Finance Bill, 2025: Highlights of Direct Taxes & GST Proposals

UNION BUDGET 2025-2026

HIGHLIGHTS OF THE FINANCE BILL, 2025

The Finance Minister Smt. Nirmala Sitharaman, delivered her eighth consecutive Union Budget on 1st February, 2025; continuing efforts of Modi 3.0 Government to make India Viksit Bharat in the face of global uncertainties/ disruptions by focussing on revival of domestic consumption without compromising fiscal prudence, employment creation, innovation, MSME’s, ease of doing business, make in India and make for world, trusting taxpayers and simplifying regulation, to name a few.

The Budget has targeted efforts towards the Middle class to spur economic growth, use of technology and AI  productivity, MSME’s and Startup’s, skilling and job creation, education, infrastructure, ease of doing business and developing green, clean and environmentally sustainable economy, to name a few. In doing so, steps are being taken to ensure that interests of rural and middleclass are being taken care of.

The taxation proposals are aimed at ensuring tax certainty, reducing litigation, widening tax base and enhancing revenues to fund the development and welfare schemes of the Government.

Further, the mention that the new Income Tax Bill would be based on the spirit of ‘trust first and scrutinize later’; would go a long way in reforming the taxation framework and improve ease of doing business in India.

As in the earlier years, we have made humble attempt to lucidly present in the following paragraphs; our analysis of some of the salient tax proposals, to enable you to grasp them easily.

As of date, these are proposals only, and if adopted by the Parliament and passed as Finance Act; will come into force for and from Assessment Year 2026-2027 relevant to Financial Year 2025-2026, unless specifically provided otherwise.

I. DIRECT TAXES

Amendments proposed under the Income-tax Act, 1961 (hereafter referred to as “the Act”).

1. Rates of Tax unchanged under Old Regime, New Regime made more attractive with reduced Income slabs and higher Rebate for personal Taxation:

For all the Assessee, the Finance Minister has maintained status quo (under Old Regime), with respect to basic tax rates, Surcharge and Health and Education Cess, basis the last year.

In order to have majority of Individual’s/ HUF’s shift to the New Regime, the following changes are proposed in New Regime:

> Rebate u/s.87A increased from 25,000/- to 60,000/- for resident individuals; and

> Income slabs modified (excluding special income like Capital Gains and Income from lotteries which would be taxed at specified rates), as per table below.

Accordingly, for salaried taxpayers income upto Rs.12,75,000/- (as against Rs.7,75,000/- currently) would be tax free and for other individuals income upto Rs.12,00,000/- (as against Rs.7,00,000/- currently) would be tax free.

For instance, an individual having aggregate incomes of Rs.15,00,000/-, Rs.20,00,000/- or Rs.24,00,000/- there end up saving of Rs.35,000/-, Rs.90,000/- and Rs.1,10,000/- respectively (excluding Surcharge and Cess).

With the revised rates for New Regime, the Old Regime may become irrelevant  in most cases, except in case of high salary earners who claim large amount of HRA benefit/Donations under Section 80G . However, we advise to do comparison before deciding which regime to adopt.

There apart no change is proposed in the rates of tax and Surcharge for Companies, Firms, LLP’s, and Co-operative societies.

2. Power to increase threshold for calculation of perquisites under Section 17:

In order to revise the monetary limits set out in Section 17 to keep pace with current times, the Finance Minister has proposed an amendment such that the Central Government can prescribe new limits for followings:

> Taxability of perquisite in case of employees drawing monetary salary exceeding 50,000/-; and

> Taxability of perquisite of expenditure incurred by the employer for travel outside India on the medical treatment of an employee or for his family member, whose gross total income is exceeding Rs. 2 Lakhs.

3. Annual Letting Value of Two Self-occupied houses to be taken at Rs. Nil, unconditionally – Welcome Amendment:

With the objective of simplifying the compliance burden for claim of Rs. Nil ALV for self-occupied houses which could not be occupied as such by the taxpayer; the Finance Minister has proposed to remove the existing condition that inability to self-occupy the house has to be due to employment or business carried out by the Assessee at any other place.

Henceforth, there is no condition to claim ALV of Two Self occupied houses at Rs. Nil.

This is welcome step and would go a long way in bringing certainty in grant of Rs. Nil ALV for Two self -occupied houses to Assessees without any questioning by the Income Tax Department.

4. Redemption of Unit Linked Insurance Policy to be taxed as Capital Gains-Welcome clarity:

To bring much needed clarity as regards taxation of profits on redemption of Unit Linked Insurance Policy(‘ULIP’) whether as Capital Gains (taxed @12.5% in case of Long-Term Capital Gains) or under Income from Other Sources (taxed @30%), the Finance Minister has proposed that gain on redemption of ULIP’s which are not exempt u/s.10(10D) would be treated as Capital Assets and taxation thereof would be akin to Equity Mutual Funds.

5. Extending benefit of Section 80CCD(1B) to contribution by parents in NPS Vatsalya Account of Minors – in Old Regime:

To promote culture of savings cum-pension amongst parents and guardians, the NPS Vatsalya Scheme was launched to start NPS account for their children.

In order to make this scheme more attractive, the following amendments are proposed by the Finance Minister:

> Contribution by parent/ guardian to NPS Vatsalya Account allowed as deduction, subject to overall limit of Rs.50,000/- (Self + Minor);

> Partial withdrawal upto 25% of contributions paid is exempt;

> Amount received from NPS Vatsalya Account on death of minor is exempt.

6. Withdrawal from National Savings Scheme after 29th August, 2024 to be Tax free:

To provide relief to individuals facing hardship who were compelled to withdraw the balance from National Savings Scheme in line with the Notification dated 29.08.2024 that no interest would be paid on the balances in the NSS after 01.10.2024; the Finance Minister has proposed to exempt withdrawals after 29^th August, 2024 which were hitherto taxable.

7. New Scheme of presumptive taxation for Non-residents providing services for Electronics Manufacturing Facility:

With the objective of promoting India as the global hub for Electronics System Design and Manufacturing; whereby non-residents would provide the required support in setting up of facilities, deploy technology and provide support services in India; the Finance Minister has proposed to extend benefit of presumptive taxation to such cases.

The salient features of the scheme proposed are as under:

> 25% of the gross receipts of to be treated as business income;

> No set-off of unabsorbed depreciation or brought forward losses against the presumptive income.

8. Significant Economic Presence-activities of non-resident with person in India for export of goods-welcome clarification:

To address the concern from stakeholders regarding definition of significant economic presence provided in Explanation 2A to Section 9(1)(i) due to which non-residents activities in India which are confined to purchase of goods in India for the purpose of export of may be treated as business connection in India, resulting in taxation challenges; the Finance Minister has clarified provided welcome clarification that such activities shall not constitute significant economic presence of such non-resident in India.

9. Simplification of compliances/ Rationalization of the provisions of Charitable Trust/Institution-Welcome steps:

With the objective of simplifying compliances and provisions related to Charitable Trust/Institutions and considering difficulties faced in reporting details of substantial contributor or their relative, the Finance Minister has proposed the following changes:

> for the smaller trusts or institutions (having gross total income upto Rs. 5 Crores before exemption in Two prior years), period of registration extended from 5 years to 10 years;

> Case of incomplete application for registration of trust or institution to be excluded from specified violation resulting in cancellation of registration;

> Substantial contributor to mean person contributing more than Rs.1 Lakh in the relevant FY or aggregate Rs.1 Lakhs upto the end of the relevant FY (hitherto limit was aggregate Rs.50,000/- up to the end of the relevant FY);

> Relative of Substantial contributor and concern in which Substantial contributor has interest is excluded from definition of specified persons.

10. Measure to simplify and reduce Transfer Pricing disputes-welcome moves:

With the objective of providing the much needed certainty and reduce disputes on Transfer Pricing (‘TP’) matters, the Finance Minister proposed following measures:

> Introduction of Block TP assessment for 3 years (from April 2026);

> Arm’s Length Price (‘ALP’) determined by TPO to apply to similar transactions for the next 2 consecutive years, if the taxpayer exercises this option and same would be confirmed by TPO.

> This would not apply to search cases;

> To give effect in subsequent 2 years, the Assessing Officer would recompute the income based on the ALP determined by TPO or directions issued by Dispute Resolution Panel;

> Scope of Safe Harbour Rules to be expanded (Circular/Rules expected on this).

11. More time granted to taxpayers to file an Updated ITR-welcome move to reduce litigation:

With the objective of nudging taxpayers to voluntarily report any omissions/lapses in filing return of income which would have effect of increased tax payable; and also furthering the trust reposed in taxpayers in declaring additional income which was missed out to be reported, the Finance Minister has proposed following changes:

> Time limit for filing Updated ITR increased from current 2 years to 4 years from the end of relevant AY;

> Additional tax and Interest payable for Updated ITR filing after 2 years:

Filing of Updated ITR would help taxpayers to bring certainty and peace of mind regarding income omitted to be reported earlier and avoid adverse consequences of penalty etc. However, filing Updated ITR would not absolve taxpayers from rigors of Black Money Act.

12. Plugging loophole in carry forward of Losses and Unabsorbed Depreciation on account of amalgamation/ business reorganization:

In order to avoid evergreening of losses by the successor entity on account of merger, succession of business etc., the Finance Minister has proposed to allow carry forward and set-off of loss in the hands of the successor entity only for the balance period of eight years, starting from the assessment year in which the loss was first computed for the predecessor entity.

13. More Tax incentives for units located in International Financial Services Centre:

To further promote and incentivize operations from the units set-up in International Financial Services Centre (‘IFSC’) and to make it global hub for financial services, the following incentives are proposed by the Finance Minister:

> Sunset dates extended from 31^st March, 2025, to 31^st March, 2030 for commencement of operations of IFSC units for availing following exemptions/ deductions:

• • income earned by investment division of offshore banking units;
  • royalty, interest income earned by non-residents on lease of aircraft, ship to IFSC units; and
  • gains on transfer of aircraft, ship by IFSC units

> Exemption of Capital gain on transfer of equity shares arising to a non-resident and unit of IFSC being extended to ship leasing business.

> Exemption of Dividend income arising to an IFSC unit from another IFSC unit being extended to ship leasing business.

> Income of a non-resident on account of transfer of non-deliverable forward contracts or offshore derivative instruments or over-the-counter derivatives, or distribution of income on offshore derivative instruments, entered into with an offshore banking unit of an IFSC is exempt.

> Arrangements for loan/ advance, between two group entities where one of the entities is a Finance Company/Finance Unit set-up in IFSC as a global or regional corporate treasury center so long as the parent/ principal entity of such group is listed on recognized exchange outside India, shall not be treated as dividend income.

> Any sum received on life insurance policy issued by an IFSC insurance office shall be exempt without the condition of maximum premium payable.

> Provisions for tax neutral relocation to IFSC are now also extended to retail mutual fund schemes and ETFs. Further, the sunset date for tax neutral relocation of funds to IFSC has been extended from 31^st March, 2025, to 31^st March, 2030.

14. Extension of Tax Exemption for Sovereign Wealth Funds and Pension Funds:

With the objective of further encouraging investments of Sovereign Wealth Funds (‘SWF’) and Pension Funds (‘PF’) into infrastructure sector of India, the Finance Minister has proposed following amendments:

> Exemption for certain specified income of Sovereign Wealth Funds and Pension Funds to be allowed where the investments have been made on or before 31^st March 2030 (currently 31^st March, 2025);

> The provisions treating the capital gains from unlisted debt securities as short-term capital gains shall not apply to investments made by SWF and PF.

15. Rationalization of TDS/TCS rates and threshold Limits and omission of Section 206AB:

To improve ease of doing business and facilitate better compliance by taxpayers, the Finance Minister has proposed changes in rates of TDS/TCS and increase threshold for applicability of the TDS/TCS in respect of the followings:

Further, the Finance Minister has also proposed to do away with the requirement of higher TDS/TCS by the Deductor in case of non-filing of ITR by Deductee.

16. Modifications in provisions related to Penalty and Prosecution:

The Finance Minister has proposed following changes in provisions related to penalty/ prosecution:

> Penalty for failure to do TDS/ TCS, availing and repayment of loans, deposits, etc. otherwise than prescribed payment mode now to be imposed by Assessing Officer, subject to monetary limits and above that with prior approval of Joint Commissioner.

> Time limit for levy of penalty modified – No penalty can be levied after 6 months from the end of the quarter in which the connected matter/appeal attains finality (up to ITAT level).

> Time limit for Assessee to apply for immunity from penalty/prosecution increased from one month to three months.

> Prosecution not to be initiated if TCS is deposited on or before due date of for filing the quarterly TCS statements (hitherto this benefit was available only for TDS).

17. Others:

> The time limit for incorporation of eligible startup increased by 5 years upto 31^st March, 2030.

> Benefits of existing Tonnage Tax Scheme extended to Inland Vessels operated by qualifying shipping companies to promote inland water transportation in India.

> Definition of ‘virtual digital asset’ (VDA) has been expanded to include any crypto-asset whether or not it is included in the existing definition of VDA and scope of reporting of Specified Financial transactions to include crypto assets.

> Long Term Capital Gains earned by Business Trust from investment in equity shares, equity-oriented fund or business trust, subject to Securities Transaction Tax, will now be taxed @ 12.5% (excluding Surcharge and Cess).

> Capital gains earned by Foreign Portfolio Investors on securities, other than equity shares, equity-oriented fund or business trust subject to securities transaction tax, are proposed to be taxed at 12.5% as against current 10% (excluding Surcharge and Cess).

> The limitation period to exclude period commencing on the date on which the stay was granted and ending on the date on which certified copy of the order is received by the jurisdictional Principal Commissioner or Commissioner or Approving Panel.

> Retention of seized books of account beyond period exceeding one month from the end of the quarter in which the order of assessment or reassessment or re-computation is made, not permitted.

> In event of multiple searches, the assessment for subsequent search to be made only after completing the assessment for prior search.

> Block assessment order to be passed within 12 months from the end of quarter of last executed authorization for search or requisition.

> Total income for block period to exclude potential double taxation of income already disclosed in the return of income.

> Undisclosed income to include ‘virtual digital asset’ effective from 1^st February, 2025.

II. INDIRECT TAXES

Key amendments proposed in respect to Goods and Service Tax are stated hereunder (to be effective from date to be notified unless otherwise specified):

> Supplier cannot reduce his output tax liability on account of credit note issued, unless the recipient has reversed the corresponding ITC.

> Schedule III is to be amended retrospectively (effective from July 1, 2017) to include the supply of goods warehoused in a SEZ or FTWZ to any person before clearance for export or to the DTA. Further, no refund shall be available if tax is already paid.

> In order to deny allowability of ITC on construction of immovable property even if property is leased, retrospective amendment is proposed w.e.f. 1^st July, 2017 in view of recent decision of Supreme Court in the case of Safari Retreats Pvt. Ltd. (34 CENTAX 62).

> Amendment made to facilitate distribution of ITC of IGST on reverse charge through ISD mechanism.

> Modification of Pre-deposit for filing appeals, for cases involving Penalty demand:

• For cases relating to detention/seizure of goods and/or conveyance in transit:

• For other cases:

> Introduction of Track and Trace mechanism for specified goods and penalty provided for non-compliance with such requirement.

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Authors:

Bhupendra Shah | B.Com., L.L.B. (SP.), A.C.S., F.C.A. 

N. Krishnakumar | B.Com., F.C.A., Grad CWA

Shreyam Shah | B.Com. F.C.A.,DISA