India's draft Income Tax Bill 2025 (ITB 2025) is more than a legislative rewrite - it's Indian Government's endeavor to align India's tax laws with today's global business environment. Drafted with over 60,000 manhours of effort, the Bill's remit is to simplify language, reduce litigation, eliminate redundant provisions, and ease compliance.
Although no major policy shifts are proposed, beneath this simplified exterior lie several nuanced provisions with potentially significant implications for cross-border transactions, capital flows, and international tax structuring. Some of these changes reflect evolving global best practices, while others appear to be drafting inconsistencies or omissions.
This article provides an overview of some of the key proposals - whether deliberate or inadvertent - within the ITB 2025 that could materially affect inbound and outbound investment involving India.
1. Capital Gains on Unlisted Shares: Forex Relief for Non-Residents
Under the current law (ITA 1961), non-residents (excluding FIIs) are taxed at a concessional 12.5% rate on long-term capital gains (LTCG) arising from the transfer of unlisted shares of Indian companies—but without any benefit for foreign exchange fluctuations. The ITB 2025 proposes to extend foreign exchange fluctuation relief to such transactions, potentially reducing the effective tax burden where the Indian Rupee has depreciated. This change could improve post-tax returns for non-resident investors, particularly in startup and private equity transactions.
2. Pre-2026 LTCL: Gets a Lifeline
The ITB 2025 retains the current restriction that long-term capital losses (LTCL) may only be offset against long-term capital gains (LTCG). However, a notable transitional relief has been introduced: LTCL incurred up to 31 March 2026 may be offset against short-term capital gains (STCG) from FY 2026–27 onwards. This change offers increased flexibility in monetizing historical losses and may present valuable tax planning opportunities going forward.
3. Nil Withholding Tax Certificates: No Longer Available
Under the current regime, non-residents may apply for either nil or lower withholding tax certificates in respect of certain payments. The ITB 2025 proposes to discontinue the issuance of nil-rate certificates altogether, permitting only lower-rate certificates across all categories of payments and recipients—including non-residents.
This effectively removes the ability to obtain a full exemption from withholding tax at the source. As a result, taxpayers seeking treaty-based relief will need to explore alternative mechanisms - such as filing returns and claiming refunds under applicable tax treaties - to recover excess withholding.
4. Loss Carry-Forward and Set-Off: Forfeited on Shareholding Change Beyond 49%
The ITB 2025 introduces a more stringent approach to the continuity of losses in closely held companies. Under the proposed rule, any change in shareholding exceeding 49% in the year of loss results in the permanent forfeiture of the right to carry forward and set off that loss - even if the original shareholding is subsequently restored.
This marks a significant departure from the current interpretational ambiguity under ITA 1961 and could have substantial implications for structuring, particularly in the context of private equity or venture capital-backed companies undergoing multiple funding rounds or ownership changes.
5. Dividend Deduction Denied: Double Taxation Risk Under the 22% Concessional Regime
Under ITA 1961, the cascading effect of dividend taxation in vertical holding structures is mitigated through a deduction for dividends received from domestic subsidiaries, provided they are redistributed at least one month before the return filing due date. However, the ITB 2025 denies this inter-corporate dividend deduction to companies opting for the 22% concessional tax regime, while continuing to allow it under the 15% regime.
This could significantly reduce the appeal of the 22% regime for investment-holding companies, particularly in cross-border structures where dividend flows are common.
6. Indirect Transfer Provisions: Broadened Scope
The ITB 2025 proposes a subtle but significant expansion in India's indirect transfer tax provisions. The definition of income deemed to accrue in India is widened to include income arising "from or through" the transfer of Indian assets—whereas the current law refers only to income arising "through" such transfers. This broadened language could potentially bring within scope a wider set of offshore transactions with an Indian nexus.
Additionally, the revised text applies to "shares or interests" in foreign entities deriving substantial value from Indian assets, clarifying that the provision covers both equity and non-equity interests in companies and other entities.
7. Fast-Track Demergers: Risk of Losing Tax-Neutral Status
Under the Companies Act 2013, fast-track demergers carried out under Section 233 offer a simplified mechanism that bypasses National Company Law Tribunal (NCLT) approval, aiming to streamline reorganizations for small or closely held companies.
However, the ITB 2025 does not recognize Section 233 demergers as qualifying for tax neutrality, instead restricting such treatment to demergers effected under Sections 230–232. This exclusion creates uncertainty and may disincentivize efficient intra-group restructurings, particularly for smaller entities or start-up groups.
Unless this omission is addressed in the final legislation or clarified through delegated guidance, fast-track de-mergers could lose their attractiveness from a tax planning perspective.
8. Liquidation: Holding Period Extended to All Securities
Under current provisions, post-liquidation period was excluded only for equity shares while calculating the holding period for capital gains purposes. ITB 2025 clarifies and expands this rule to apply to all types of investments held in a company undergoing liquidation - not just shares.
This clarification provides certainty to investors dealing in distressed assets or insolvency-driven transactions. It may influence both exit timing and valuation strategies in restructuring or resolution scenarios.
9. Undisclosed Crypto Assets: Taxable at 78%
The ITB 2025 explicitly brings Virtual Digital Assets (VDAs)—including cryptocurrencies—within the definition of "specified assets" for the purposes of taxation on undisclosed income. As a result, any undisclosed VDA found to be owned by a taxpayer will attract a punitive tax rate of 78% (inclusive of surcharge and cess), consistent with the treatment of other unreported assets such as money, bullion, or jewelry.
For foreign investors with Indian crypto exposure, this amendment underscores the critical importance of robust due diligence, documentation, and proactive reporting to avoid harsh penal consequences.
10. Treaty Interpretation: Tiered Framework for Undefined Terms
The ITB 2025 introduces a structured, hierarchical approach to interpreting undefined terms in India's tax treaties. Where a term is not defined in the treaty itself, the meaning will be drawn in order of priority from - the ITB 2025; notifications issued by tax authorities; any other Central Government legislation related to taxes; and any other Act of the Central Government.
This tiered methodology aligns India's treaty interpretation more closely with international norms and OECD guidance. It also aims to reduce ambiguity and litigation over undefined treaty terms - an area that has historically been contentious in cross-border tax disputes.
11. Access to Digital Platforms in Search Operations: Expanding Reach and Risk
A notable feature under the ITB 2025 is the expansion of enforcement powers, granting tax authorities the ability to access and extract data from taxpayers' digital platforms during search and seizure operations. This includes email servers, social media accounts, online trading and banking platforms, investment dashboards, and even cloud-hosted application servers.
Crucially, this power is not confined to domestic digital infrastructure—it may also extend to platforms and servers located abroad, especially where Indian tax interests or cross-border transactions are involved. Given this, it is increasingly important to ensure the following in M&A deals:
- Media disclosures are carefully managed;
- SPA terms and representations are appropriately drafted to account for potential digital scrutiny;
Conclusion: Time to Reassess, Restructure, and Reengage
As the draft Bill moves through the parliamentary review process, further refinements are possible. However, the direction of travel is unmistakable: India is advancing toward a tax regime marked by greater clarity, broader scope, and stricter enforcement.
For foreign investors and international tax advisors, this is a pivotal moment to step back and reexamine existing structures. Now is the time to:
- Revisit investment holding and exit strategies - particularly where concessional tax regimes or cascading dividends are involved;
- Assess treaty eligibility and indirect transfer exposure - especially in light of broadened definitions and interpretational rules;
- Prepare for enhanced compliance requirements - notably on withholding tax procedures and disclosure of virtual digital assets;
- Reevaluate restructuring options - including fast-track demergers and loss continuity provisions under the new framework.
With thoughtful restructuring and proactive engagement, cross-border investors can turn these changes into opportunities—not just compliance challenges.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
