. Typically, women receive alimony payments from their ex-husbands. And people who have strong and inflexible opinions that women use family laws as ‘get rich quick’ route are likely to argue that women should foot the tax bill on both kinds of alimony payments: made via lump sum amounts and/or on monthly basis. 

A tax law view would be to ask who benefits from the alimony payment? And who bears the burden? The latter should receive a deduction on the payment and the former should shoulder the tax liability. Irrespective of gender. I’m willing to go a step further and suggest that even if the alimony payment is not made because of a court order, but voluntarily as part of a valid contract, the above principles should apply. Taxability of alimony payments should not depend on whether court ordered it, or parties themselves agreed to it. IT Act, 1961 provides deductions to all kinds of voluntary contributions including to political parties, it is imperative that same principles apply to personal relationships if it ends with mutual consent – actual or perceived. We should stop hiding behind the argument that alimony payment is a personal obligation and thus does not qualify for deduction. Unless one entertains the far-fetched belief that providing such a deduction may further catalyze divorces.         

Finally, and just as a matter of abundant caution I would like to add that transfer of various assets – jewelry, house, etc. – between two spouses can and do happen when they are still legally married and sometimes after the marriage has legally ended. The transfers of such assets attract different tax liabilities and warrant a separate discussion.  

Skeletal Timeline of Income Tax Reform in India

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1860-1886: 

Income tax was introduced in India for the first time in 1860 to overcome the financial difficulties due to First War of Independence of 1857. The period of 1860-1886 saw the Govt alternating between income tax and license tax as a source of revenue. Income tax became the preferred option when the first systematic form of income tax law was passed in 1886. 

1860: Income Tax Act, 1860 enacted in India

  • First income tax law of India 
  • Income was divided into four schedules to be taxed separately 
  • Four schedules were: income from landed property, income from professions and trades, income from securities, and income from salaries and pensions

1863: Income Tax Act, 1860 ‘expired’ 

1869: Income tax was reintroduced due to financial difficulties faced by the British Govt 

1873: Income Tax Act, 1869 ‘expired’  

1878: Income tax was replaced by license tax to raise money for famine insurance

1886: Income Tax Act, 1886 enacted with important changes 

  • Income was divided into four classes
  • Four classes were: salaries, pensions or gratuities, net profits of companies, interest on securities of Govt of India, and income from other sources 
  • Agricultural income was exempt from income tax and so were properties devoted to charitable and religious purposes  

1918-1961: 

The foundation for modern Indian income tax law – as we know it today – was laid with enactment of 1918. Income tax reforms were initiated after the First World War and eventually led to a broad review of income tax collections leading to enactment of Income Tax Act, 1922, foundational legislation for the current Income Tax Act, 1961. The foundation for tax administration was also laid during this period.   

1918: Income Tax Act, 1918 replaced the Income Tax Act, 1886 

  • Broad shape of contemporary income tax law started emerging  
  • Act of 1918 replaced ‘schedular income tax’ with ‘total income tax’ 

1922: Predecessor to the Income Tax Act, 1961 enacted 

  • Income Tax Act, 1922 was enacted based on recommendations of All India Committee
  • Income tax rates were determined annually via ‘Finance Acts’ (Annual Budget) and were not encoded in the Income Tax Act itself 

1939: Special Enquiry Committee comprised of experts from India and England 

1941: Income Tax Appellate Tribunals were established 

  • First specialist tribunals constituted in India 

1956: Union of India stresses on reform of IT Act, 1922

  • It was acknowledged that IT Act, 1922 had grown in an unplanned manner 
  • It was decided to re-examine the IT Act, 1922 to simplify it and make it more intelligible and referred the task to Law Commission of India  

1958: Law Commission of India submits it report 

  • 12th Report of the LCI made extensive suggestions for rearrangement of provisions
  • LCI stated that income tax law was in a state of ‘hopeless confusion’ due to constant tinkering with the IT Act, 1922 via short sighted amendments 

1959: Tyagi Committee submitted its report 

  • The Committee was formally called ‘Direct Taxes Administration Enquiry Committee’ 
  • The Committee acknowledged that simplification of tax laws was not an easy task. It recommended that provisions of IT Act, 1961 should be rearranged more logically and expressed in clearer language to remove ambiguities in the law

1961: Income Tax Act, 1961 was enacted 

Promise of IT Act, 1961

Promise of Income Tax Act, 1961: 

Morarji Desai promised the following when introducing the income tax law in 1961: 

Simplification has been sought to be obtained by replacing obscure and ambiguous expressions with clear ones and by re-arranging the provisions of the Act so as to make them more easy of comprehension than they are at present. 

1961-Present: 

Over years, Income Tax Act, 1961 grew complex, longer, and difficult to decipher due to various reasons. The Union of India’s propensity to amend the law every year, frequently with retrospective effect, emergence of novel forms of business transactions, incomes, tax evasion techniques, and divergence between the Revenue Department’s understanding of income tax law provisions and judicial interpretation of such provisions contributed to the complexity. Not least was the use of extensive ‘Provisos’, ‘Explanations’ in the statute which made the law difficult to understand and administer.   

1963: Central Boards of Revenue Act, 1963 passed 

  • Repealed the Central Board of Revenue Act, 1924 
  • Central Board of Revenue was replaced by two entities: Central Board of Direct Taxes and Central Board of Indirect Taxes and Customs. Former is the ape administrative body for income taxes in India  

1991-92: Raja Chelliah Committee examined India’s entire tax landscape 

  • Formally called the ‘Tax Reforms Committee’, it recommended a series of tax reforms for direct and indirect taxation 
  • The Committee though did not suggest enacting a new income tax law, only suggested various changes including but not limited to corporate taxes, interest taxation, agricultural income, and gift tax  

2009: First notable attempt to replace the IT Act, 1961 

2010: Revised version, Direct Taxes Code Bill, 2010 presented in the Parliament 

  • Revised version incorporated some comments received on the 2009 version
  • Direct Taxes Code Bill, 2010 referred to the Standing Committee on Finance

2012: Standing Committee on Finance submitted its Report on Direct Taxes Code Bill, 2010 

2014: Revised version of Direct Taxes Code Bill, 2010 was again put up for comments 

  • Direct Taxes Code Bill, 2010 lapsed with dissolution of the 15th Lok Sabha 
  • No clear commitment by the new BJP Govt to take the process forward 

2017: Task Force on Direct Tax Code setup 

  • Initially the Task Force was led by Mr. Arbind Modi and later by Mr. Akhilesh Ranjan 

2019: Task Force submitted its Report 

  • Report was never released to the public 

2024: Ms Nirmala Sitharaman announces a review of IT Act, 1961

  • CBDT forms an ‘Internal Committee’ to substantively review IT Act, 1961 
  • It was announced that the review will be completed within 6 months 

2025: Ms Nirmala Sitharaman announces that new income tax bill will be introduced 

  • Promises that new income tax law will be based on ‘trust first, scrutinize later’ principle 
  • New law will be substantively shorter and simpler as compared to IT Act, 1961
  • Also indicates that the income tax bill will be referred to the Standing Committee 

Promise of Income Tax Bill, 2025: 

Nirmala Sitharaman promised the following in her Budget Speech of 2025 

New IT bill will carry forward the spirit of  ‘nyaya based on the concept of trust first, scrutinise later’ and ‘the new bill will be clear and direct in text with close to half of the present law, in terms of both chapters and words. Also ‘It will be simple to understand for taxpayers and tax administration, leading to tax certainty and reduced litigation.’ [Not verbatim]

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