Evolution of the Income Tax Act, 2025: UPSC Current Affairs Story Arc

Overview

The Evolution of the Income Tax Act, 2025 marks a seismic shift in India's fiscal architecture, replacing the archaic Income Tax Act of 1961. This arc tracks the legislative journey of a law designed to simplify the tax code, formalize the taxation of Virtual Digital Assets (VDAs), and rationalize tax rates like Tax Collected at Source (TCS). The process began with a draft Bill in early 2025, which faced scrutiny by a Select Committee, leading to its withdrawal for refinement. By February 2026, the final Act was enacted during the Union Budget, signaling a move toward a more transparent, technology-aligned, and 'trust-based' taxation system starting April 1, 2026.

How This Story Evolved

Initial Bill provisions discussed (Mar 2025) → Bill withdrawn for revision (Aug 2025) → Final Act enacted and announced (Feb 2026)

1. 2025-03-04: India's Income Tax Bill, 2025 on Virtual Digital Assets (VDAs)
   More details

   UPSC Angle: Income Tax Bill, 2025 introduces framework for Virtual Digital Assets (VDAs).

   Key Facts:

   • India's Income Tax Bill, 2025 introduces a legal framework for Virtual Digital Assets (VDAs)
   • VDAs were defined in the Finance Act, 2022
   • Major economies like the U.K., U.S., Singapore, and Australia treat VDAs as property or securities.
2. 2025-08-08: Income-tax Bill Withdrawn
   More details

   UPSC Angle: Income-tax Bill, 2025 withdrawn after Select Committee report.

   Key Facts:

   • The Income Tax Bill, 2025 was withdrawn on August 8, 2025.
   • A new version will be introduced in the Lok Sabha on August 11.
   • Nirmala Sitharaman withdraws Income Tax Bill in Lok Sabha.
   • New Bill to be introduced on August 11.
   • Income-tax Bill, 2025 withdrawn.
   • Original bill introduced on February 13, 2025.
   • A fresh bill will be introduced to replace the Income-tax Act, 1961.
3. 2026-02-02: New Income Tax Act, 2025
   More details

   UPSC Angle: Income Tax Act, 2025 will come into force from April 1, 2026.

   Key Facts:

   • Income Tax Act, 2025 will come into force from April 1, 2026
   • Replaces the existing 1961 Act
   • Review of old act completed following announcement in July 2024
   • Simplified new “Income Tax Act, 2025” will replace the existing 1961 Act from April 1, 2026
   • Tax Collected at Source (TCS) on overseas tour packages and education remittances reduced to a flat 2%

Genesis

Trigger

The Union Budget announcement in July 2024 by Finance Minister Nirmala Sitharaman, calling for a comprehensive review of the 1961 Act to make it concise and easy to read.

Why Now

The proliferation of Virtual Digital Assets (VDAs) and the increasing complexity of cross-border remittances necessitated a legal framework that matches global standards (like those in the UK and US) and reduces litigation.

Historical Context

This follows the decade-long ghost of the 'Direct Tax Code' (DTC) first proposed in 2009. While the DTC stalled, the 2025 Act represents the successful implementation of those long-standing reform goals.

Key Turning Points

1. [2025-08-08] Withdrawal of the Income-tax Bill, 2025 from the Lok Sabha

   Demonstrates the rigor of parliamentary scrutiny; the government chose to revise the law based on committee feedback rather than rushing an imperfect draft.

   Before: A draft focusing on VDA clarity. After: A revised Bill incorporating deeper legislative corrections and rationalized TCS rates.

2. [2026-02-02] Enactment of the Income Tax Act, 2025 in the Union Budget

   Finalizes the death of the 1961 Act and sets a hard deadline for the new regime.

   Before: Decades of tax law layers and amendments. After: A simplified, record-time replacement effective from April 1, 2026.

Key Actors and Institutions

Key Institutions

• Ministry of Finance
• Lok Sabha
• Select Committee of Parliament
• Central Board of Direct Taxes (CBDT)

Key Concepts

Virtual Digital Assets (VDAs)

Digital representations of value, including cryptocurrencies and NFTs, that can be digitally traded or transferred.

Current Fact: The 2025 Bill aligns VDA taxation with global standards (UK, US, Singapore) treating them as property or securities (Mar 4, 2025).

Tax Collected at Source (TCS)

A tax payable by a seller which he collects from the buyer at the time of sale, later remitted to the government.

Current Fact: TCS on overseas tour packages and education remittances has been reduced to a flat 2% under the new Act (Feb 2, 2026).

Select Committee

An ad-hoc parliamentary committee formed to examine a specific Bill in detail and suggest improvements.

Current Fact: A report from the Select Committee led to the withdrawal of the first draft of the Income Tax Bill on August 8, 2025.

What Happens Next

Current Status

The Income Tax Act, 2025 has been enacted (announced Feb 2, 2026) and is scheduled to come into force on April 1, 2026.

Likely Next

Issuance of new 'Rules' under the Act by the CBDT and transition guidelines for taxpayers shifting from the old 1961 regime to the 2025 regime.

Wildcards

Judicial challenges to specific VDA valuation rules or potential further amendments if global crypto regulations shift significantly before April 2026.

Why UPSC Cares

Syllabus Topics

• Indian Economy and issues relating to planning, mobilization of resources
• Government Budgeting
• Parliament and State Legislatures—structure, functioning, conduct of business

Essay Angles

• Simplification of Laws: A Step Toward Trust-Based Governance
• Regulating the Digital Frontier: Cryptos and India's Economic Future
• Legislative Scrutiny as a Pillar of Robust Democracy

Prelims Likely: Yes

Mains Likely: Yes

Trend Signal: rising

Exam Intelligence

Previous Year Question Connections

• Procedure for Money Bills and the role of Rajya Sabha. — The Income Tax Bill is a Finance Bill/Money Bill; its withdrawal and re-introduction involve specific parliamentary procedures tested here.
• Recommendations of the Kelkar Task Force on Direct Taxes. — The 2025 Act is the modern fulfillment of direct tax reform recommendations like those by Kelkar.
• Motions that can be made during Bill introduction, including referral to a Select Committee. — Directly explains the mechanism used to revise the Income Tax Bill in August 2025.

Prelims Angles

• Under the 2025 Act, the TCS for overseas education remittances is capped at 2%.
• India's VDA definition was first introduced in the Finance Act, 2022, but formalized as property/securities in the 2025 Act.
• The new Act completely replaces the 1961 Act starting from the financial year April 1, 2026.

Mains Preparation

Sample Question: Analyze the legislative journey of the Income Tax Act, 2025. How does the new law address the challenges of the digital economy and the need for tax simplification in India?

Answer Structure: Intro (Replacement of 1961 Act) → Legislative Stages (Select Committee, Withdrawal, Re-introduction) → Key Reforms (VDA formalization, TCS rationalization) → Critical Analysis (Reduced litigation vs. implementation challenges) → Conclusion (Alignment with 'Ease of Doing Business').

Essay Topic: From Complexity to Clarity: The Evolution of India’s Fiscal Laws.

Textbook Connections

Key Takeaway

The 2025 Act signifies India's transition from a post-colonial tax framework to a modern, digital-ready code that prioritizes legislative precision over historical complexity.

All Events in This Story (3 items)

1. 2025-03-04 [Economy] — India's Income Tax Bill, 2025 on Virtual Digital Assets (VDAs)
   India's Income Tax Bill, 2025 introduces a legal framework for Virtual Digital Assets (VDAs), aligning the country's tax structure with global standards. The taxation of Virtual Digital Assets under the Income Tax Bill, 2025 is a major step toward regulatory clarity, ensuring financial transparency and government oversight. Major economies like the U.K., U.S., Singapore, and Australia treat VDAs as property or securities.
   More details

   UPSC Angle: Income Tax Bill, 2025 introduces framework for Virtual Digital Assets (VDAs).

   Key Facts:

   • India's Income Tax Bill, 2025 introduces a legal framework for Virtual Digital Assets (VDAs)
   • VDAs were defined in the Finance Act, 2022
   • Major economies like the U.K., U.S., Singapore, and Australia treat VDAs as property or securities.
2. 2025-08-08 [Polity & Governance] — Income-tax Bill Withdrawn
   The Income-tax Bill, 2025, introduced in the Lok Sabha on February 13, 2025, has been withdrawn following a report from the Select Committee and suggestions for incorporating correct legislative meaning. A fresh bill will be introduced to replace the Income-tax Act, 1961.
   More details

   UPSC Angle: Income-tax Bill, 2025 withdrawn after Select Committee report.

   Key Facts:

   • The Income Tax Bill, 2025 was withdrawn on August 8, 2025.
   • A new version will be introduced in the Lok Sabha on August 11.
   • Nirmala Sitharaman withdraws Income Tax Bill in Lok Sabha.
   • New Bill to be introduced on August 11.
   • Income-tax Bill, 2025 withdrawn.
   • Original bill introduced on February 13, 2025.
   • A fresh bill will be introduced to replace the Income-tax Act, 1961.
3. 2026-02-02 [Polity & Governance] — New Income Tax Act, 2025
   The Union Budget 2026–27 announced that the Income Tax Act, 2025 will come into force from April 1, 2026, replacing India's six-decade-old income tax law. The comprehensive review of the old 1961 Act was completed in record time following its announcement in July 2024.
   More details

   UPSC Angle: Income Tax Act, 2025 will come into force from April 1, 2026.

   Key Facts:

   • Income Tax Act, 2025 will come into force from April 1, 2026
   • Replaces the existing 1961 Act
   • Review of old act completed following announcement in July 2024
   • Simplified new “Income Tax Act, 2025” will replace the existing 1961 Act from April 1, 2026
   • Tax Collected at Source (TCS) on overseas tour packages and education remittances reduced to a flat 2%