New income tax bill fixes key anomalies, expands exemptions and protects late filers’ refund rights

In a sweeping overhaul aimed at removing drafting errors, easing compliance burdens, and clarifying contentious provisions, the Lok Sabha on August 11 passed the Income-Tax (No.2) Bill, 2025 and the Taxation Laws (Amendment) Bill, 2025 — legislation that amends the Income-tax Act, 1961 and the Finance Act, 2025.

The revised 624-page bill, reintroduced after last week’s withdrawal of an earlier version, incorporates most recommendations of the Select Committee chaired by BJP’s Baijayant Panda. It corrects several anomalies — most notably restoring the right to claim tax refunds even if returns are filed after the deadline, aligning alternate minimum tax rates for LLPs with existing provisions, and expanding exemptions for non-profits.

Saudi sovereign wealth fund gets full tax shield

A major change in the amendment bill explicitly names the Public Investment Fund (PIF) of Saudi Arabia and its wholly-owned subsidiaries in the Act’s clause (23FE), granting them complete income tax exemption. The $925-billion fund, which already enjoyed partial relief, had faced restrictive norms when investing through subsidiaries. The move mirrors earlier provisions for the Abu Dhabi Investment Authority and is expected to pave the way for fresh Saudi investments, including stakes in two new ONGC- and BPCL-led refinery projects.

Pension and education tax relief

The updated law extends market-linked National Pension System tax benefits to the guaranteed Unified Pension Scheme, allowing retirees to withdraw 60% of the UPS corpus tax-free. It also reinstates nil tax collection at source for Liberalized Remittance Scheme transfers for education financed through financial institutions—provisions missing in the withdrawn draft.

Targeted amendments and digital powers

The bill streamlines block assessment rules in search and seizure cases, clarifying that penalties apply only to “total undisclosed income”—not previously declared income. It retains the controversial definition of “virtual digital space,” empowering tax authorities to access emails, social media accounts, remote servers, and digital platforms without passwords during searches.

Other changes include:

• Allowing nil-TDS certificates for taxpayers with no liability.
• Reinstating inter-corporate dividend deductions for companies under concessional tax regimes.
• Removing “beneficial owner” references in loss set-off rules.
• Expanding exemptions for non-profits to 5% of total donations, not just anonymous ones.

The government says the new framework, set to replace the 1961 Act from April 1, 2026, will modernize India’s direct tax regime by removing obsolete clauses, aligning tax laws with global practices, and simplifying compliance for individuals, corporates, and institutional investors.