[Analysis] Taxation Laws Amendment Bill 2025 – Detailed Summary and Impact

The Taxation Laws (Amendment) Bill, 2025, passed by the Lok Sabha on 11 August 2025, amends the Income-tax Act, 1961 and the Finance Act, 2025 to introduce key tax reforms. It aligns the Unified Pension Scheme (UPS) with the National Pension System by granting tax exemptions on withdrawals and retirement benefits, streamlines block assessment procedures by abating overlapping assessments after search actions, expands the ₹75,000 standard deduction to taxpayers opting for the new tax regime from AY 2026-27, and extends the Section 10(23FE) exemption to investments made by Saudi Arabia’s Public Investment Fund and its subsidiaries. These amendments aim to simplify compliance, reduce duplication in assessments, and promote foreign investment.

Table of Contents

1. Extension of tax benefit to subscribers of the Unified Pension Scheme
2. Any proceedings for the block period commenced after the search shall stand abated
3. Expanding Rs. 75,000 standard deduction to taxpayers choosing the new tax regime for AY 2026-27
4. Benefit of Section 10(23FE) exemption extended to the Public Investment Fund of Saudi Arabia

On 11 August 2025, the Lok Sabha passed the Taxation Laws (Amendment) Bill, 2025 [‘Amendment Bill’], which amends the Income-tax Act, 1961 (ITA), and the Finance Act, 2025. The bill amends various provisions of the Act to allow tax benefits to the subscribers of the Unified Pension Scheme rolled out in 2025, and to correct errors in the Finance Act 2025. The changes made by the Amendment Bill are as follows:

1. Extension of tax benefit to subscribers of the Unified Pension Scheme

[Section 10(12AA), Section 10(12AB), Section 80CCD]
The Central Government introduced the Unified Pension Scheme (UPS), effective from 01-04-2025 [Notification F. No. FX-1/3/2024 – PR., dated 24-01-2025], as an option under the National Pension System (NPS) for the Central Government employees covered under NPS, so that they may receive an assured payout after their retirement.

It is a ‘fund-based’ payout system which relies on the regular and timely accumulation and investment of applicable contributions (from both the employee and the employer (the Central Government)) for the grant of a monthly payout to the retiree.

To operationalise this framework, the Pension Fund Regulatory and Development Authority (PFRDA) had issued the PFRDA (Operationalisation of the Unified Pension Scheme under NPS) Regulations, 2025, on 19 March 2025.

To grant the tax benefit to the subscriber of UPS, the Amendment Bill makes the following amendments to the Income-tax Act 1961.

1.1 Exemption for the amount received from UPS

A new clause (12AA) has been added to Section 10 to provide an exemption for payments received from the National Pension System (NPS) Trust under the UPS. This clause provides that any amount received by a subscriber of the UPS, at the time of superannuation, voluntary retirement, or retirement under clause (j) of Rule 56 of the Fundamental Rules (where such retirement is not considered as a penalty under the Central Civil Services (Classification, Control and Appeal) Rules, 1965), will be exempt from tax to the extent it does not exceed 60% of the individual corpus.

Further, a new clause (12AB) is added to Section 10 of ITA, which provides an exemption for any lump sum amount received on retirement. This exemption is allowed for the lump sum payment allowed to the central government employee on superannuation at the rate of 10% of monthly emoluments. The above exemption is available to an assessee who is a registered subscriber to UPS.

1.2 Taxation of the withdrawals from the UPS

The Amendment Bill inserts a new sub-section (3A) under Section 80CCD to provide for the tax treatment of withdrawals from the UPS for Central Government employees.

It provides that any amount standing to the credit of a UPS subscriber, whether under sub-section (1) or (1B), including contributions eligible for deduction under Section 80CCD(1), (1B), or (2), along with any accrued income thereon, will be fully taxable in the year of receipt in the hands of assessee or his nominee. However, such withdrawal shall be subject to the exemption allowed under Section 10(12AA) and Section 10(12AB).

The amount will be taxable if it is received on account of superannuation, voluntary retirement, or retirement under clause (j) of Rule 56 of the Fundamental Rules [if such retirement is not considered a penalty under the Central Civil Services (Classification, Control and Appeal) Rules, 1965].

Further, a new sub-section (6) is inserted to Section 80CCD which clarifies that for the purpose of computing the taxable withdrawal under sub-section (3A), any amount transferred from an individual’s NPS corpus to the pool corpus on account of superannuation, voluntary retirement, or retirement under clause (j) of Rule 56 of the Fundamental Rules (where such retirement is not treated as a penalty under the Central Civil Services (Classification, Control and Appeal) Rules, 1965) shall not be considered as “amount received” by the assessee in that year.

2. Any proceedings for the block period commenced after the search shall stand abated

[Section 158BA]
The Finance (No. 2) Act 2024 reintroduced the block assessment scheme by substituting Chapter XIV-B (Sections 158B to 158BI) in cases where a search under Section 132 or a requisition under Section 132A has been made on or after 01-09-2024.

Section 158BA of this chapter provides a detailed framework for assessing total undisclosed income resulting from searches and requisitions. Section 158BA(2) provides that any pending assessment, reassessment, or recomputation for any assessment year within the block period automatically abates (is discontinued) upon the initiation of a search or the making of a requisition. In other words, regular assessments for the block period shall abate. There will be one consolidated assessment for the block period. Until the block assessment is complete, no further assessment/reassessment proceeding shall take place regarding the period covered in the block. This ensures that all related assessment activities are consolidated under the block assessment process, avoiding duplication and ensuring a thorough review of all relevant periods.

The Amendment Bill amends section 158BA of the ITA to expand the scope of abatement. It provides that any proceeding for assessment, reassessment, or recomputation for which a notice has been issued during the period commencing from the date of search initiation (or requisition) and ending on the date of the block assessment order under Section 158BC(1)(c) shall also abate. This abatement occurs on the date such notice is issued. However, an exception is made for the assessment year in which the last search authorisation is executed.

Under the existing section, abatement is linked only to the pendency of proceedings as on the date of search/requisition. For example, a search takes place on 10 January 2025. On that date, the AY 2020–21 assessment is pending, so it shall abate. For AY 2021–22, assessment is not pending on the search date, as there may be a time limit still available with AO to issue the notice. Now, between 10 January 2025 and the date of the block assessment order, the AO still have the legal power to initiate a separate regular assessment for AY 2021–22 by issuing a notice. This might have caused duplication of work & conflicting results, and legal disputes over jurisdiction if AY 2021-22 falls in the block period. Thus, this amendment addresses this gap by stating that the pending proceedings shall abate even if they commence after the search date but before the block order is issued.

3. Expanding Rs. 75,000 standard deduction to taxpayers choosing the new tax regime for AY 2026-27

[Section 16]
The Finance Act 2025 has revised the tax rates and slabs under the new tax regime of Section 115BAC for the Assessment Year 2026-27. It also increased the income threshold for claiming a tax rebate under Section 87A for resident individuals taxable under the new regime of Section 115BAC from Rs. 7 lakhs to Rs. 12 lakhs, and the maximum rebate amount has been raised from Rs. 25,000 to Rs. 60,000.

This results in zero tax liability for taxpayers having income up to Rs. 12 lakhs. In case of salaried taxpayers, this threshold limit is slightly higher as they can also claim the benefit of standard deduction under section 16(ia).

For every employee, the standard deduction is Rs. 50,000 or the amount of salary received, whichever is lower. However, this limit is increased to Rs. 75,000 in case the employee’s income tax is computed under the new tax regime of Section 115BAC(1A)(ii). This is provided by the Proviso to Section 16(ia).

Section 115BAC provides an alternate tax regime to an individual. The sub section (1A) of Section 115BAC has the following clauses:

• Clause (i) provides the alternate tax regime for the assessment year 2024-25
• Clause (ii) provides the alternate tax regime for the assessment year 2025-26
• Clause (iii) provides the alternate tax regime for the assessment year 2026-27

However, the higher standard deduction under Section 16(ia) is allowed in reference to Section 115BAC(1A)(ii). The Finance Act 2025 omitted to amend Section 16(ia) to give the benefit of a higher standard deduction in case tax is computed in accordance with Section 115BAC(1A)(iii). To address this gap, an amendment has been made to the proviso of Section 16(ia) by inserting a reference to clause (iii) of Section 115BAC(1A).

4. Benefit of Section 10(23FE) exemption extended to the Public Investment Fund of Saudi Arabia

Section 10(23FE) of the ITA provides an exemption to certain specified persons on income in the nature of dividends, interest, or long-term capital gains (whether or not such capital gains are deemed as short-term capital gains under section 50AA) or specified sum under Section 56(2)(xii) arising from an investment made in India, whether in the form of debt or share capital or unit, shall be exempt from tax.

The Amendment Bill extends the benefit of Section 10(23FE) exemption to:

• The Public Investment Fund of the Government of Saudi Arabia; and
• A wholly owned subsidiary of the Public Investment Fund of the Government of the Kingdom of Saudi Arabia, which is a resident of Saudi Arabia and makes an investment, directly or indirectly, out of the fund owned by the said Government.