Income Tax Bill 2025: Is 18.5% LTCG tax proposed on LLPs under new draft bill?

Recent social media posts have led to widespread confusion regarding a supposed increase in the Long-Term Capital Gains (LTCG) tax rate for individual investors in the proposed Income Tax Bill, 2025. Contrary to these claims, the Income Tax Department has clarified that the LTCG tax rate for individuals will remain unchanged at 12.5%. The misunderstanding appears to be rooted in a misinterpretation of Clause 206 of the draft bill, which is actually focused on the Alternative Minimum Tax (AMT) applicable to non-corporate entities such as Limited Liability Partnerships (LLPs), not individuals.

The proposed Income Tax Bill, 2025, seeks to streamline and consolidate existing tax laws in India, but some provisions have raised concerns among stakeholders.

Some reports claimed that the draft bill includes a controversial expansion of the AMT that could significantly increase the tax burden on LLPs and partnership firms. This expansion could raise the effective tax rate on long-term capital gains for these entities from 12.5% to 18.5%, a 6% increase that has sparked debate.

The Income Tax Department issued a clarification on Tuesday regarding the Income Tax Bill 2025, stating its purpose is limited to linguistic simplification and the repeal of obsolete provisions.

"There are news articles circulating on various media platforms that the new Income Tax Bill, 2025 proposes to change tax rates on LTCG for certain categories of taxpayers. It is clarified that the Income Tax Bill, 2025, aims at language simplification and removal of redundant/obsolete provisions. It does not seek to change any rates of taxes. Any ambiguity in this respect shall be duly addressed during the passing of the Bill," the Income Tax Department said in its post.

What's the issue

Jatin Arora, Founder of Arora Law Offices, indicated that the removal of current AMT exemptions could "erode the benefits of using LLPs for investments," particularly affecting those structured as investment vehicles. The increased tax liability for LLPs primarily generating LTCG would represent a major shift in investment strategy, prompting many to reconsider their financial arrangements.

Amit Gupta, a partner at Saraf and Partners, pointed out that the original aim of the AMT, introduced in 2011, was to maintain the tax base by targeting entities benefiting from profit-linked deductions. However, the current bill extends the AMT to all non-corporate entities, not just those claiming deductions, potentially increasing tax liabilities for LLPs.

Hemen Asher, Partner at Bhuta Shah & Co LLP, warned that such a move could disincentivize the use of LLPs, which have long been favoured by family offices and startups for their operational simplicity, lower compliance burden, and favourable tax treatment.

He said that while regulators like SEBI and IFSCA permit LLPs to set up Alternative Investment Funds (AIFs), other bodies like the RBI and Registrar of Companies (RoC) have expressed reservations about LLPs being used primarily for investments. Experts fear that this amendment could be used as a backdoor regulatory tool to discourage such use, even if not explicitly stated.

CA Vivek Khatri wrote on X: "Tax Shock Incoming for India’s Richest Families.  The new I-T Bill may raise LTCG tax on LLPs from 12.5% to 18.5% via AMT. Family offices, promoter outfits, & LLP-run investment arms are the target. No deductions. No exemptions. Just pure tax heat. It’s no longer tax planning. It’s tax defense mode."

What has the government said

The Select Committee reviewing the bill has recommended that the AMT does not apply to individuals, Hindu Undivided Families (HUFs), or similar entities unless specific deductions are claimed or their adjusted total income surpasses Rs 20 lakhs. Additionally, the Committee proposed restoring carry-forward provisions for AMT credit to align with existing laws. Nevertheless, the Finance Ministry has dismissed these suggestions, citing them as a "policy change" outside the bill's intended scope.

In response to public concerns, the Income Tax Department stated that the new bill aims primarily at "simplification and consolidation," assuring that "AMT was already applicable under the IT Act, 1961, to taxpayers claiming specified deductions. The same principles will continue." 

"As explained in our FAQs, the Income Tax Bill, 2025 primarily aims at language simplification, removal of redundant/obsolete provisions, consolidating the existing provisions without any structural or policy changes and without disturbing the long-settled taxation principles. AMT was applicable under the I-T Act, 1961, to such taxpayers who claimed specified deductions. The provisions of AMT in the Income Tax Bill, 2025, would be identical. Any ambiguity in this respect shall be duly addressed," the department reacted to a user's post on X.