Bridging Eras: A Comparative Insight into the making of the Income-Tax Acts of 1961 and 2025

Last year, in the Union Budget 2024-25, the Hon'ble Finance Minister announced a comprehensive review of the Income-tax Act, 1961. The stated objective is to make the Act concise, lucid, easy to read, and understand. The expected outcome is a reduction of disputes and litigation, thereby providing tax certainty to the taxpayers. The review exercise was proposed to be completed in six months.

Sticking to its timeline with precision—a rarity in large-scale legislative overhauls, the Income-tax Bill, 2025, was tabled in Parliament on 13th February 2025, simplifying the language and structure of the Income-tax Act, 1961. The Bill was referred to the Select Committee for examination. Following a series of stakeholder consultations, including detailed consultation with ICAI, the Select Committee presented its report in the Lok Sabha on 21st July, 2025. As per the PIB Press Release posted on 21st August, 2025, almost all of the recommendations of the Select Committee were accepted by the Government. In addition, since there were other changes in drafting, alignment of phrases, and cross-referencing to be incorporated based on suggestions received, the Government withdrew the Income-tax Bill, 2025, as reported by the Select Committee. Thereafter, the Income-tax (No. 2) Bill, 2025 was introduced, considered and passed by the Lok Sabha on 11th August, 2025 and returned by the Rajya Sabha on 12th August, 2025. After receipt of the Hon'ble President of India's assent on 21st August 2025, the Income-tax Act, 2025, has been notified in the Official Gazette.

The three core principles of the simplification exercise undertaken while drafting the 2025 Act were:

1. Textual and structural simplification for improved clarity and coherence.
2. No major tax policy changes to ensure continuity and certainty.
3. No modifications of tax rates, preserving predictability for taxpayers.

Whether the expected outcome, i.e., reduction of disputes and litigation, thereby providing tax certainty to the tax payers, can be achieved, given the possibilities of a new wave of legal disputes triggered by changes in statutory terminology, like substitution of "notwithstanding anything contained" with "Irrespective of anything contained" and consolidation of provisions in the Bill, remains to be seen.

The intent of the formulation of the Income-tax Act, 2025, vis-à-vis the Direct Taxes Code

In this context, it would be interesting to note the profound shift in the objective of the Income-tax Act, 2025, vis-à-vis the Direct Taxes Code, which was slated for introduction in the decade following the turn of the century but ultimately did not see the light of day.

The Direct Taxes Code Bill, 2010, was introduced in the Lok Sabha on 30th August, 2010, exactly a decade and a half back. Shri Pranab Mukherjee, the then Union Finance Minister, in his Budget Speech Union Budget 2011-12, stated, "The introduction of the Direct Taxes Code (DTC) and the proposed Goods and Services Tax (GST) will mark a watershed."

A reading of Paras 1.7 and 2.1 of the Discussion Paper released along with the Direct Taxes Code for public feedback in August 2009 would throw light on the objective of the Direct Taxes Code -

"1.7 The Code is not an attempt to amend the Income Tax Act, 1961; nor is it an attempt to "improve" upon the present Act. In drafting the Code, the Central Board of Direct Taxes (the Board) has, to the extent possible, started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. Tax policies that would promote growth with equity have been reflected in the new provisions. Hence, while reading the Code, it would be advisable to do so without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Income Tax Act, 1961."

"2.1 The Code seeks to consolidate and amend the law relating to all direct taxes, that is, income-tax, dividend distribution tax, fringe benefit tax and wealth-tax so as to establish an economically efficient, effective and equitable direct tax system which will facilitate voluntary compliance and help increase the tax-GDP ratio."

Considering the objective of the Income-tax Act, 2025, to simplify the Income-tax Act, 1961, there is a dramatic departure in the intent and purpose of the Income-tax Act, 2025, vis-à-vis the Direct Taxes Code. Further, with the abolition of the wealth-tax from A.Y.2016-17, fringe benefit tax from A.Y. 2010-11, and dividend distribution tax in respect of dividends declared, distributed, or paid on or after 1-4-2020, there is no requirement of consolidation of direct tax laws at this point in time.

The Direct Taxes Code Bill, 2010, was referred to the Standing Committee on Finance on 9th September, 2010, for examination, and the Standing Committee presented its report in the Lok Sabha in March, 2012. After the introduction of the Direct Taxes Code Bill, 2010, annual amendments were simultaneously effected in the Income-tax Act, 1961, and the Wealth-tax Act, 1957, through Finance Acts, 2011, 2012, and 2013, in line with the policy changes proposed in the Code. Since introducing these changes into the Direct Taxes Code Bill, 2010 would necessitate numerous official modifications, potentially rendering the Bill overly complex and making the legislative process unnecessarily burdensome, it was therefore decided to draft a new Direct Taxes Code that would incorporate all the proposed amendments and be introduced as a fresh Bill. Accordingly, the Direct Taxes Code Bill, 2013, was prepared.

The year 2014 marked the onset of a new political chapter in India, and by 2015, the proposed Direct Taxes Code was formally shelved, signalling the end of a six-year-long push for a new direct tax legislation. Para 129 of the Budget Speech of 2015-16 by the then Union Finance Minister, Shri Arun Jaitley, highlighted the thought process of the new Government - "Enactment of a Direct Taxes Code (DTC) has been under discussion for quite some time. Most of the provisions of the DTC have already been included in the Income-tax Act. Among the very few aspects of DTC which were left out, we have addressed some of the issues in the present Budget. Further, the jurisprudence under the Income-tax Act is well evolved. Considering all these aspects, there is no great merit in going ahead with the Direct Tax Code as it exists today."

It is noteworthy that in the intervening period and over the years, the features which were proposed in the Direct Taxes Code have been incorporated in the Income-tax Act, 1961 itself, for example, introduction of investment-linked tax deduction and phasing out of profit-linked tax incentives, the concept of "place of effective management" (POEM) for determination of residence of companies, introduction of advance pricing agreements for international transactions, application of transfer pricing principles to transactions involving non-cooperative jurisdictions (notified jurisdictional areas), and introduction of General Anti Avoidance Rules (GAAR).

Purpose behind Evolution of Income-tax Legislation - Transition from 1922 Act to 1961 Act & from 1961 Act to 2025 Act

It would be interesting to go back 67 years in time and take a look at the Twelfth Report (Income-tax Act, 1922) of the Law Commission of India issued in 1958, which was instrumental in shaping the Income-tax Act, 1961. The Government had entrusted the task of revising the Indian Income-tax Act, 1922, to the Law Commission of India so as to make its provisions more intelligible without affecting its basic tax structure. The Commission acknowledged that the task was difficult, citing the observation of the Codification Committee in England, "to expect from us a codification of the law of income-tax which the layman could easily read and understand was a vain hope, which only the uninstructed could cherish". The Commission mentioned that while it is possible to make the provisions of the Act more logical and clearer without affecting the tax structure, it is certainly not possible to make the Act simpler without encroaching upon at least the "fringe and verge of the tax structure".

A comparison of how the objective of simplification was sought to be achieved then, during the formulation of the Income-tax Act, 1961, and how it has been addressed now in the drafting of the Income-tax Act, 2025, is given below -

1. Rearrangement and re-grouping of the sections of the Income-tax Act - While both the 1961 Act and the 2025 Act have tried to reorganise sections logically, the criticism in the 1922 Act was the lack of coherent arrangement of related provisions, which made the law cumbersome for the taxpayers and administrators. Therefore, while drafting the 1961 Act, the provisions were reorganised and grouped together in related chapters to address this concern. For instance, all provisions concerning income-tax authorities were grouped under Chapter XIII (comprising of sections 116 to 138); the provisions relating to Appeals and Revision were placed in Chapter XX (comprising of sections 246 to 269); and the provisions relating to incomes not included in total income were placed in a separate Chapter III (comprising of sections 10 to 13) of the Income-tax Act, 1961. The purpose of this restructuring was to improve the Act's clarity and ease of use. The Income-tax Act, 1961, had 298 sections and 5 Schedules at the time of its enactment. 
   
   The 2025 Act has done a structural rationalisation through tabular presentations for enhanced readability and removed obsolete and redundant provisions, reducing the length by nearly half. For example, the provisions relating to charitable trusts spread across different Chapters of the Income-tax Act, 1961, have been consolidated in a single chapter in the 2025 Act. Shifting provisions from sections to related Schedules in the 2025 is also in line with the objective of simplification. The Income-tax Act, 2025, notified in the Official Gazette, has 536 sections and 16 Schedules.
2. Splitting up of sections vs. Consolidation of sections - While framing the Income-tax Act, 1961, the sections in the 1922 Act, which ran into pages, were split up into independent sections for simplification, for example, provisions relating to capital gains, Income-tax authorities, and advance tax. Conversely, while drafting the Income-tax Act, 2025, many sections in the 1961 Act have been consolidated for reducing fragmentation, for example, provisions relating to TDS, TCS, presumptive income provisions of residents, and presumptive income provisions of non-residents. 
   
   Interestingly, these are two diametrically opposite methods adopted for achieving the same objective of simplification.
3. Conversion of provisos into sub-sections and clauses - It may be noted that even after the exercise of conversion of provisos in the 1922 Act into independent provisions while framing the Income-tax Act, 1961 reducing the number of provisos by more than 50% to around 90 in the 1961 Act at the time of its enactment, around 1100 plus provisos have been added thereafter in the last 65 years in the 1961 Act, which have once again been converted into sub-sections and clauses in the 2025 Act. 
   
   It would be interesting to wait and watch how long the 2025 Act can stay free of provisos.
4. Simplification of language - In drafting the Income-tax Acts of 1961 and 2025, new expressions were coined to simplify and replace lengthy phrases. 
   
   To illustrate with an example, in the 1961 Act, the new expression "representative assessee" was coined to cover all cases where a person is made responsible in the assessment of the income of another person as a trustee, guardian, Court of Wards, receiver, agent of a non-resident or otherwise. 
   
   A parallel example in the 2025 Act is the use of the phrase "competent authority" in sections 377 and 378 pertaining to revision of orders. "Competent Authority" has been defined to mean the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. Thereafter, the words "Competent Authority" have been used in these sections. Another example is defining "Specified Banking and Online Mode" in section 66 to mean a transaction by an account payee cheque or an account payee bank draft or use of the electronic clearing system through a bank account or through such other electronic mode, as may be prescribed. Accordingly, "specified banking and online Mode" has been used in the relevant provisions relating to Profits and gains of business or profession. 
   
   Further, in the 2025 Act, references to sub-sections and clauses have also been simplified. For example, referring to section 246(1)(a), instead of clause (a) of sub-section (1) of section 246. Also, amounts have been referred to in figures rather than words. Like the quantum of penalty is mentioned as "Rs.500000" instead of "a sum of five lakh rupees". All these changes have contributed to reducing the word count in the 2025 Act and enhancing its readability.
5. Substantive changes in the Act - In the 1961 Act, the substantive changes include the incorporation of provisions for the treatment of cash credits and unexplained investments in sections 68 and 69, respectively, to ensure that such incomes were adequately taxed and to prevent tax evasion. Another change was the removal of the provisions taxing remittances of past years' income on the reasoning that such provisions were counterproductive and discouraged repatriation of capital. This change was made to align the tax provision with the broader objective of encouraging investment and economic growth. 
   
   In the 2025 Act, the objective was to simplify the language and structure of the law to make it concise, lucid, easy to read, and understand. Accordingly, the provisions in this Act are in line with the said objective. The only significant substantive change is the expansion of search and seizure provisions to include cases where the competent authority, in consequence of information in his possession, has reason to believe that a person to whom summons or notice is issued or might be issued, would not produce information in electronic form or on a computer system, which will be useful for, or relevant to, any proceedings under the Act. This provision allows the authorised officer to inspect any information, electronic records, and communication available on computer systems, including e-mails, social media etc.
6. "Previous Year" & "Assessment Year" vis-à-vis "Tax Year" and "Financial Year succeeding the relevant tax year" - The 1922 Act did not define "assessment year", though the concept of assessment year was there in the said Act and the definition of "Previous year" in the said Act also contained reference to assessment year. Accordingly, since the expression had been used by decisions of courts and was well-understood as meaning the financial year for which the assessment is being made, the definition of 'assessment year' was inserted while formulating the Income-tax Act, 1961. 
   
   However, in the Income-tax Act, 2025, the 100-year-old concepts of "previous year" and "assessment year" have been replaced with "Tax Year" and "Financial Year succeeding the relevant tax year". The stated reason for the same is that the use of the terms 'previous year' and 'assessment year' was creating confusion in the minds of the taxpayers, as they represented two different financial years. In effect, the long-standing concepts of "previous year" and "assessment year," dating back to the 1922 Act, have now been substituted with "tax year", reportedly to mitigate confusion stemming from their representation of two different financial years.
7. Examination of other tax laws - The provisions of the Estate Duty Act, the Wealth Tax Act, and the Gift Tax Act were examined, and the same were leveraged in framing the proposals of the Income-tax Act, 1961. 
   
   With the repeal of the Estate Duty Act and the Gift Tax Act in the years 1985 and 1998, respectively, and the abolition of wealth tax from A.Y.2016-17, multiplicity of direct tax legislations was not a concern that required to be addressed while drafting the Income-tax Act, 2025. However, given its cross-references and reliance on key definitions from the Income-tax Act, 1961, it is imperative that the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, is revised in tandem with the Income-tax Act, 2025.

Simplification in tax structure - Not a mandate while drafting the 1961 Act and the 2025 Act

In its 1958 report, the Law Commission had pointed out that meaningful simplification of income-tax law is not possible without a fundamental simplification of the overall tax structure, and expressed a wish that the Indian Legislature would simplify the tax structure following the good practices of other progressive countries. To better grasp the context of this observation, it is essential to revisit the tax structure as it stood in 1961, especially for individuals and HUFs -

The differences between these 4 categories were in the basic exemption limit and the first slab where the income-tax rate was 3%. Thereafter, there were four slabs of Rs. 2,500 with rates of 6%, 9%, 11% and 14%, respectively, which are common for all the categories. This was followed by a slab of Rs. 5,000 was subject to a rate of 18%. The highest rate of 25% was attracted on total income exceeding Rs. 20,000.

Surcharge was leviable on income tax if the total income exceeded Rs. 7,500. The higher threshold exemption of Rs. 15,000 for the levy of surcharge on HUFs was linked to the number of members entitled to claim partition. Further, deeming to be entitled to claim partition was different for a HUF under Mitakshara Law and Dayabhaga Law.

In addition to this, for individuals and HUFs having total income above Rs. 20,000, super-tax was levied which again increased in slabs with the increase in total income, ranging from 5% to 45%. Super-tax was an additional duty of income-tax levied under section 95 of the said Act as it stood at that point in time. The maximum rate of super-tax was 45% on total income exceeding Rs. 70,000. Again, a surcharge was imposed on super-tax also.

A key point to consider is that, during that period when no online filing of returns or the Annual Information Statement (AIS) existed, verifying the basis on which individuals claimed higher exemptions, such as marital status or number of children, and whether or not they are wholly or mainly dependent on the individual, would have been inherently time consuming and reliance would have to be placed on the documentary proof submitted. Also, examining documentary evidence for Hindu Undivided Families (HUFs), whether governed by Mitakshara or Dayabhaga law, the number of minor coparceners and the members eligible to claim partition, solely to verify if the correct basic exemption limit for income-tax and correct threshold for surcharge, as the case may be, was applied, would have been a labour intensive and challenging task. In retrospect, a question arises as to whether the time and effort invested were worth the outcome.

Thus, at that time, the tax structure was notably convoluted, characterized by multiple classifications of individuals and Hindu Undivided Families (HUFs), varying basic exemption limits, diverse income-tax slabs and rates, and layered surcharges. Additionally, a super-tax was imposed on individuals and HUFs with total income exceeding Rs. 20,000, which also attracted a surcharge.

Subsequently, the super tax was removed with effect from 1-4-1965, and the rates of super tax were integrated with the rates of income tax in the rate schedule of income tax laid down in the Finance Act, 1965. Accordingly, the highest rate of income-tax was 65% for total income exceeding Rs. 70,000. The years 1971-1974 witnessed the highest rates of tax with the highest slab personal income-tax rate at 85% for total income exceeding Rs. 2 lakh. This was to be increased by a surcharge@10% where total income does not exceed Rs. 15,000 and surcharge@15% in other cases. From A.Y. 1976-77, the maximum personal tax rate was brought down to 70% for total income exceeding Rs. 70,000, with a surcharge@10% of income-tax.

Now, standing in 2025, it would be fitting to commend the Government for its sustained efforts over the years in streamlining the nation's tax structure and moderating the tax rates. Individuals and HUFs are not divided into categories based on any criteria for the applicability of tax rates. The higher basic exemption for senior citizens and super senior citizens is also only in cases where the individual opts out of the default tax regime and pays tax as per the regular provisions of the Act. As per the data shared by the Income-tax Department in August 2024, 72% of the taxpayers paid tax under the default tax regime for A.Y. 2024-25, which is expected to go up to 95% by A.Y. 2026-27, with further rationalisation of tax slabs and rates under the default tax regime. There is no categorisation of individuals and HUFs based on any criteria under the default tax regime.

The rates of taxes are now moderate, with the maximum rate of tax being 30% for individuals/HUFs/AOPs/BOIs (highest slab rate), domestic companies and firms (flat rate). Of course, surcharge on income tax is levied beyond a particular threshold, which is once again progressive and increases in slabs with the increase in total income of the taxpayer. The exception is in case of undisclosed income, assets, expenditure, etc., where the rate of tax is 78% (including surcharge and cess) to deter tax evasion.

With simplified tax regimes offering concessional tax rates for different taxpayer categories and presumptive schemes benefiting small enterprises and professionals, the present tax framework reflects a high degree of rationalization.

Thus, while there was a dire need to simplify the tax structure while drafting the Income-tax Act, 1961, such a need did not arise now in the context of the Income-tax Act, 2025, as recent years have already seen substantial rationalisation of tax slabs and rates across various categories of taxpayers.

Income-tax Act, 2025- Last Mile Revisions before Roll Out

Reverting to the Income-tax Act, 2025, the new legislation is, undoubtedly, a comprehensive simplification initiative designed to make the law easier to understand.

This is the first time that so many sections have been consolidated and presented in tabular form in an Act. Tabular form of presentation minimises the use of long sentences and enhances readability. However, so far, tables were more used in the Explanatory Memorandum to the Finance Bill or the Circular explaining the provisions of the Finance Act for illustrating the rationale of a change and were not used in the main Act itself. The lawmakers deserve appreciation for taking the risk and deviating from established drafting norms. However, numbering of tables and incorporating cross-references would have made the exercise complete and served the intended purpose of ease of comprehension. Assigning numbers to tables would enhance ease of reference, while incorporating cross-references would facilitate a more comprehensive understanding of the provision. For example, all the TDS provisions in the Income-tax Act, 1961, have been consolidated in one single section, namely, section 393 of the Income-tax Act, 2025, and presented in the form of a table. However, to have a complete understanding of a TDS provision, say, relating to commission or brokerage, Sl. No.1 in the table in section 393(1) has to be read with the exemption provided in Sl. No.1 in the table in section 393(4) and the meaning of "commission and brokerage" in section 402(7). Columns can be inserted in the table in section 393(1) to give reference to Sl. No. of exemptions contained in the table in section 393(4) and the meaning of the term in section 402. This would provide a holistic understanding of the provision.

Also, further consolidation of provisions is possible; for example, provisions relating to penalties can be consolidated into one section and presented in a table. Other such provisions, which can be presented in a table, are the prosecution provisions, fees, and provisions relating to the set-off of losses.

While the rates of income tax have been rationalised over the years, however, as far as rates of TDS are concerned, there are still six rates of TDS and differential threshold limits for different payments. There are examples of overlapping, which continue in the 2025 Act, and this is one of the reasons for litigation. Streamlining the rates and raising threshold limits would promote easier compliance. Introducing two or three uniform TDS rates along with standardized threshold limits could significantly reduce disputes, as it would minimize the likelihood of applying incorrect rates.

The phrase 'Notwithstanding anything contained in 'in the Income-tax Act, 1961, has been the subject of extensive legal interpretation, and its meaning is judicially settled. Its replacement with 'Irrespective of anything contained in' or 'Irrespective of anything contrary' in the 2025 Act, solely for the sake of linguistic simplicity, risks triggering new rounds of litigation over whether the latter conveys the same legal effect as the former.

Though the Income-tax Act, 2025 has not made significant policy-level changes, it is hoped that the Finance Bill, 2026 will incorporate certain substantive changes in law required to facilitate the ease of doing business in India and improve India's ranking in the Global map. For example, it is imperative to align the prosecution provisions of the Income-tax Act with the broader decriminalisation objectives of the Jan Vishwas Act. Equally essential is the rationalisation of penal provisions to reduce litigation. With the Rules remaining to be formulated and Forms to be developed, it is essential that the overarching goal of simplification remains a guiding principle throughout this process.

References

• The Indian Income-tax Act, 1922, the Income-tax Act, 1961 and the Income-tax Act, 2025
• The Finance Acts, 1961 to 1976
• Forty-Ninth Report of the Standing Committee on Finance (March, 2012) - The Direct Taxes Code Bill, 2010
• The Twelfth Report of the Law Commission of India (1958) Indian Income-tax Act, 1922
• Discussion Paper on Direct Taxes Code released in August, 2009.
• Budget Speech Union Budget 2011-12 and Union Budget 2015-16
• PIB Press Release posted on 2.8.2024 (Ministry of Finance)
• PIB Press Release posted on 21.8.2025 (Ministry of Parliamentary Affairs)