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Tax experts at Lakshmikumaran & Sridharan provide an insider assessment on direct tax proposals brought in the 2025 budget.

The Finance Bill 2025 has brought many taxpayer and investor-friendly changes to the existing income tax law, and also the proposal to bring the new income tax bill. The focus of this budget was to give more impetus to foreign investors, bring about a reduction of transfer pricing litigation, and provide a boost to middle-class taxpayers. The authors have analysed some of these changes.

New income tax bill

The finance minister, in her budget speech of 2025, made an important announcement of tabling the ¡°New Income Tax Bill¡±. The new bill is said to address the longstanding plea of all stakeholders for an easily comprehended, clear and direct text promoting tax certainty and reducing litigation.

The present income tax legislation contains a total of 298 sections with multiple subdivisions in each of them. It is expected that the new bill would be close to half of the size of the present legislation.

New scheme for non-residents

In the past few years, the Indian government has made certain policy changes to boost domestic capabilities for manufacturing high-end electronics in India. To encourage this further, a simpler taxation mechanism has been created for non-residents who are providing services and technology in India to resident companies for the setting up of electronic manufacturing facilities, or in connection with the production of electronic goods in India (section 44BBD).

Under the proposed provision, 25% of the amounts received/accrued from the resident in India would be taxed in India. Thus, the effective tax rate will be less than 10%. The decision is aimed at rendering a tax-friendly environment to non-residents who extend support in setting up such facilities in the country.

However, the proposed provision requires more clarity from the legislature on:

1. Class of non-residents covered by the proposal;
2. Scope of the term ¡°services¡±;
3. Eliminating incongruence with existing provisions, which may equally apply to such non-residents; and
4. Category of facilities set up in India that the amendment seeks to cover.

Providing such clarity would ensure tax certainty for non-residents.

Amending scope of SEP

The Indian tax legislation considers the ¡°existence of business connection¡± as a factor for determining accrual of income in India. The Finance Act, 2020, introduced the concept of significant economic presence (SEP) to constitute business connection for non-residents in India. The definition of an SEP included any and every transaction made by a non-resident with a resident Indian, thus leading to an incongruence in law. Despite the mere purchase of goods for export not inviting any tax implications in India, as a result of an SEP, such a transaction could lead to the creation of a business connection and result in potential tax exposure in India.

In various double tax avoidance agreements entered into by India, the mere purchase of goods in the country does not lead to the creation of a ¡°permanent establishment¡± in the nation.

The present budget has endeavoured to address this and align the provisions of the law to state that the mere purchase of goods for export does not constitute an SEP. Nevertheless, the significance of this amendment will presently be relevant only in respect of transactions with those persons resident in a country/territory with whom India does not have a full-fledged tax treaty.

Transfer pricing block assessment

A scheme for block assessment of transfer pricing is proposed for easing the compliance burden on taxpayers and the administrative burden on tax authorities. While more information on the scheme will emerge once necessary rules are put in place, what is known at present is that a taxpayer will be entitled to apply an arm¡¯s length price (ALP) determined by the tax officer for a particular year, to two immediately subsequent years.

This option can be exercised provided the transactions are similar, and this is subject to review and confirmation by the tax officer. Once confirmed, the tax officer is likely to apply the already determined ALP for the two subsequent years.

Some areas that require further clarity are: (1) What is the ¡°similarity¡± in transactions that is considered for the application of this proposed provision?; (2) Is it the methodology that is to be mirrored for the two other years, or the price itself that is determined by the tax officer?; (3) Will a taxpayer be entitled to choose this option only for a particular set of transactions to the exclusion of others?; and (4) the effect of orders passed by a dispute resolution panel in the first year.

While, prima facie, this appears to be an attempt to reduce litigation, more can be said only when the rules are put in place.

Investment incomes

Taxation of AIFs. Alternative investment funds (categories I and II) in India enjoy a pass through for core investment incomes like dividend and capital gains, and are liable to pay tax on business income. There existed a concern as to whether income from a transfer of securities was to be bucketed as capital gains or as business income.

If classified as ¡°business income¡±, AIFs would pay tax at the maximum rate, thus causing a larger dent in the returns distributable/funds further investible. The Finance Bill 2025 now proposes that investments made by these funds (in accordance with regulations) shall constitute capital assets and income from a transfer will be taxable only as capital gains. This amendment also shifts the tax incidence from the fund to the investor.

Tax on LTCG for FIIs. The Finance Bill 2025 further rationalises the rate of taxation of long-term capital gains (LTCG). While foreign institutional investors (FIIs) are taxed at 10%, all other taxpayers are taxed at 12.5%. The Finance Bill seeks to bring in parity by raising capital gains tax rates for FIIs to 12.5%.

Extension of section 10(4E). Any income generated by a non-resident from a transfer of a forward contract, or an offshore or over-the-counter derivative contract entered into with an offshore banking unit in an international financial services centre (IFSC), is exempted from tax in India. The Finance Bill also proposes to extend the scope of this exemption to income from such transactions entered into with a foreign portfolio investor in an IFSC.

Exemption under section 10(10D). Presently, amounts received from maturity of a life insurance policy are exempted from tax subject to certain conditions. One such condition is that the policy amount should not exceed a certain sum individually, or in aggregate. This condition-based exemption was also applicable to policies taken by non-residents from insurance intermediaries located in an IFSC.

The exemption in respect of non-residents from maturity of a life insurance policy is now proposed to be made available without requirement to comply with the condition regarding the premium not exceeding the specified amount. The other existing conditions will, however, remain and, in such cases, the non-residents may take leverage under the provisions of tax treaty if available.