India’s Budget 2025 Unveils Tax and Regulatory Reforms

India’s recently presented Union Budget on February 1, 2025, introduces significant tax and regulatory reforms with a strong focus on areas relevant to the international community. The beat of proposals in the recently announced Union Budget sets a clear pathway toward a Viksit Bharat (developed nation) and aims to propel the country to a $30 trillion economy by 2047. India’s Union Finance Minister presented her eighth consecutive budget, blending fiscal prudence with bold measures to accelerate economic growth. The budget emphasizes structural reforms, digitalization, inclusive development, and investment-friendly policies. It reflects India’s commitment to modernizing its economy, initiating transformative reforms across six key domains: taxation, power sector, urban development, mining, financial sector, and regulatory reforms. Additionally, the budget significantly boosts spending in critical sectors such as infrastructure, nuclear energy, artificial intelligence, healthcare, and defense, while offering relief to lower-middle-class taxpayers without altering the corporate tax burden.

This paper delves into the key tax and regulatory reforms proposed in the budget, particularly those with international implications that will be effective for the tax year beginning April 1, 2025.

Direct Tax Reforms

The Union Budget 2025 is primarily aimed at providing tax relief to the middle class and promoting the ease of doing business in India. It includes measures to improve dispute resolution policies, address transfer pricing issues, introduce incentives, adjust withholding tax measures, and streamline mergers and acquisitions, alongside indirect tax reforms.

Personal Income Tax Reforms—Increased Tax Exemption Limit: Individuals earning up to ₹12 lakh annually are now exempt from income tax under the new regime. This reform is inspired by the words of the renowned Telugu poet and playwright Gurajada Appa Rao, who famously said, “Desamante Matti Kaadoi, Desamante Manushuloi” — “A country is not just its soil, a country is its people.” In line with this vision, the budget introduces a full tax exemption for individuals earning up to ₹1.2 million annually. The move has been met with a strong positive response, as it directly benefits the people while contributing to a reduction in the fiscal deficit from 4.8% to 4.4%. This reflects a commitment to both the people and fiscal discipline.

Essentially, the income exemption threshold has been raised from ₹700,000 to ₹1.2 million, and the tax rebate benefit is now available to taxpayers with a total income (excluding special rate income such as capital gains) up to ₹1.2 million. This means individuals earning up to ₹1.2 million annually will not be required to pay any income tax.

This revision represents a fundamental shift in tax policy, ensuring more disposable income, which will contribute to financial stability and stimulate long-term economic growth.

Corporate Tax. No changes have been made to corporate tax rates.

Ease of Doing Business in India

The budget introduces several structural reforms aimed at improving India’s business environment. Key initiatives include the digitalization of compliance, simplification of regulatory filings, and the introduction of risk-based assessment frameworks. These measures are designed to reduce bureaucratic delays and foster a more transparent system. The proposed changes seek to align India’s business climate with global best practices, making it a more attractive destination for foreign investors.

Significant reforms in company law compliance and streamlined business approvals are set to boost investor confidence. At the same time, the government’s new incentives for firms adopting environmental, social, and governance (ESG) standards align with the global shift toward sustainable investment.

Clarity on Tax Treatment for AIFs Investing in Infrastructure and Securities. Section 115UB of the Income Tax Act, 1961, grants “pass-through” tax status to Category-I and Category-II alternative investment funds (AIFs) regulated by SEBI (Securities Exchange Board of India) or IFSCA (International Financial Services Centre). Under this provision, these funds are not taxed on the income they earn, except for business profits. Instead, the tax obligation is passed on to the investors (unit-holders), who are then taxed based on their share of the fund’s income.

In simpler terms, when an investor holds units in an AIF, any income generated by the fund (except business income) is treated as if the investor directly earned it. The investor will then pay taxes on this income as though they had made the investments themselves, ensuring that the income is taxed similarly to direct investments in securities. It is important to note that any income classified as business income is taxable at the AIF level, and unit-holders are exempt from taxation on that income.

There has been some ambiguity regarding the classification of income from the sale of securities—whether it should be treated as business income or capital gains. To provide clarity and investor-friendly solutions, the Budget now specifies that securities held by investment funds under Section 115UB, and invested in accordance with SEBI regulations, will be treated as capital assets. As a result, any income from the sale of these securities will be considered capital gains, not business income. It’s worth noting that the tax rate on capital gains (both short-term and long-term) is typically lower than the tax rate on business income.

Extended Tax Holidays for Startup. While the global startup ecosystem may be facing challenges, India’s startup culture continues to thrive. Under the current tax regulations, eligible startups can enjoy a 100% deduction on profits for any three consecutive years within the first ten years of their incorporation. One of the eligibility criteria stipulates that startups must be incorporated on or before April 1, 2025. However, in response to the current landscape and to further encourage entrepreneurship, the deadline for incorporating startups has been extended to April 1, 2030 (Finance Bill 2025, p. 35).

Transfer Pricing Reforms

The Union Budget introduces key refinements to India’s transfer pricing (TP) framework, aligning it more closely with OECD guidelines. These changes aim to simplify compliance through enhanced safe harbor provisions and streamlined documentation requirements, significantly reducing the administrative burden on businesses.

Rationalization of TP Provisions—Block Assessment for Determining Multi-Year Arm’s Length Price. Determining the arm’s length price (ALP) for transactions between related multinational entities has historically been a complex and often contentious process, leading to frequent litigation. Under the existing framework, multinational companies typically undergo a TP assessment each year for identical transactions, with the Transfer Pricing Officer (TPO) determining the ALP on an annual basis. This repetitive process adds administrative complexity and increases the risk of disputes.

To address these challenges, the Budget introduces a new provision allowing taxpayers to apply the same ALP to “similar international transactions or specified domestic transactions” (SDTs) for a block of three years starting April 1, 2026 (§92CA(3B) of Income-tax Act). The process is as follows:

The taxpayer must submit an application to opt for this provision.
The TPO will review the transactions to confirm their similarity and validity.
If approved, the ALP established for the first year will apply to similar transactions for the subsequent two years.
Additionally, the TPO will determine the validity of this option within one month of its exercise (subject to specific conditions). If the option is declared valid, no further reference to the TPO will be necessary for those transactions.

While the forms and procedures for this process are yet to be specified (with a new sub-section 3B of §92CA to prescribe the required details), this reform offers significant relief to multinational companies, creating a more efficient path for administration and dispute resolution.

Safe Harbor Rules—Rationalization of Margin. The budget also proposes to rationalize safe harbor margins to reduce litigation. Further details, including the specific margins and their applicability, are expected to be issued through a future circular.

Harmonization of Significant Economic Presence (SEP) Applicability with Business Connection. The concept of Significant Economic Presence (SEP) applies in situations where India does not have a Double Taxation Avoidance Agreement (DTAA) with certain countries. SEP regulations assess whether a foreign company is liable to pay tax in India based on its digital or online business activities, even in the absence of a physical office in the country. These provisions apply to non-residents conducting business transactions with Indian residents if a “business connection” is created in India based on either of the following conditions:

Revenue-linked condition: Any transaction involving goods, services, or property between a non-resident and a person in India, including the provision of data or software downloads, if the aggregate payments from such transactions during the tax year exceed INR 20 million (approximately US$280,000) (Explanation 2A(a)).
User-linked condition: Systematic and continuous soliciting of business or engaging with Indian users, where the number of Indian users exceeds 300,000.

Under the existing income tax provisions, income derived from operations limited to purchasing goods in India for export was not considered to accrue or arise in India, as it did not establish a “business connection.” However, under the SEP rules, such transactions or activities could have been deemed to arise in India. The current budget introduces an amendment clarifying that transactions limited to purchasing goods for export will not create a significant economic presence in India. This change is a key step towards harmonizing tax provisions, reducing conflicts, and enhancing the ease of doing business in India (section 9(l) of Inome-tax Act, Explanation 2A(i) – please review/edit).

Rationalization of Taxation of Business Trusts. Business Trusts, such as Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs), have become increasingly popular investment vehicles in recent years. These trusts enjoy pass-through taxation on interest, dividends, and rental income from special purpose vehicles. Under the current income tax framework, the total income of a business trust is taxed at the maximum marginal rate, except for capital gains tax under Sections 111A (short-term capital gains on listed securities at 20%) and 112 (long-term capital gains on assets other than listed securities at 12.5%).

However, the current regulations omitted any reference to Section 112A, which governs the taxation of long-term capital gains on listed securities. As a result, long-term capital gains that should have been taxed at 12.5% were instead taxed at the maximum marginal rate. The Budget addresses this gap by explicitly including the applicability of Section 112A, ensuring a fair and consistent tax treatment. This amendment reflects a well-considered approach to harmonizing tax rates and promoting equitable taxation.

Presumptive Taxation Extended to Non-Residents for Electronics Manufacturing Facility. The Budget 2025 introduces a strategic measure to extend the presumptive taxation regime to non-residents and foreign companies, reinforcing India’s position as a global hub for Electronics System Design and Manufacturing (ESDM). To encourage non-residents to contribute to the growth of India’s electronics industry by facilitating manufacturing setup and technology transfer, the government has expanded this taxation framework. Under this scheme, 25% of gross receipts will be considered taxable income, with no additional deductions permitted, ensuring stability and promoting industry growth. This scheme will lead to an effective tax liability of less than 10% on gross receipts.

Illustration of Presumptive Taxation Scheme—Example:

A foreign company earns ₹1 crore (~$140k) from eligible services in India. Under the presumptive taxation scheme, 25% of the gross receipts is considered taxable income.

Taxable Income = 25% of ₹1 crore = ₹25 lakh (~ $35k)

Tax Calculation:
Corporate Tax Rate = 35%, Cess = 4% on Tax Payable
Total Tax Payable= ₹9.10 lakh (~ $12,740)
Effective Tax Rate on Gross Receipts: (₹9.10 lakh / ₹1 crore) × 100 = 9.1%

Thus, the effective tax payable is 9.1% of the gross receipts (~9.1% of $140,000).

Rationalization and Incentives for IFSC Operations

The government has introduced several strategic measures to incentivize the development of India’s International Financial Services Centres (IFSC), with the goal of attracting global financial services operations. Below are the key updates:

Extension of Tax Concessions for IFSC Units (effective April 1, 2025): The sunset dates for tax benefits related to IFSC units have been extended until March 31, 2030. This extension covers capital gains exemptions, the relocation of funds to the IFSC, and other specific benefits available under sections 10 and 80LA.
Exemption on Life Insurance Policies (Effective April 1, 2025): IFSC Insurance Offices will now offer life insurance policies with exempt proceeds, removing the current cap on premiums. This measure aims to make IFSC life insurance offerings more competitive with other global jurisdictions.
Ship Leasing Units Tax Exemptions (Effective April 1, 2025): Following the example of aircraft leasing, capital gains and dividend exemptions for ship leasing units within the IFSC have been proposed. This exemption will apply to non-residents or IFSC units engaged in ship leasing operations.
Rationalization of the ‘Dividend’ Definition for Treasury Centres (Effective April 1, 2025): A revised definition of “dividend” will exclude loans or advances between group entities, where one is a finance unit in the IFSC. This change ensures that such transactions are not classified as “dividends,” helping treasury centres in the IFSC avoid unnecessary tax liabilities.
Simplified Regime for IFSC-Based Fund Managers (Effective April 1, 2025): A simplified tax regime for fund managers operating in the IFSC is proposed, with adjustments to conditions that make it more attractive compared to foreign jurisdictions. For example, the conditions around participation from Indian residents in funds managed by IFSC fund managers will be relaxed.
Non-Deliverable Forward Contracts and Derivatives (Effective April 1, 2026): A proposal has been made to expand tax exemptions for non-residents entering into contracts and derivatives with IFSC units. This initiative aims to further establish the IFSC as a global financial hub.
Tax-Neutral Relocation of Funds (Effective April 1, 2026): Retail schemes and Exchange Traded Funds (ETFs) will now be included in the tax-neutral relocation regime under section 47. This will ensure that the transfer of assets to and from such funds in the IFSC does not incur capital gains taxes, enhancing the appeal of the IFSC as a global financial platform.

These steps are designed to bolster the competitiveness of the IFSC, attracting global financial services businesses and encouraging them to establish operations in India. The proposed amendments will be implemented in stages, starting in 2025, with a focus on making the IFSC a tax-efficient and attractive destination for international business activities.

Rationalization of Withholding Tax, Tax Collected at Source Provisions to Ease Compliance

Several significant changes have been proposed to the withholding tax regulations, including an increase in the threshold for withholding tax deductions. This adjustment aims to alleviate the compliance burden for businesses and individuals involved in smaller transactions. Additionally, the previously conflicting provisions of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) have been harmonized, eliminating confusion and inconsistencies. These reforms are designed to streamline tax compliance, enhancing efficiency and providing benefits to both taxpayers and businesses.

Merger & Acquisition Reforms

Fast-Track Mergers. The Union Budget 2025 introduces measures to streamline and accelerate the approval process for company mergers. The scope of fast-track mergers, previously limited to small companies, holding companies, wholly-owned subsidiaries, and startups, will be expanded. By broadening eligibility, the aim is to simplify the process, reduce regulatory hurdles, and eliminate procedural delays. These changes will enhance the efficiency of mergers and acquisitions (M&A) transactions, providing a faster and more predictable framework, ultimately fostering a business-friendly environment.

Curtailed Carry-Forward of Losses for M&As. A significant amendment introduced in Union Budget 2025 alters the carry-forward of losses in the context of mergers and acquisitions. Under the existing regime, amalgamating companies can carry forward their accumulated losses for up to eight years from the year of amalgamation. However, effective April 1, 2025, the carry-forward of losses will be limited to the remaining unexpired portion of the original eight-year period .

For example, if an amalgamation occurs in the fifth year after the losses were incurred, the amalgamated entity will only be able to carry forward the losses for the remaining three years.
While this change may present challenges, the government has also introduced measures to expedite merger approvals and reduce procedural bottlenecks. The expansion of fast-track mergers is designed to foster a more conducive environment for corporate restructuring and growth.

Indirect Tax Reforms

While there have been no major changes to customs and other indirect tax regulations, some adjustments have been made to specific customs tariff rates. These refinements aim to fine-tune the regulatory framework without altering the overall structure of indirect taxation.

Foreign Direct Investment Regulatory Reforms

The government has announced a significant reform by increasing the Foreign Direct Investment (FDI) limit in the insurance sector from 74% to 100%. This move is designed to attract more foreign capital, strengthen the sector, and contribute to economic growth. The expanded FDI limit will apply to companies that reinvest the entire premium collected within India, ensuring that the funds directly benefit the domestic market.

Furthermore, the government has established a High-Level Committee tasked with identifying and implementing regulatory changes to enhance the ease of doing business and encourage investment. Additionally, the government will review and simplify existing regulations to make foreign investment more seamless and business-friendly. These changes are expected to bring advanced technology, better risk management, and enhanced financial stability to the insurance sector, fostering increased competition, improved product offerings, and greater customer benefit, which will drive the overall growth of the industry.

Key Development: Introduction of the New Income Tax Code

In a siginifcant move, the Finance Minister announced that a new Income Tax Bill will be introduced in the coming week, signaling a major shift in India’s tax framework. with the objective to simplify the tax regime, and ease the compliance burden for taxpayers.

Staying true to this commitment, the Income Tax Bill, 2025 was proposed on 12th February 2025, aimed to replace the present Income-tax Act, 1961. Guided by principles of clarity, continuity, and predictability, reducing the Act’s volume by 49% - from 512,535 words to 259,67, while consolidating chapters (from 47 to 23), and sections (from 819 to 536). It incorporates stakeholders’ feedback, adopts best practices from Australia and the UK, and retains existing taxation principles, tax rates while enhancing usability. While its full implications are still being analyzed, the bill primarily focuses on simplifying language, improving structure, and reducing complexity—without introducing major tax policy changes—to ensure continuity and certainty.

Conclusion

This is the current government’s ninth Union Budget, a clear reflection of its steadfast economic vision and policies since it came into power in 2014. While addressing fiscal deficit reduction, the budget also brings substantial tax relief and reforms aimed at enhancing the ease of doing business in India. From streamlining regulatory frameworks to boosting investments in startups and the IFSC, as well as rationalizing transfer pricing audits and expanding safe harbor rules, the proposals mark a decisive move toward creating a business-friendly environment. These steps align with India’s larger ambition to position itself as one of the world’s leading economies, driving robust growth. And yes, the new tax bill is on the horizon—a potential GAME CHANGER! Stay tuned!

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Anshu Khanna is a partner at Nangia Andersen India Pvt. Ltd., a member firm of Andersen Global, in the San Francisco office.