The Lok Sabha recently passed the revised Income Tax (No. 2) Bill, 2025, marking a significant step toward replacing the long-standing Income Tax Act of 1961. Introduced by Finance Minister Nirmala Sitharaman, this bill is designed to modernize and simplify India’s tax system. After clearing the Lower House, it will move to the Rajya Sabha for approval before becoming law with the President’s assent. One of the key highlights of this bill is its specific focus on pensioners, offering several tax benefits and clarifications that aim to ease the tax burden for retirees.
Among the important provisions for pensioners, the bill formalizes tax reliefs related to the Unified Pension Scheme (UPS) under the National Pension System (NPS). Subscribers to this scheme can now enjoy a tax-free withdrawal of up to 60% of their total pension corpus upon retirement—whether it is due to regular superannuation, voluntary retirement, or certain types of early retirement. However, this exemption applies only if the retirement payout complies with government rules notified earlier this year. Notably, these benefits are already available but have been integrated clearly into the revised framework to ensure consistency.
The bill also introduces tax exemptions for “retirement benefit accounts” maintained in certain notified countries, allowing income from such accounts to remain tax-free. This is a welcome clarification for those who have retirement funds abroad, reducing ambiguity around tax liabilities. Another significant change is the extension of full tax exemption on commuted pensions. Previously, only salaried employees could avail of this exemption, but now it applies to all individuals who have invested in approved pension schemes, broadening the scope of tax relief on lump sum pension payments.
Clarifying tax rules for partial withdrawals from pension schemes before maturity is another welcome aspect of the bill. By clearly defining the tax treatment of these early withdrawals, the government hopes to reduce disputes and confusion among taxpayers and tax authorities. In addition, the bill maintains the existing deduction rules for family pensions, where either one-third of the pension amount or ₹15,000, whichever is less, can be deducted from taxable income.
Beyond pension-related changes, the new Income Tax Bill 2025 aims to simplify the overall tax law by reducing the number of sections from over 800 in the 1961 Act to 536, while cutting the chapters from 47 to 23. This streamlining effort is meant to make the law easier to understand and comply with, removing outdated provisions and introducing clearer definitions. To aid this, the bill increases the number of tables and formulae, improving transparency and clarity for taxpayers and tax professionals alike.
An important part of the bill involves enhanced powers for income tax officials, particularly in search and seizure operations. The bill permits tax officers to access electronic documents, including emails and social media accounts, during investigations, even allowing them to override passwords if the required access codes are not provided. While officials argue this is necessary to obtain incriminating evidence hidden in digital records, the expanded powers have raised concerns among some lawmakers about potential misuse and violations of privacy rights.
The bill’s journey began in February 2025 when it was introduced and referred to a Select Committee of 31 members for detailed examination. The committee submitted a comprehensive report with 285 recommendations, most of which have been accepted by the government and incorporated into the revised bill. Notable improvements include more flexibility for tax refunds, even when returns are filed late, which corrects earlier ambiguities that could have caused hardship for taxpayers.
Another significant amendment included in the Taxation Laws (Amendment) Bill, 2025, which accompanies the Income Tax Bill, is the explicit inclusion of Saudi Arabia’s Public Investment Fund and its subsidiaries for full income tax exemption in India. This amendment is expected to facilitate large-scale investments from the fund in Indian projects, including major refineries, by removing previous restrictions.
The bill also addresses other technical corrections such as aligning the Alternate Minimum Tax (AMT) applicability for Limited Liability Partnerships (LLPs) with existing provisions, correcting drafting errors that would have limited refund claims, and reinstating certain dividend deduction benefits for companies. Furthermore, it clarifies that remittances under the Liberalised Remittance Scheme (LRS) for educational purposes will not attract tax collection at source (TCS), which was missing in the earlier draft.
By defining “tax year” as the 12-month period starting April 1 and retaining the definition of “virtual digital space,” the bill continues to regulate the collection of information during surveys and searches across digital platforms. This reflects the government’s intent to keep tax administration relevant to the digital age while also streamlining assessment procedures related to search and seizure by focusing only on undisclosed income.
Overall, the Income Tax (No. 2) Bill, 2025 represents a major overhaul of India’s direct tax laws. It attempts to simplify a complex legal framework while balancing taxpayer rights and enforcement powers. If passed by the Rajya Sabha and signed into law, it is expected to come into effect from April 1, 2026. For pensioners and other taxpayers alike, the bill promises clearer rules, more tax reliefs, and a legal structure better suited to the modern economy.
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