DECODING: INCOME TAX ACT 1961 VERSUS 2025

Abstract

This article decodes the Income Tax Act, 2025, by comparing it with the Income Tax Act, 1961. Tax is one of the most important factors in generating revenue for the Government. The taxation system of a country should provide for the development of an individual as a whole, to ensure the greatest happiness for the greatest number — and not be like an elephant in the farm field, neither consuming nor benefiting others. The primary objective of this doctrinal study is to analyse the differences between the old and new Income Tax Acts. This study highlights the jurisprudence and interpretation principles of taxing statutes. The data utilised are drawn primarily from the old and new Income Tax Acts. Beyond examining both Acts, this study creates awareness among taxpayers about the applicable slab rates. In conclusion, it is hoped that the new Income Tax Act, 2025 will clear the ambiguities of the Income Tax Act, 1961, to ensure socio-economic justice.

I. Introduction

The operation of an economic system should not result in the concentration of wealth, as stated by Article 39 of the Indian Constitution.[1] A fair taxation system is an important factor for the unified economic growth of a country, and this system should be in accordance with the “ability to pay” of an individual.[2] Taxes are levied in several forms — for example, income tax, goods and services tax, and others. To ensure the taxation system remains fair and equitable, it must evolve in accordance with the prevailing economic conditions and living standards.

There is, therefore, a continuing need to reinvent the taxation system from time to time. Recently, the Income Tax Act, 1961 was repealed by the new Income Tax Act, 2025, in furtherance of the principles of the Indian Constitution. This article examines the definition and kinds of taxes, the evolution of the taxation system, the constitutionality of taxes in India, jurisprudence and interpretation of taxing statutes, the difficulties embedded in the old Act, a comparative analysis of the old and new Income Tax Acts, the object and purpose of framing the new Act, and relevant case laws.

II. Definition and Kinds of Tax

The term “tax” is defined in the Cambridge Dictionary as “the money paid to the government, based on individual income or the cost of goods or services bought.”[3] Adam Smith, popularly known as the Father of Modern Economics, observed in his seminal work The Wealth of Nations[4] that the subjects of every state ought to contribute towards the support of the government in proportion to their respective abilities.

Tax is classified into two major types:[5]

(i) Direct Taxes: A direct tax is levied directly on the taxpayer and cannot be shifted to anybody else. Examples include income tax, corporation tax, and property tax.
(ii) Indirect Taxes: An indirect tax is collected by an intermediary from the person who ultimately bears the economic burden of the tax. The burden may be shifted to another party. Examples include customs duty and Goods and Services Tax.

III. Evolution of the Taxation System

Two thousand years ago, Caesar Augustus issued a decree to tax the whole world. Greece, Germany, and the Roman Empires also levied taxes based on occupations.[6] In India, the system of direct taxation draws its early references from two ancient texts:

(i) Manu Smriti: Manu, the ancient sage, stated that taxes should be levied by the king according to the Shastras. He advised that taxes should be proportionate to the income and expenditure of the subject, and cautioned against excessive taxation. Accordingly, most taxes in ancient India were considered highly productive.[7]

(ii) Arthashastra: The Arthashastra was authored by Kautilya, also known as Chanakya, India’s foremost philosopher-statesman.[8] This treatise covers administration, economy, and foreign policy, and provides detailed guidance on taxation, revenue collection, and budgeting. Kautilya defined Vartanam as a tax on all foreign commodities imported into the country, Dvarodaya as a tax paid by businessmen on the import of foreign goods, and yatravetana as a levy on pilgrims.

At the international level, the “OECD Model Tax Convention on Income and on Capital,” adopted in 1963, has served as the basic reference document for the negotiation, interpretation, and application of tax treaties.[9] In India, the history of income tax begins in 1922.[10] In 1924, the Central Board of Revenue Act constituted the statutory body for administering the Income Tax Act.[11] During World War II, businesses gained substantial profits,[12] prompting the enactment of laws to tax excess profits. Between 1940 and 1947, the government developed investigation techniques for tax enforcement.[13] In the twentieth century, the Income Tax Department began computerising its departmental operations.[14] In 1961, the Income Tax Act was passed to replace the 1922 legislation.[15]

IV. Constitutionality of Tax in India

The Indian Constitution, under Article 366(28),[16] defines “taxation” as: “the imposition of any tax or impost, whether general or local or special, and tax shall be construed accordingly.” The levy of tax must not be arbitrary, unreasonable, or excessive, so as to ensure a fair and equitable taxation system. Article 265 of the Indian Constitution provides that no tax shall be levied or collected except by authority of law.

Article 246, read with Schedule VII, provides for three legislative lists: the Union List, the State List, and the Concurrent List. Income tax is placed in Entry 82 of the Union List under Schedule VII of the Indian Constitution, thereby vesting Parliament with exclusive legislative competence over it.

V. Taxing Jurisprudence and Interpretation

The legal philosophy or jurisprudence of taxing statutes is rooted in natural justice. Natural justice recognises three foundational principles to ensure fair interpretation:[17]

(i) Nemo debet esse judex in propria causa — no one shall be a judge in their own cause.
(ii) Audi alteram partem — hear the other side.
(iii) Speaking orders or reasoned decisions.

In Fast Finance Private Limited v. Assistant Commissioner of Income Tax,[18] the Court remitted the case to the respondent to pass a speaking order and directed that the assessment be completed in accordance with law.

The interpretation of taxing statutes is governed by the principle of strict or literal construction.[19] Such statutes should be interpreted neither in favour of the taxpayer nor in favour of the taxing authority. In Cape Brandy Syndicate v. Inland Revenue Commissioners,[20] it was held that a taxing statute does not establish a new precedent but must be interpreted on its express terms. In CIT v. Calcutta Knitwears,[21] the Court held that a taxing statute must be strictly construed even where the literal interpretation results in hardship, with equity, logic, and morality having no role to play.

In H. H. Lakshmi Bai v. CIT,[22] the Court reaffirmed that a taxation statute must be strictly construed. Similarly, in A. V. Fernandez v. State of Kerala,[23] it was held that in construing fiscal statutes and in determining the liability of a subject to tax, one must have regard to the letter of the law. These decisions collectively establish that taxing statutes must be unambiguous, clear, and certain.

VI. Income Tax: An Overview

Income tax is a form of direct tax levied by the Government of India on the income of every person, in accordance with the Income Tax Act, 1961 and the Income Tax Rules, 1962.[24] Recently, the 1961 Act was repealed by the Income Tax Act, 2025, which came into force on 1 April 2026. The Central Board of Direct Taxes (CBDT) is responsible for the administration of direct taxes.[25]

VII. Difficulties of the Income Tax Act, 1961

The Income Tax Act, 1961 accumulated significant structural and substantive difficulties over the course of its operation:[26]

1. The Act was amended over 65 times in 60 years, undergoing more than 4,000 changes through Finance Acts and Taxation Laws Amendment Bills.
2. Several exemptions and deductions were added over time in pursuit of socio-economic goals.
3. These exemptions and incentives reduced the tax base, caused increased disputes, higher compliance costs, and imposed greater burdens on taxpayers.
4. The Act was drafted in traditional legal language characterised by long sentences, numerous provisos, and extensive explanations, making it difficult to comprehend.
5. Due to repeated amendments, the Act developed a fragmented structure, and the presence of outdated provisions rendered it increasingly complex.

VIII. Comparative Analysis: Income Tax Act, 1961 versus 2025

The following is a point-by-point comparison of the key differences between the Income Tax Act, 1961 and the Income Tax Act, 2025:[27]

1. Structure: The Income Tax Act, 1961 originally contained 298 sections, 23 chapters, and 14 schedules, and came into force on 1 April 1962, repealing the 1922 Act. The new Income Tax Act, 2025 contains 536 sections, 23 chapters, and 16 schedules, and came into force on 1 April 2026.

2. Preamble: The preamble of the Income Tax Act, 1961 encompassed both income tax and super tax, though provisions relating to super tax were subsequently omitted by amendment. The preamble of the Income Tax Act, 2025 deals exclusively with income tax from its inception.

3. Demerger: Under the Income Tax Act, 1961, Section 2(19AA) defined “demerger” with reference to Sections 391 to 394 of the Companies Act, 1956, whereby approval by the High Court was sufficient for a company to claim the demerger exemption. Under the Income Tax Act, 2025, Section 2(35) defines “demerger” with reference to Sections 230 to 232 of the Companies Act, 2013, making approval by the National Company Law Tribunal (NCLT) mandatory for claiming the exemption, thereby introducing a more rigorous procedural requirement.

4. Permanent Account Number (PAN): The Income Tax Act, 1961 contained no specific definition for PAN. Section 2(76) of the Income Tax Act, 2025 now defines PAN as a unique number consisting of ten alphanumeric characters allotted by the Assessing Officer to a person.

5. Special Economic Zone: The Income Tax Act, 1961 contained no specific definition for “Special Economic Zone.” Section 2(104) of the Income Tax Act, 2025 defines this term by cross-reference to Section 2(za) of the Special Economic Zones Act, 2005.

6. Tax Year: Under Section 3 of the Income Tax Act, 1961, “previous year” was defined as the financial year immediately preceding the assessment year. Section 3(1) of the Income Tax Act, 2025 replaces this concept with the term “tax year,” defined as the twelve-month period of a financial year commencing on 1 April, thereby simplifying the temporal framework for tax computation.

7. Old Tax Regime — Slab Rates:
(i) Income up to ₹2.5 lakh — Nil
(ii) Income from ₹2.5 lakh to ₹5 lakh — 5%
(iii) Income from ₹5 lakh to ₹10 lakh — 20%
(iv) Income above ₹10 lakh — 30%

New Tax Regime — Slab Rates under Section 115BAC of the Income Tax Act, 1961:
(i) Income up to ₹2.5 lakh — Nil
(ii) Income from ₹2.5 lakh to ₹5 lakh — 5%
(iii) Income from ₹5 lakh to ₹7.5 lakh — 10%
(iv) Income from ₹7.5 lakh to ₹10 lakh — 15%
(v) Income from ₹10 lakh to ₹12.5 lakh — 20%
(vi) Income from ₹12.5 lakh to ₹15 lakh — 25%
(vii) Income above ₹15 lakh — 30%

8. Exemptions: The old tax regime offered several tax exemptions. The new tax regime does not provide for such exemptions.

9. Rebate: Under the old tax regime, the rebate under Section 87A of the Income Tax Act, 1961 was available to persons with income up to ₹5 lakh, with a maximum rebate of ₹12,500. Under the new tax regime, Section 156 of the Income Tax Act, 2025 provides a rebate for income up to ₹12 lakh, with a maximum rebate of ₹60,000.

10. Tax on Individuals and HUF: Section 115BAC of the Income Tax Act, 1961 governed the tax on the income of individuals, Hindu Undivided Families (HUF), and others. Under the Income Tax Act, 2025, this is governed by Section 202, which prescribes the following slab rates:
(i) Income up to ₹4,00,000 — Nil
(ii) Income from ₹4,00,001 to ₹8,00,000 — 5%
(iii) Income from ₹8,00,001 to ₹12,00,000 — 10%
(iv) Income from ₹12,00,001 to ₹16,00,000 — 15%
(v) Income from ₹16,00,001 to ₹20,00,000 — 20%
(vi) Income from ₹20,00,001 to ₹24,00,000 — 25%
(vii) Income above ₹24,00,000 — 30%

11. Life Insurance and Provident Fund Deductions: Section 123 of the Income Tax Act, 2025 consolidates the deductions for life insurance premiums, deferred annuities, and provident fund contributions (replacing Sections 80C, 80CCC, 80CCE, and 80CCD of the 1961 Act). It provides that an individual or a Hindu Undivided Family may deduct from total income an aggregate sum as enumerated in Schedule XV, not exceeding ₹1,50,000.

12. Standard Deduction: Under Section 19 of the Income Tax Act, 2025, the standard deduction is:
(a) ₹75,000 or the salary, whichever is less, in cases governed by Section 202;
(b) ₹50,000 or the salary, whichever is less, in any other case.
By comparison, the standard deduction under the old tax regime was fixed at ₹50,000.

IX. Object of the Income Tax Act, 2025

The Income Tax Act, 2025 was enacted with the following principal objectives:[28]

1. To replace archaic and confusing language with modern, straightforward drafting.
2. To introduce faceless assessments and digital compliance mechanisms, thereby curbing corruption.
3. To simplify the filing process, reduce disputes, and enhance transparency.
4. To align the tax framework with global trends, including the taxation of digital assets and global income.

X. Purpose of Framing the Income Tax Act, 2025

The purpose underlying the enactment of the new Act may be stated as follows:[29]

1. The language and structure of taxing statutes must be unambiguous and clear.
2. Tax policies must be maintained with consistency to avoid confusion and unnecessary litigation.
3. Tax rates must be kept stable to provide predictability for taxpayers.

XI. Relevant Case Laws

In Govind Saran Ganga Saran v. S.T. Commercial,[30] the Supreme Court held that a State tax law must specify a single point of taxation for goods declared under the Central Sales Tax Act. The Court also enumerated the essential components of a valid tax:

(i) The nature of the taxable event;
(ii) The taxpayer;
(iii) The rate at which the tax is imposed; and
(iv) The measure or value to which the rate is applied for computing the tax liability.

In Tata Iron and Steel Company Limited v. State of Bihar,[31] the Court held that the word “fee” falls within the meaning of “tax” for the purposes of Article 265 of the Constitution, thereby requiring statutory authority for the levy and collection of any fee.

XII. Conclusion

This article has examined the complexity inherent in the Income Tax Act, 1961 and compared it with the new Income Tax Act, 2025, with a primary focus on the applicable slab rates. The analysis reveals a recurring need to reinvent the taxation system in accordance with prevailing economic conditions and standards of living. The article has emphasised the importance of the principles of jurisprudence and the interpretation of taxing statutes — in particular, the rule that taxing statutes must be interpreted neither in favour of the taxpayer nor in favour of the taxing authority.

The article further underscores that the taxation system must not become an undue burden on taxpayers, and that ambiguity and obscurity in tax statutes render compliance unnecessarily difficult. It is acknowledged that this study is largely doctrinal in nature and does not fully explore the practical consequences of the transition between the two Acts. It is hoped that the proper, fair, and equitable implementation of the Income Tax Act, 2025 will give effect to the constitutional principles of India and advance the goal of socio-economic justice.

References

[1] The Constitution of India, 1950, art. 39.
[2] A. C. Pigou, The Economics of Welfare (1920) <http://pombo.free.fr/pigou1920.pdf> accessed 17 February 2026.
[3] Cambridge University Press & Assessment, Cambridge Dictionary <https://dictionary.cambridge.org/dictionary/english/tax> accessed 17 February 2026.
[4] Adam Smith, The Wealth of Nations (Electronic Classics Series, 2005) <https://www.rrojasdatabank.info/Wealth-Nations.pdf> accessed 17 February 2026.
[5] Ministry of Statistics and Programme Implementation (MoSPI), Government of India <https://www.mospi.gov.in/sites/default/files/Statistical_year_book_india_chapters/DIRECT-INDIRECT%20TAX-WRITEUP.pdf> accessed 17 February 2026.
[6] Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, Government of India, ‘History of Direct Taxation’ <https://incometaxindia.gov.in/pages/about-us/history-of-direct-taxation.aspx> accessed 17 February 2026.
[7] Ibid.
[8] Vinay Vittal, ‘Kautilya’s Arthashastra: A Timeless Grand Strategy’ (2011) <https://apps.dtic.mil/sti/pdfs/AD1019423.pdf> accessed 17 February 2026.
[9] Organisation for Economic Co-operation and Development, ‘Tax Treaties’ <https://www.oecd.org/en/topics/tax-treaties.html> accessed 17 February 2026.
[10] CBDT (n 6).
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] Ibid.
[15] Press Information Bureau, Government of India, ‘The Income Tax Act, 2025: Reshaping Tax Framework’ (2025) <https://static.pib.gov.in/WriteReadData/specificdocs/documents/2025/sep/doc202593626601.pdf> accessed 17 February 2026.
[16] The Constitution of India, 1950, art. 366(28).
[17] National Academy of Customs, Indirect Taxes and Narcotics (NACIN), ‘Principles of Natural Justice’ <https://nacin.gov.in/ZCLucknow/Images/Documents/E_Books/59_Principles%20of%20natural%20justice.pdf> accessed 17 February 2026.
[18] Fast Finance Private Limited v. Assistant Commissioner of Income Tax, 2021 SCC OnLine Mad 47535.
[19] Bombay Chartered Accountants’ Society, ‘Interpretation of Taxing Statutes’ <https://www.bcasonline.org/Referencer2018-19/part3/interpretation-of-taxing-statutes.html> accessed 17 February 2026.
[20] Cape Brandy Syndicate v. Inland Revenue Commissioners (1921) 12 TC 358.
[21] CIT v. Calcutta Knitwears, (2014) 6 SCC 444.
[22] H. H. Lakshmi Bai v. CIT, (1994) 2 SCC 534.
[23] A. V. Fernandez v. State of Kerala, AIR 1957 SC 657.
[24] The Institute of Cost Accountants of India, ‘General FAQs’ <https://icmai.in/upload/Taxation/FAQ/WORD2.pdf> accessed 17 February 2026.
[25] The Institute of Chartered Accountants of India, ‘Basic Concepts of Income Tax’ <https://resource.cdn.icai.org/74792bos60498-cp1.pdf> accessed 17 February 2026.
[26] Press Information Bureau (n 15).
[27] Income Tax Act, 1961 <https://www.indiacode.nic.in/bitstream/123456789/2435/1/a1961-43.pdf>; Income Tax Bill, 2025 <https://prsindia.org/files/bills_acts/bills_parliament/2025/The_Income-tax_Bill,_2025.pdf> accessed 17 February 2026.
[28] Press Information Bureau (n 15).
[29] Ibid.
[30] Govind Saran Ganga Saran v. Commissioner of Sales Tax, AIR 1985 SC 1041.
[31] Tata Iron and Steel Company Limited v. State of Bihar (2018) SCC 12 107.