Income Tax Bill 2025: Relief likely for small taxpayers filing returns only for refunds

Under the current draft of the Bill, individuals whose total income is below the basic exemption limit, but who have had tax deducted at source (TDS), must file a return to claim their refund.

A key recommendation by the Select Committee of the Lok Sabha on the Income-Tax Bill, 2025, could bring much-needed relief to small taxpayers. The Committee has suggested simplifying refund process for those taxpayers whose income is below basic exemption limit.

"Very important and welcome suggestion made by the committee is about simplifying refund process for those taxpayers whose income is below basic exemption limit. As per committee recommendations, individuals with income below basic exemption limit should be allowed to file returns and claim refunds beyond due time without any penalty or penal interest. This is very positive recommendation and will help in expanding tax base by voluntary compliance," says Sujit Bangar, Founder - TaxBuddy.com.

Under the current draft of the Bill, individuals whose total income is below the basic exemption limit—but who have had tax deducted at source (TDS)—must file a return to claim their refund. Failure to do so within the stipulated time could potentially trigger penal provisions, including prosecution under certain circumstances. This provision, the Committee observed, was proving unnecessarily harsh for small taxpayers, especially those with low or no taxable income, such as senior citizens, pensioners, or temporary workers.

"The Committee observed that the current mandatory requirement to file a return solely for the purpose of claiming a refund could inadvertently lead to prosecution, particularly for small taxpayers whose income falls below the taxable threshold but from whom tax has been deducted at source. In such scenarios, the law should not compel a return merely to avoid penal provisions for non-filing,"

Recognizing the potential for misuse of penal provisions and the unnecessary stress caused to taxpayers, the Committee has recommended removing sub-clause (1)(ix) of Clause 263 of the Bill. This amendment, if accepted, would introduce greater flexibility in the system. It would allow eligible individuals to claim refunds without the looming threat of penalties or prosecution if their income is otherwise exempt from tax.

“This change would bring procedural fairness into the system,” the Committee noted, especially for those whose income is technically below the threshold but who face TDS deductions nonetheless. The move is expected to align the new Income-Tax framework with the principles of simplicity and taxpayer convenience.

Baijayant Panda, Chairperson of the Select Committee of Lok Sabha, presented the report of the Select Committee on the Income-Tax Bill, 2025 to the Lok Sabha on 21st July, 2025. The Bill was introduced in Lok Sabha on 13th February, 2025, and referred to the Select Committee on the same day through a motion moved by Nirmala Sitharaman, Minister of Finance and Corporate Affairs. The Committee, comprising 31 members of Lok Sabha, was tasked with examining the Bill and submitting its report by the first day of the Monsoon Session, 2025.

The recommendation reflects a broader shift toward easing compliance and reducing the administrative burden for honest taxpayers.