Income Tax Bill 2025: Parliamentary panel suggests TDS refunds beyond due date without penalty

The parliamentary panel has recommended allowing taxpayers to claim TDS refunds after the ITR due date without penalties, as part of suggested changes to the Income Tax Bill, 2025, which aims to simplify and replace the existing Income Tax Act, 1961. Among the major ones, it has proposed allowing taxpayers to claim TDS refunds even after missing the ITR deadline, without facing penalties -- a move that could offer relief to millions of small taxpayers. 

In its 4,575-page report tabled in the Lok Sabha, the committee, chaired by BJP MP Baijayant Panda, recommended several crucial changes to the draft legislation that aims to replace the Income Tax Act, 1961. The proposals focus on easing compliance, removing ambiguities, and safeguarding genuine taxpayers, especially senior citizens, pensioners, temporary workers, and not-for-profit organisations (NPOs).

Relief for small taxpayers

Under the current draft, individuals whose total income is below the basic exemption limit, but have tax deducted at source (TDS), must file an income tax return to claim a refund. If they fail to do so within the prescribed time, they could face penal provisions, including prosecution in certain cases.

The panel found this particularly harsh, especially for those without taxable income who are drawn into the tax net only because of automatic TDS deductions by banks, employers, or institutions. The Committee observed that the requirement to file a return solely to claim a refund places an unnecessary compliance burden on small taxpayers.

To ease this burden, the panel recommended allowing refund claims even after the due date, provided there is no intent to evade taxes. It also backed making penalties for non-maintenance of books of accounts discretionary, instead of automatic, to avoid punishing procedural lapses by honest taxpayers.

New ‘tax year’ and clearer definitions

One of the structural reforms endorsed by the panel is the unification of the terms ‘previous year’ and ‘assessment year’ into a single ‘tax year’. This change is expected to simplify the tax code and reduce confusion for ordinary taxpayers.

Other key changes include updating outdated definitions such as “capital asset” and “infrastructure capital company”, and reinforcing the “actual payment” rule. The Committee stressed that only expenses actually paid—rather than merely accrued—should be allowed as business deductions, improving clarity and plugging potential loopholes.

Religious donations and NPO exemptions

The report also tackles the taxation of anonymous donations. While such donations to purely religious trusts remain tax-free, those made to trusts with both religious and charitable functions, such as running schools or hospitals, are currently taxed under the draft bill.

The Committee warned that this could adversely affect NPOs and suggested maintaining the current exemption for religious-cum-charitable trusts. It also called for clearer definitions to ensure that legacy charitable and religious trusts are not disqualified from exemptions due to vague wording in the new bill.

GAAR and refund certificates for non-residents

Addressing broader systemic concerns, the panel recommended refining the language of the General Anti-Avoidance Rule (GAAR) to prevent it from being misused against legitimate corporate restructurings. It proposed inserting the phrase “in the circumstances of the case” to ensure that genuine transactions are not treated as tax avoidance schemes.

To facilitate smoother cross-border tax compliance, the Committee also backed restoring Nil withholding certificates—especially relevant for non-residents entitled to tax treaty benefits—to avoid unnecessary refund delays in zero-tax situations.

Simpler tax regime

In total, the panel proposed 566 recommendations aimed at simplifying compliance, reducing litigation, and making the law more intuitive. Several suggestions were drawn from taxpayer feedback and expert consultations.

If accepted, these recommendations could significantly reduce the compliance burden for individuals and organisations, while reinforcing the integrity of India’s tax system. The government’s response to these proposals and the final shape of the Income Tax Bill, 2025, will be closely watched by taxpayers and tax professionals alike.