Ep 2/23
Key Definitions — What Changed from 1961 to 2025
Tax Year, Person, Assessment, VDA, Business Connection, Significant Economic Presence
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Definitions
Chapter I
Expanded and clarified
Tax Year
New
Single concept replaces two
SEP Threshold
Rs.2Cr
Revenue or 3L users
VDA
Defined
Crypto, NFTs included
Definitions are the building blocks of any statute. In the Income Tax Act 2025, most key definitions are carried forward unchanged from 1961 — but several have been updated, clarified, or expanded. This episode covers the most important changes: the new Tax Year concept, the updated definition of Significant Economic Presence for non-residents, the expanded Virtual Digital Asset definition, and the clarified Business Connection rules. Understanding these definitions correctly prevents the most common errors in applying the new Act.
The Law
Tax Year — The New Master Time Concept
Section 2 of ITA 2025 defines Tax Year as the twelve-month period commencing on 1 April every year. This single definition replaces the two-concept system of ITA 1961 (Previous Year: when income is earned + Assessment Year: when it is taxed). Under ITA 2025, the Tax Year is both when income is earned AND when it is assessed — a single reference point. Tax Year 2026-27 means: income earned from 1 April 2026 to 31 March 2027, assessed (return filed) during that same Tax Year 2026-27 and up to the due dates within that year. For TDS purposes: TDS deducted during Tax Year 2026-27 is credited to the taxpayer's Tax Year 2026-27 account.
Section 2 definition of Tax Year, ITA 2025; CBDT Explanatory Note on Tax Year concept
The Law
Business Connection and Significant Economic Presence — Updated
The definition of Business Connection (relevant for taxing non-resident business income in India) has been updated in Section 2 of ITA 2025. The concept of Significant Economic Presence (SEP) is now fully embedded in the main definition rather than being a proviso. SEP exists when: (1) aggregate payments from Indian transactions exceed Rs.2 crore in a Tax Year; OR (2) the non-resident has systematic and continuous soliciting of business through digital means targeting Indian users, if user count exceeds 3 lakh. SEP creates a taxable nexus in India even without a physical presence. This is particularly relevant for global digital platforms, cloud service providers, and foreign e-commerce companies serving India.
Section 2, ITA 2025 — Business Connection definition; SEP provisions consolidated from old Section 9(1)(i) Explanation
Critical Intricacy
Virtual Digital Asset — Updated and Expanded Definition
The VDA definition in ITA 2025 Section 2 has been expanded from the 2022 version. It now explicitly includes: (1) cryptocurrencies of all types including stablecoins (previously debated); (2) Non-Fungible Tokens of any kind; (3) any other digital asset notified by the Central Government. Key exclusion clarified: gift cards, loyalty points, and reward points are NOT VDAs unless they can be converted to Indian or foreign currency outside the issuer's ecosystem. The tax rate on VDA income (30% flat under Section 135 of ITA 2025, equivalent to old Section 115BBH) and the prohibition on loss offset are unchanged. TDS on VDA transfer under Section 393 Nature Code 1034 at 1% is unchanged from old Section 194S.
Section 2 VDA definition, ITA 2025; Section 135 (30% VDA rate); Nature Code 1034 (VDA TDS)
Common Challenge
Person — Expanded to Include New Entity Types
The definition of 'Person' in Section 2 of ITA 2025 has been expanded to explicitly include: (1) LLPs as a distinct category (were previously included under 'firm' but ambiguity existed); (2) Alternative Investment Funds registered with SEBI; (3) Real Estate Investment Trusts; (4) Infrastructure Investment Trusts. These are now expressly named persons for income tax purposes. This matters for: TDS obligation (they can be both deductors and deductees), return filing obligation, and assessment procedures. Previously, the treatment of REITs, InvITs, and AIFs required reading across multiple provisions — now they are expressly included in the basic definition.
Section 2 — Definitions — Key Terms
In this Act, unless the context otherwise requires: 'Tax Year' means the twelve months period commencing on the 1st day of April every year. 'Person' includes: (i) an individual; (ii) a Hindu undivided family; (iii) a company; (iv) a firm; (v) an association of persons or a body of individuals, whether incorporated or not; (vi) a local authority; and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. 'Virtual Digital Asset' means any information or code or number or token, generated through cryptographic means or otherwise, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value. [Section 2, Income Tax Act 2025 — selected definitions]
Section 2, Income Tax Act 2025; Comparison with Section 2, Income Tax Act 1961
Definition-Based TDS Triggers Under ITA 2025
Apply / Deduct
- +VDA transactions: Section 393 Nature Code 1034 at 1% on consideration (gross, not gain)
- +Non-resident Business Connection/SEP: TDS on payments to non-resident with SEP in India
- +LLP payments to partners: Section 393 Nature Code 1025 at 10% (Section 194T equivalent retained)
- +REIT/InvIT distributions: specific Nature Codes apply to different distribution components
Not Required
- −Gift cards, loyalty points, reward points: NOT VDAs — no Nature Code 1034 TDS
- −Non-resident with no Business Connection AND no SEP: business income not taxable in India — no Section 393(2) TDS if genuinely no connection
- −SEP below Rs.2 crore threshold: no taxable nexus in India for business income
Practical Challenges
CHALLENGE 1 — LLP partner payment new reference: An LLP pays interest on partner capital of Rs.5,00,000 in Tax Year 2026-27. Old Act: Section 194T at 10%. New Act reference?
Answer: Section 393 Nature Code 1025 at 10%. The mechanism is identical to old Section 194T. Threshold Rs.20,000 aggregate per partner per year unchanged. The only change is the form (Form 140 instead of Form 26Q) and the Nature Code (1025 instead of Section 194T). Deposit TDS by 7th of following month.
CHALLENGE 2 — Crypto stablecoin: A trader exchanges USDT (stablecoin) for Bitcoin. Old Act: treated as VDA to VDA exchange — 30% on gains, 1% TDS. New Act treatment?
Answer: Identical. USDT and all stablecoins are expressly included in the VDA definition under ITA 2025 Section 2. The exchange is a VDA-to-VDA transfer. Buyer deducts TDS under Nature Code 1034 at 1% on the consideration value of the purchase. Seller pays 30% on gains under Section 135. No change in substance — just new section references.
CHALLENGE 3 — Foreign SaaS company with Rs.2.5 crore Indian revenue: A UK-based SaaS company has Rs.2.5 crore annual revenue from Indian customers. Does it have SEP in India under ITA 2025?
Answer: Yes. The SEP threshold of Rs.2 crore is crossed. The company has a Business Connection in India under the SEP definition in ITA 2025 Section 2. It must file an Indian income tax return for Tax Year 2026-27. Its profits attributable to Indian operations are taxable in India. TDS obligations of Indian customers paying for the software depend on DTAA treatment — may be business income (not taxable without PE) or royalty (taxable). Company should obtain India-UK DTAA benefit by filing Form 10F with Indian tax authority.
Worked Examples — Key Definitions Applied
Example 1 — Tax Year on a TDS certificate
Scenario: Employee receives Form 130 (new Form 16) from employer for salary earned April 2026 to March 2027.
Working: Form 130 header: Tax Year 2026-27. Old Form 16 would have said Assessment Year 2027-28. The income, the tax deducted, and the certificate contents are identical. The employee files their income tax return for Tax Year 2026-27 by 31 July 2027. Claims the TDS credit shown in Form 130. All numbers the same — only the form number (130 vs 16) and the year label (Tax Year 2026-27 vs Assessment Year 2027-28) have changed.
⚠ Common Mistake: Employee expecting to receive old Form 16 and not recognising new Form 130. Brief employees before April 2027: Form 130 is the new Form 16. Do not call your employer confused — it is the correct form.
Example 2 — VDA: stablecoin exchange
Scenario: Investor holds 10,000 USDT (stablecoin, 1 USDT = Rs.85). Exchanges for 0.01 Bitcoin (also worth Rs.8,50,000) in May 2026.
Working: Both USDT and Bitcoin are VDAs under ITA 2025 Section 2. This is a VDA-to-VDA exchange. Buyer of Bitcoin: deducts TDS under Section 393 Nature Code 1034 at 1% on Rs.8,50,000 = Rs.8,500. Pays in cash since consideration is in-kind. Seller of USDT (buyer of Bitcoin): gains on USDT = Rs.8,50,000 (received) minus cost of USDT. Say cost was Rs.8,00,000. Gain = Rs.50,000. Tax at 30% under Section 135 = Rs.15,000. TDS credit Rs.8,500 available.
⚠ Common Mistake: Treating USDT as foreign currency rather than VDA. USDT is expressly a VDA under ITA 2025 Section 2 — it is not Indian or foreign currency. All exchange transactions involving USDT attract VDA provisions including 30% tax and 1% TDS.
Example 3 — SEP: foreign company filing obligation
Scenario: US-based SaaS company Techflow earns Rs.3 crore from Indian enterprise customers in Tax Year 2026-27. No employees or office in India.
Working: SEP threshold: Rs.2 crore. Techflow's Indian revenue: Rs.3 crore > Rs.2 crore. SEP exists under ITA 2025 Section 2 Business Connection definition. Techflow must: (1) obtain Indian PAN; (2) file Indian income tax return for Tax Year 2026-27 by 31 October 2027; (3) determine profits attributable to Indian SEP; (4) check India-US DTAA — if profits are business income under DTAA with no PE, taxable only in US. Techflow should obtain a tax opinion on DTAA applicability and file Form 10F to claim DTAA benefit.
⚠ Common Mistake: Techflow assuming no Indian tax obligation because it has no physical presence in India. SEP removes the requirement for physical presence. Rs.3 crore revenue triggers the nexus regardless of where Techflow's servers or employees are located.
Action Guide
- 1Update all client communication templates replacing Previous Year/Assessment Year with Tax Year
- 2Brief payroll teams: Tax Year 2026-27 appears on Form 138 (salary TDS return) where Form 24Q used to say Assessment Year 2027-28
- 3For LLP clients: confirm Nature Code 1025 is updated in accounting software for partner payment TDS
- 4For crypto clients: confirm VDA definition now expressly covers stablecoins — trading in USDT/USDC is also subject to Section 393 Nature Code 1034
- 5For foreign digital company clients: assess whether ITA 2025 SEP threshold applies — >Rs.2 crore Indian revenue triggers Indian tax filing obligation
✓ Do This
- ✓Brief all team members on Tax Year terminology — it appears on every new form and return
- ✓Confirm VDA definition covers stablecoins for crypto-active clients — no ambiguity now
- ✓Check SEP threshold for foreign company clients with Indian digital revenue
✗ Avoid This
- ✗Do not confuse Tax Year 2026-27 (when income is earned) with the return filing period (same Tax Year but up to July/October 2027)
- ✗Do not assume LLP partner payments are now exempt just because old Section 194T was 'new' — Nature Code 1025 continues the same obligation
- ✗Do not ignore SEP provisions for foreign company clients — Rs.2 crore threshold is not high