New Income Tax Bill corrects anomalies, allows refunds for returns filed beyond deadline

Income tax exemption is given at present to several sovereign wealth funds including Saudi’s Public Investment Fund, which has over $925 billion assets under management and was notified for I-T exemption in November 2022. However, the Fund had faced some restrictive norms related to investments through various subsidiaries. With this amendment, the government has granted complete income tax exemption to Saudi’s Fund by specifying its name explicitly in the Act as has been done earlier for the Abu Dhabi Investment Authority (ADIA).

Introduced in Finance Act, 2020, Clause (23FE) of section 10 of the Act provides for the exemption to specified persons from the income in the nature of dividend, interest, long-term capital gains or certain other incomes arising from an investment made by it in India. The amendments for Saudi’s Fund are significant as it may explore investment opportunities in India including a stake in the two new refineries being planned by state-run ONGC and BPCL.

The Taxation Laws (Amendment) Bill also extended income tax benefits under the market-linked national pension system (NPS) to the guaranteed unified pension scheme (UPS) to provide further impetus to the scheme. Lump sum payments or the accumulated UPS corpus, up to 60 per cent, from contributions made during a person’s working years can be now withdrawn tax-free at the time of retirement.

Separately, in the changes made in the Income-Tax (No.2) Bill, 2025, the government tweaked drafting errors to correct anomalies like allowing individuals to claim TDS refund even if income tax return is filed after the deadline. It aligned the applicability of the Alternate Minimum Tax (AMT) for Limited Liability Partnerships (LLPs) with the existing provisions of the Income-tax Act, 1961, removing the expanded scope that would have included LLPs not claiming specific tax benefits and attracted a higher rate of 18.5 per cent as against the preferential rate of 12.5 per cent.

“One of the most crucial amendments in the updated bill is the revision of Clause 263, which addresses the eligibility for claiming income-tax refunds. The original draft included a provision—Clause 263(1)(a)(ix)—that could have been interpreted to mean that a taxpayer could only claim a refund if their tax return was filed on or before the statutory due date. This represented a significant departure from the established legal position, where refunds could be claimed even for belatedly filed returns. Recognising the potential for this to cause undue hardship and create ambiguity, the newly introduced bill has completely omitted this restrictive clause,” Amit Maheshwari, Tax Partner, AKM Global said.

The new Bill also clarified that there will be nil TCS on Liberalised Remittance Scheme (LRS) remittances for education purposes financed by any financial institutions, a provision that had gone missing in the earlier version. The Bill has also allowed taxpayers who do not have any I-T liability to obtain nil-TDS certificate along with deductions for certain inter-corporate dividends for companies opting for a concessional rate, in line with the existing provisions.

The Government seeks to replace the existing Income-Tax Act, 1961 through the new I-T Bill, 2025, which was first introduced in Parliament on February 13, 2025, to simplify the six-decade-old structure of direct taxation by streamlining provisions, removing obsolete references, and creating a crisper and simpler legal framework. The new I-T Bill, is likely to come into effect from April 1, 2026.

Certain amendments have been made to remove ambiguities related to transfer pricing provisions along with changes relating to the carry forward and set-off of losses. The reference to the beneficial owner has been omitted to align with Section 79 of the Income-tax Act, 1961 along with a clarification of applicability of 30 per cent standard deduction after deduction of municipal taxes while calculating house property income. “Notable changes such as the inclusion of nil-TCS (tax collection at source) for specified LRS education remittances, provision for nil-TDS certificates, reinstatement of inter-corporate dividend deductions for companies availing concessional tax rates, and the removal of the beneficial owner condition in loss set-off provisions address key gaps in the earlier draft,” Sandeep Jhunjhunwala, partner, Nangia Andersen LLP, said.

The Select Committee’s recommendation that exemption should be allowed to non-profit organisations (NPOs) for 5 per cent of the total donation instead of just 5 per cent of anonymous donations, as is the case in the existing Act, has been incorporated in the revised Bill. “Like many other changes made in the revised bill, this amendment also addresses an inadvertent drafting anomaly in the original bill,” Sachin Garg, partner, Nangia & Co LLP, said.

Like the earlier draft, the new Bill introduces the concept of “tax year”, which has been defined as the 12-month period beginning April 1. It has also retained the contentious definition of “virtual digital space” — the powers to call for information by income tax authorities during surveys, searches and seizures including e-mail servers, social media accounts, online investment, trading and banking accounts, remote or cloud servers and digital application platforms. Clause 247 allows tax officers to bypass passwords and access digital platforms like emails and social media during searches.

The provisions related to block assessment in search and seizure cases have also been streamlined, with a majority of changes made to replace the definition of ‘total income’ with ‘total undisclosed income’. “When the block assessment regime for search and seizure cases was introduced through the Finance Act, 2024, the law used the term “total income” for determining the taxable base. This broad terminology created apprehension among taxpayers and professionals, as it suggested that even disclosed income — income already reported in returns or otherwise accounted for — could be brought within the ambit of the block assessment, potentially attracting harsh penalties. Recognising these concerns, the Finance Act, 2025 has revised the definition and replaced the term “total income” with the more precise term “total undisclosed income”.”

“This change makes it clear that the primary objective of search and seizure proceedings is to identify, tax, and penalise income that has been concealed or not reported, rather than re-assessing income that is already on record. This change was not recorded in earlier draft of income tax bill 2025,” Maheshwari said.