TDS Refunds Without Penalty Proposed In Income Tax Bill 2025: Parliamentary Panel

Income Tax Act

A parliamentary committee has recommended allowing major taxpayer-friendly reforms in the draft Income Tax Bill, 2025, which aims to replace the existing Income Tax Act of 1961.

Among the key recommendations is a provision allowing taxpayers to claim refunds of Tax Deducted at Source (TDS) even after missing the income tax return (ITR) deadline—without facing penalties.

The proposal, part of a comprehensive 4,575-page report tabled in the Lok Sabha, was submitted by the parliamentary panel chaired by BJP MP Baijayant Panda. The committee’s recommendations target reduced compliance burdens, enhanced clarity, and protection for genuine taxpayers.

Relief For Small & Non-Taxable Income Earners

Currently, individuals whose income falls below the basic exemption limit must still file an ITR if TDS has been deducted, just to claim a refund. Failure to do so on time may invite penalties—even prosecution in rare cases.

The panel called this requirement “particularly harsh,” especially for individuals who are otherwise not liable to pay tax, such as senior citizens, pensioners, and temporary workers. These taxpayers often have TDS deducted automatically by banks or employers.

Noting the undue compliance pressure, the committee recommended that refunds should still be claimable after the deadline, as long as there’s no intent to evade taxes. This change could bring significant relief to millions of small taxpayers.

Flexibility In Penalties and Bookkeeping

Another important recommendation is to make penalties for not maintaining books of accounts discretionary rather than mandatory. The goal is to prevent penalizing honest taxpayers for minor procedural lapses.

In a bid to simplify the tax framework, the panel also recommended replacing the terms ‘previous year’ and ‘assessment year’ with a single ‘tax year’. This structural change is aimed at reducing confusion and streamlining tax calculations for ordinary citizens.

Updated Definitions & Clearer Deduction Rules

The committee proposed modernizing outdated definitions, such as “capital asset” and “infrastructure capital company,” to reflect today’s economic realities.

It also emphasized that only expenses actually paid—not just accrued—should qualify for tax deductions. This move aims to plug loopholes and bring greater transparency to business expense claims.

Support For Non-Residents & Cross-Border Transactions

To ease cross-border tax compliance, the panel recommended restoring Nil withholding certificates for non-residents who are eligible for tax treaty benefits. This would help prevent unnecessary refund delays in situations where no tax is ultimately payable.

The committee has made a total of 566 recommendations to improve tax compliance, minimize litigation, and make the tax regime more intuitive. Many of these suggestions stem from public feedback and expert consultations.

If adopted, these proposals could significantly reduce compliance challenges for individuals and organisations, while strengthening the fairness and efficiency of India’s tax system. The government’s response and the final form of the Income Tax Bill, 2025, will be closely watched by taxpayers and professionals alike.