The New Income Tax Bill 2025, recently passed by the Lok Sabha, has clarified that small taxpayers are not exempt from Income Tax Return (ITR) filing. This means that even those with income below the basic exemption threshold must file returns to claim refunds on excess taxes deducted at source (TDS).

Key Provisions and Implications

The bill retains Section 433, mandating that all refund claims be made by furnishing a return as per Section 263. This effectively means there are no alternative methods for claiming refunds. Despite earlier proposals to eliminate mandatory return filing for small taxpayers seeking refunds, the revised bill maintains this requirement.

Why This Matters for Small Taxpayers

Small taxpayers, including senior citizens, often have TDS deducted from their income, even if their total income falls below the taxable limit. To reclaim this excess TDS, they must file an ITR. The Select Committee acknowledged concerns that mandatory filing solely for refunds could lead to inadvertent prosecution, especially for those with incomes below the taxable threshold. The committee had suggested removing a clause to provide flexibility in allowing refund claims without mandatory filing. However, the revised bill did not incorporate this change.

Amendments and Clarifications in the New Bill

The Income Tax Bill 2025 aims to simplify and update India's taxation system, replacing the Income Tax Act, 1961. The bill has been drafted in simpler language, clarifies deductions, and introduces major changes for ITR filers. The bill also addresses concerns regarding tax deductions for house property income. It explicitly states that the 30% standard deduction should be computed after deducting municipal taxes from the annual value. This clarifies the deduction mechanism and aligns the proposed provisions with the existing legal framework. The bill also allows individuals to claim TDS refunds even if their returns are filed late.

Other Notable Changes

• Tax Rebate: A tax rebate is allowed while computing income tax, applicable on income tax calculated before deductions. Individual residents in India are entitled to a 100% deduction of income tax payable or ₹12,500, whichever is less, if their total income does not exceed ₹5,00,000.
• Pension Relief: The bill provides a clear tax deduction for commuted pension received from specific pension funds, such as the LIC Pension Fund. It grants full tax exemption on the entire commuted pension for individuals receiving payments from approved pension schemes like LIC Pension Fund, regardless of employment status.
• Standard Deduction: The 30% standard deduction will apply after municipal taxes; pre-construction interest deduction allowed for both self-occupied and let-out properties.

Bill to simplify the taxation system

Finance Minister Nirmala Sitharaman has stated that the new bill aims to simplify tax laws, reduce complexities, and make the ITR filing experience seamless. The goal is to make tax laws easy to understand, clarifying deductions and reducing the time and hassle for taxpayers. The revised legislation reduces the scope and intricacy of the current Income Tax Act, cutting the number of active sections and chapters while shortening the text by approximately half. It eliminates the confusing distinction between assessment year and previous year, introducing a straightforward concept of 'tax year'.

Conclusion

While the New Income Tax Bill 2025 aims to simplify the taxation system, it does not exempt small taxpayers from ITR filing if they seek a refund. Taxpayers must file returns to claim refunds for excess TDS, even if their income is below the taxable threshold. The bill does introduce several other changes, including provisions for late filers to claim refunds, clearer deduction rules for house property, and simplified language. The bill is set to take effect from April 1, 2026, and is intended to make tax compliance simpler and more taxpayer-friendly.