Has the promised zero penalty privilege for small taxpayers been taken away in the New Tax Act 2025?
Here’s what experts say

Aug 29, 2025

Synopsis
The Lok Sabha approved the Income Tax Act 2025. It clarifies rules for late ITR filing and tax refunds. A select committee suggested changes to Section 263. The bill removes sub-clause (1)(ix). Taxpayers can now claim refunds even with delayed returns. This resolves confusion for those filing after the deadline. The new rules aim to provide flexibility for refund claims.

On July 21, 2025, the Lok Sabha Select Committee had suggested that the tax law shouldn’t compel a person to file an ITR just to avoid penaltiesfor non-filing of an ITR. So, the committee had suggested removal of this provision in the Tax law. In the most recent Income Tax Act, 2025, sub-clause 1(ix) has been removed from Section 263.

The Select committee's press release dated July 21, 2025 said: “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. The Committee, therefore, recommended to remove sub-clause (1)(ix) from Clause 263 to provide flexibility for allowing refund claims in cases where the return is not filed in due time."

The New Income Tax Act 2025, passed by the Lok Sabha has cleared up the confusion regarding those who are filing ITRs after the original deadline, solely for the purpose of claiming a tax refund.

In simple terms, this means that taxpayers who submit their returns late or make changes after the deadline will still be eligible for refunds. But, the recommendation of the committee for eliminating the requirement to file returns just to receive tax refunds still doesn't seem to be there.

What does the latest Income Tax Act, 2025 say about ITR filing and tax refund?

S. Vasudevan, Executive Partner, Lakshmikumaran and Sridharan attorneys, says: “Section 263(1)(a)(ix), as introduced originally in February 2025, prohibited claim of refund by filing belated returns. Accordingly, the select committee proposed to delete sub clause (ix) to Clause 263(1)(a) so that the assessee is eligible to claim refund even after filing a belated return.

Vasudevan says: “Accepting this recommendation of the Select Committee, the said sub-clause (ix) has been omitted from the Income Tax Bill (No. 2), 2025 (as passed by Lok Sabha) allowing assessees to claim refund by filing belated returns as well. Thus, the suggestion of the Select Committee has been accepted.”

O.P. Yadav, Tax Evangelist at Prosperr.io & Former Principal Commissioner of Income-Tax, says there were two aspects to watch here:
Penal provisions for non-filing of ITR solely for the purpose of claiming refund and

Claiming ITR refund for belated ITR filing.

Yadav says that the Select Committee recommended removing sub-clause 1(ix) from Clause 263 which the Lok Sabha accepted.

What does the Income Tax Act, 1961 say about tax refund?

Yadav explains:

Under the existing law—the Income-tax Act, 1961—Chapter XIX deals with “Refunds.” Section 239(1) provides that “Every claim for refund under this Chapter shall be made by furnishing a return in accordance with the provisions of Section 139.”

In the Income-Tax Bill, 2025 (which was before the Select Committee), Chapter XX deals with “Refunds.” Section 433 of the Chapter provides that “Every claim for refund under this part shall be made by furnishing a return as per Section 263.” As there was no policy change in this respect, the Committee made no recommendation to modify Section 433.

What did the select committee say about tax refunds under Income Tax Act, 2025?

According to Yadav, in paragraph 433 of the report, the Select Committee noted that “the suggestion to allow refunds in case of late/revised income-tax returns filed due to exceptional/emergency circumstances such as medical emergency, natural calamity, death in the family, etc. has been accepted by the Department.

“Accordingly, the Committee recommended to carry out suitable modification in clause 263 to enable refunds in case of filing belated or revised returns.” The Committee also recommended substitution of the words “this part” with “this Chapter” to correct a drafting error, which was accepted.”

Section 263 of the 2025 Act corresponds to Section 139 of the Income Tax Act, 1961, which contains the provisions for filing a return of income. Under clause (ix) of Section 263(1)(a) of the Bill, it was provided that “a person who intends to claim a refund under Chapter XX” has to compulsorily file a return of income on or before the due date. There was no such condition in Section 139 (1) of the Income-tax Act, 1961, and therefore, this amounted to a policy change. The Select Committee report indicates that the Ministry of Finance accepted that clause (ix) of Section 263(1)(a) was a drafting error.

The Committee, after observing 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”, recommended removing the above sub-clause from Section 263 to provide flexibility for allowing refund claims in cases where the return is not filed within the due date.

In the Income-Tax (No.2) Bill, 2025, passed by Parliament, clause (ix) of Section 263(1)(a) has been removed exactly as recommended by the Committee. This means the condition for filing a return in such cases within the due date has been done away with. However, any person intending to claim a refund has to make such a claim by filing a return in accordance with Section 263—which includes filing a return within the due date under Section 263(1), a belated return under Section 263(4), or a revised return under section 263(5)—as required by section 433 of the Bill. This aligns with the existing provisions of Section 139 of the Income-tax Act, 1961.

The seventh proviso to Section 139(1) of the Income-tax Act, 1961, provides certain circumstances under which a person (other than a company or a firm), who is otherwise not required to file a return, is required to compulsorily furnish return of income. Clause (xi) (renumbered as clause (x) in the Income-Tax (No.2) Bill, 2025) has been incorporated in Section 263(1)(a) to cover such circumstances and provides that “a person, other than a company or a firm, who during the tax year, fulfills such conditions as prescribed” must file a return. Such conditions are to be prescribed in the Income-tax Rules.

What about Rule 12AB?

Yadav explains:

One of the existing conditions prescribed in Rule 12AB for compulsory filing of returns under the seventh proviso to Section 139(1) is where the aggregate of TDS and TCS during the financial year is Rs 50,000 or more in the case of a senior citizen and ₹25,000 or more in other cases.

In such cases, a return must be filed irrespective of whether a refund is claimed or not. It remains to be seen whether these conditions are retained or modified when drafting rules under clause (x) of Section 263(1)(a), in light of the Select Committee’s observation 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 of ITR.

[The Economic Times]