The Income Tax Act, 1961 was the foundation for India's taxation direct system for more than six years. Through the years it was subject to numerous amendments including The Finance Act, 2005 (which introduced the Securities Transaction Tax) and the Finance Act, 2020 (which provided taxpayers with the option of an entirely new tax system with lower rates, but with fewer exemptions). But, critics often have criticized its intricacy, the dependence on exemptions, as well as the excessive amount of litigation. In this regard it is noteworthy that the Union Government has enacted the Income-Tax Act, 2025, to replace the legislation of 1961.

The new Act is designed to modernize tax administration to align with India's idea of a digital economy. It also seeks to increase compliance and expand the tax base, while also simplifying the tax structure. For those who are interested in public governance and policy (including UPSC students), it provides valuable insight on the interplay of technology, economic policy and social equity.

1.Simplification of Tax Slabs and Rates

The most prominent change in the current Act is the fusion of several slabs into smaller categories, influenced by the recommendations from the Direct Taxes Code (DTC) that had previously suggested rationalization.

For instance, people who earn between Rs. 5 and 15 lakh per year are eligible for a reduced rate, with less exemptions. This will likely reduce the complexity of compliance. However, as we saw in the Finance Act, 2020 reforms taxpayers who relied previously heavily on deductions from Section 80C (investments with PPF, ELSS, etc.) could now be facing higher tax burdens

Implications: While taxpayers who are salaried benefit from less complicated calculation but the middle-class may be required to reorient their savings away from tax shelters to longer-term financial goals.

2. Digital-First Tax System

The Act is a legal requirement for an electronic filing regime similar to earlier government initiatives, such as that of the Faceless Assessment Scheme, 2019. Filing, refunds and review, and grievance redressal will be handled exclusively via an online portal.

This is in line the Indian's Digital India Mission, aiming to cut down on physical interactions between officials and taxpayers. This will help in reducing corrupt practices and discretionary power. However, concerns about digital literacy are still a problem. As per the National Sample Survey (2022) only 38% of rural households are connected to the internet, which could cause problems with compliance.

The implications: While urban taxpayers have a lot to gain by speed, transparency and efficiency elderly citizens and rural households could initially have a difficult time achieving full digital compliance.

3. Stricter Reporting Requirements

The Act extends existing Statement of Financial Transactions (SFT) framework that was first established by the Finance Act, 2015. Today, all high-value purchases, such as real estate, foreign travel purchases, as well as luxury goods, require an obligation to disclose.

This is in the same role as India's efforts to stop black money through laws like legislation like the Benami Transactions (Prohibition) Amendment Act 2016, along with the Black Money (Undisclosed Foreign Income and Assets) Act, 2015. The burden of compliance grows, as even the smallest irregularities in financial statements could cause a heightened level of an investigation.

Implications: Honest taxpayers have nothing to be concerned about, however the burden of maintaining precise records and documents has risen significantly.

4. Rationalisation of Deductions and Exemptions

The new law is a continuation of the government's efforts to create a "clean, exemption-free regime." A number of deductions under Section VI-A (such as 80C, 80D, as well as 80G) have been simplified and a number of exemptions specific to sectors (like the exemptions for housing loan interests pursuant to Section 24(b)) are been eliminated.

The main reason that drives the decision, as outlined in Kelkar Committee on Direct Taxes (2002) is to stop distortions from the investment and savings decisions. However, this could also mean higher liability for those who have constructed their financial plans around exemptions.

Implications: Taxpayers will have to shift their investment decisions away from return-oriented strategies to tax-centric ones and reduce their dependence on instruments such as LIC policies or mortgages exclusively to gain tax advantages.

5. Greater Compliance for Businesses and Professionals

The Act requires e-invoicing even for businesses that fall below the earlier GST thresholds, and it integrates indirect and direct taxes reporting methods. The legislation is based on the experience from GST Council where e-invoicing has reduced the number of fraudulent input credit transactions.

For small, micro, and medium-sized enterprises (MSMEs) this means an increase in compliance costs, such as the purchase of accounts, software for accounting and even in training. Similar concerns were brought up in legislation like the Companies (Amendment) Act, 2013 that imposed filing requirements on small businesses.

Implications: Transparency as well as a reduction in tax evasion are both expected however MSMEs might think this is a sign of regulatory excess if they are not aided by handholding measures.

6. The Human Side of Transition

The Income-Tax Act, 2025 is not just a legal document but rather a legal contract of social relations between government as well as its people. For common taxpayers the first hurdle is adapting to new slabs, exemptions that are reduced, and online portals.

However, experts in governance agree that a more simplified and clear system can help to improve confidence in institutions. Similar to in the Goods and Services Tax (GST) introduction this year, the initial few years will likely be filled with confusion and burdens of compliance however, the efficiency of the system could increase over time.

Conclusion

The Income-Tax Act, 2025 represents one of the most significant changes to the tax system since Independence. By streamlining slabs and eliminating tax evasions and distortions, insuring compliance with digital technology and tightening the reporting requirements the Act is designed to create an efficient fair, transparent, and fair tax system.

The lesson for policymakers is in balancing efficiency and inclusion. The most important thing for taxpayers  is to adopt digitisation and maintain better records and think about strategies for saving. In addition, for those seeking to join public administration the Act provides a current example on how the tax system interacts with governance, technology as well as social justice.