Tax Rewrites 2025: How India’s New Income Tax Bill Could Shape Market Mood and Money Flows

India’s Income-tax Bill, 2025 , is the most substantial legislative rewrite of the country’s tax law in decades. It is intended to replace the Income-tax Act, 1961. The bill restructures and reorders many provisions , bundles related concepts into clearer chapters, and aims to remove obsolete language. It keeps tax rates and the broad tax regime largely the same, while introducing clearer rules on topics such as deductions, filing procedures, and retirement benefit accounts.

Key Changes in the New Income Tax Law

Here are the eight key changes announced under the new tax law that will be made effective from 1 April 2026:

1. Reduced Complexity

The new law drastically simplifies the structure of the Income Tax Act. The number of sections has been scaled down from 819 to 536, and the chapters from 47 to 23. The word count was reduced to 2.6 lakh from 5.12 lakh by eliminating archaic language and redundant provisions. This overhaul is not cosmetic; it reduces litigation and improves accessibility. The law now includes 39 tables and 40 formulas, replacing verbose text with structured formats.

2. Single “Tax Year” Concept

The dual system of “Previous Year” and “Assessment Year” has been abolished. The new bill introduces a unified “Tax Year”, simplifying compliance and financial planning. This change eliminates confusion for taxpayers and professionals alike, especially in cross-border transactions and reporting. The new definition is codified in Clause 3 of the bill and will apply uniformly across all heads of income.

3. Refund Eligibility

Under Sections 263 and 433, taxpayers who file belated or revised returns beyond the due date will still be eligible for refunds. This corrects a long-standing issue where late filers lost their right to claim excess TDS. However, the bill retains the requirement to file a return to claim refunds, even for those below the exemption limit. This means senior citizens and low-income taxpayers must still file returns to recover TDS, despite recommendations to remove this burden.

4. Simplified House Property Deductions

The new law provides a precise structure for deductions under the “Income from House Property” head. Section 21 sets a standard deduction of 30% on annual value, while interest on borrowed capital for purchase, construction, or repair is separately deductible. This clarity resolves prior ambiguities around vacant properties and co-owned assets. For example, rental income from a vacant property will now be assessed based on actual occupancy, not notional value, reducing unfair tax burdens. Section 24 also codifies the treatment of arrears and unrealised rent.

5. Reinstatement of Section 80M

The deduction for inter-corporate dividends under Section 80M has been reinstated. This prevents double taxation in multi-tiered corporate structures, especially for companies under the 22% concessional tax regime. The omission of this provision in earlier drafts had raised concerns among holding companies and investment firms. Its reintroduction ensures that dividends received from subsidiaries are not taxed again when distributed further.

6. NIL-TDS Certificates

Taxpayers with no tax liability can now apply for NIL-TDS certificates in advance. This includes both resident and non-resident individuals and entities. The provision is particularly beneficial for retirees, students, and small investors who often face unnecessary deductions. The certificate mechanism is codified to prevent excess tax collection and reduce refund-related compliance.

7. Pension Deductions

The bill introduces explicit deductions for commuted pensions and lump-sum payments from specified funds like the LIC Pension Fund. Earlier, such deductions were implied and subject to interpretation, leading to inconsistent treatment. Now, taxpayers receiving pensions from approved schemes will benefit from clear exemptions under the new clauses. This change supports financial planning for retirees and aligns with the government’s push for pension scheme adoption under the Unified Pension Framework.

8. PIF Benefits

In a strategic move, the new law grants direct tax benefits to the Public Investment Fund (PIF) of Saudi Arabia, recognising its sovereign status. This includes exemptions on capital gains and dividends from Indian investments. The provision is part of a broader bilateral investment framework and aims to attract long-term foreign capital.

What the New Tax Rule Means for Government Revenue and Short-Term Flows

Tax rules shape receipts and refunds. Recent data show the government’s net direct tax collections were down year-on-year between April and August 2025, partly because of earlier policy moves and a deferred filing deadline; the government nonetheless projects a rebound in collections later in the year. Changes in refund rules and tighter TDS corrections can alter the timing of receipts and refunds, which in turn affects the government’s cash position. A stronger or weaker cash position changes how much the government borrows in the short term, and that matters for interest rates and bond markets.

How Markets May Read the Change?

Markets react to clarity and surprises. Two channels matter here:

• Sentiment and certainty. Simplified rules and fewer legal knots are positive for sentiment. Corporates facing fewer compliance uncertainties can plan investment and capital allocation with more confidence. That can support equity valuations over time, especially for sectors where tax ambiguity has been a drag.

• Cash-flow timing for firms and households. Changes that speed up refunds or reduce withholding disputes free up cash for businesses and retail savers. More cash in hand can raise consumption and corporate working capital, which is supportive for cyclical sectors. On the other hand, if the government tightens collection timing, firms may see temporary pressure on liquidity.

What Foreign Investors and Flows Might Do

Foreign portfolio investors watch for clarity and the macro tilt. They care less about the legal form and more about predictability, taxes on capital gains and repatriation rules, and macro balance. Global investors generally welcome a cleaner tax code that reduces surprises and dispute risk. However, any hint that the change will tighten near-term cash flows or that revenue projections have been optimistic could prompt caution. The net effect on foreign flows will be driven by the overall macro picture: growth, inflation, and interest rates, with tax clarity being an incremental but meaningful factor.

Conclusion

The Income-tax Bill, 2025, is important because it modernises how tax law is written and applied. It does not rewrite tax rates, but by reducing ambiguity, clarifying key items, and adjusting procedural timelines, it can change how cash circulates in the economy. That shift in receipts timing, refunds, and dispute risk is what will shape market mood and money flows over the coming months. Investors should focus on cash-flow indicators, government borrowing updates, and sectoral rules to read the practical impact of the bill.