Are the new digital search provisions under the Income Tax Act 2025 justifiable?

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Introduction

On August 12, 2025, the Indian Parliament passed the Income Tax (No. 2) Bill 2025, replacing the Income Tax Act, 1961, to update income tax enforcement for the digital Bharat. The new Income Tax Act, 2025, will come into force from April 1, 2026. Its most significant change and transformation is the massive expansion of search and seizure powers into “virtual digital spaces.” While this is meant to tackle tax evasion hidden in emails, cloud storage and encrypted devices, the safeguards are weak. This raises serious concerns that the law could be misused, threateningthe right to privacy promised under Article 21 of the Constitution of India.

Under the old Income Tax Act, 1961, searches were physical in the real world, where officers needed a “reason to believe” that someone was hiding income or assets before initiating a search action in the premises of the assessee or lockers to seize cash, jewellery, digital data from computers or mobile phones or documents.

The new Section 247 of the Income Tax Act, 2025, brings tax search and seizure completely into the digital world. If officers believe someone is hiding income or evidence, they can now search not just physical places but also computer systems and online spaces. Section 261(e) of the new Act defines “virtual digital space” very broadly, covering social media, emails, bank trading accounts, cloud storage, remote servers and apps. This means a tax investigation could reach everything from WhatsApp chats to Gmail inboxes and Cloud backup,s even if the data is stored on overseas servers.¹

Revised powers of the income tax authorities

Under Section 247 of the new Act, the term “computer system” is used repeatedly, effectively giving tax authorities very broad powers to access digital spaces and extract personal information from electronic devices. The relevant portion of this section reads as follows:

“The approving authority may authorise any Joint Director or Joint Commissioner or Assistant Director or Assistant Commissioner or Income-tax Officer, or any Joint Director or Joint Commissioner, so authorised, may authorise any Assistant Director or Assistant

Commissioner or Income-tax Officer, (the officer so authorised in all cases being herein referred to as the authorised officer) to––

• enter and search any building, place, vessel, vehicle, aircraft where he has reason to suspect that such assets, books of account or other documents, or such information in electronic form or on a computer system are kept;
• require any person, who is found to be in possession or control of any books of account or other documents maintained in the form of electronic record or any information in electronic form or on a computer system, to afford the authorised officer with such reasonable technical and other assistance (including access code, by whatever name called) as may be necessary to enable the authorised officer to inspect such books of account or other documents or such information;
• break open the lock of any door, box, locker, safe, almirah, or other receptacle or override the access code to any computer system for exercising the powers conferred by clause (i) where the keys thereof are, or the access to such building, place, etc., or the access code to such computer system, as the case may be, is not available;
• search any person who has got out of, or is about to get into, or is in, the building, place, vessel, vehicle or aircraft, if the authorised officer has reason to suspect that such person has secreted about his person any such books of account, other documents, any information in electronic form, or a computer system asset;
• place marks of identification on any books of account or other documents, or make or cause to be made extracts or copies therefrom and also from coma puter system;”²

 Section 261(e) defines “computer system” in extremely wide terms wh, which significantly expands the scope of the powers conferred under Section 247.

The Act defines “computer system” as:

“computer system means computers, computer networks, computer resources, communication devices, digital or electronic data storage devices, used on inand-alone mode or part of a computer system, linked through a network, or utilised through intermediaries for information creation or processing or storage or exchange, and includes the remote server or cloud server or virtual digital space;”³

Let’s break down this definition step by step to understand what all can be covered under it:

1. “Computers, computer networks, computer resources” – Any laptop, desktop, tablet, computers connected with a server, etc.
2. “Communication devices” – Mobile phones, smartwatches and any device used to call, send messages or emails are covered.
3. “Digital or electronic data storage devices” – This part of the definition covers hard drives, pendrives, external SSDs, memory cards, etc. In short e, every device used to preserve or store data/information covered under this definition.
4. “Used on stand-alone mode or part of a computer system” – This part of the definition covers even the digital devices which are used as a separate device altogether li,ke the mobile phone or a personal laptop.
5. “Linked through a network, or utilised through intermediaries” – So even if your data is not on your own device but handled by another company’s system, it is still covered in the definition. Using Gmail, WhatsApp, Dropbox or your banking app ev, even though Google, Meta or banks store the data, it is still considered part of your “computer ”
6. “For information creation or processing or storage or exchange” – Typing a Word document, storing photos on Google Drive, sending invoices by email,l everything is covered by this definition.
7. “Includes the remote server,r cloud server, or virtual digital space” – This part of the definition confers the maximum powers to the income tax department. Even if nothing is saved on your phone or laptop b, but everything is in the cloud storage s, it can bestill scscrutinisedy the income tax department.

Further, these powers should be understood alongside Section 261(i) which defines “Virtual Digital Space” as “an environment, area or realm, that is constructed and experienced through computer technology and not the physical, tangible world which encompasses any digital realm that allows users to interact, communicate and perform activities using computer systems, computer networks, computer resources, communication devices, cyberspace, internet, worldwide web and emerging technologies, using data and information in the electronic form for creation or storage or exchange and includes––

1. email servers;
2. social media account;
3. online investment account, trading account, banking account,
4. any website used for storing details of ownership of any asset;
5. remote server or cloud servers;
6. digital application platforms; and
7. any other space of similar nature”⁴

These provisions raise concerns that tax authorities may now have wider powers to access personal data stored on cloud servers, online investment platforms, and social media accounts because these are clearly mentioned in the law. The main questions are whether the powers of search and seizure have actually expanded and whether such broad powers violate a person’s right to privacy.⁵

Is the Right to Privacy being compromised here?

The Supreme Court, in the Puttaswamy⁶ case decided by a nine-judge bench, held that the right to privacy is a fundamental right protected under the Constitution of India. This judgment overruled the earlier decision in M.P. Sharma,⁷ which had denied constitutional protection to rigthe ht to privacy. The Court also relied on cases like Canara Bank⁸ wh,, which dealt with search and seizure and held that even when the government has lawful power to search, it must follow proper safeguards so that personal information is not misused or shared with ununauthorisedersons. Later judgments confirmed that privacy is especially important in search and seizure cases and that authorities must record reasons in writing before conducting such actions.⁹

Although section 247 is legally valid and aims to prevent tax evasion, it may not fully satisfy the standards of proportionality and safeguards laid down in Putthe taswamy case (cited supra). The Income Tax Act, 2025 do, es not clearly provide enough procedures to protect an individual’s privacy during searches and seizure.

Section 247 does not clearly explain what “reason to believe” means,s which allows officers too much personal discretion. Courts have said that such reasons must be based on facts and logic and not on guesswork, surmises and suspicion. Courts can also check whether the reasons were dishonest or based on irrelevant material. However, section 249 of the new IT Bill prevents these reasons from being shared even with courts or appellate authorities, es making judicial review almost impossible.

Under the current Section 132 of the Income Tax Act, 1961, searches usually require a SatisfactionNotet,e i.e. approval from senior officers, a search warrant and proper documentation. These searches mainly focus on physical items like cash and documents wi,th only limited use of digital records. Importantly, the law has never allowed full digital searches brto breakncryption take controlrol of entire digital systems.¹⁰

Conclusion

Tax evasion methods have changed with the growth of technologn andd law enforcement agencies must also adapt. Today u undisclosedd wealth may be hidden in encrypted files stored on cloud servers or routed through online platforms, digital wallets and virtual assets. The Income Tax Act, 20,25 correctly recognises that tax officers need modern powers to trace this digital trail. However, it does not lay down clear procedures to protect the privacy of taxpayers. While many countries have updated their laws in similar ways. Most have also built in strong safeguards. The Supreme Court’s ruling in Puttaswamy requires the State to use the least intrusive method to achieve its objective. The new tax law leans more towards surveillance than privacy by granting wide powers without equally strong protections.

Several reforms are necessary in the upcoming Income Tax Act, 2025. First, there should be proper judicial oversight for digital searches, such as requiring warrants in certain situations or allowing post-search judicial rereview so taxpayers can challenge searches on valid grounds. Second, the standard for starting a search should be clearly defined to ensure that minor or routine cases do not result in serious privacy violations. Third, the principle of proportionality must be clearly written into thelaw la w for example,mple if a notice of inquiry can serpurposethe pu,,rpose then a full search of digital devices should not be permitted. Fourth, data protection duties must be expressly stated. Information collected during a search should be used only for that specific investigation and not as general intelligence. Finally, Parliament and civil society must stay aler and d the judicial bodies like CIT(A), ITAT and High Courts may need to limit excessive powers or insist on safeguards where necessary.¹¹

People are more likely to comply with tax laws when they trust that authorities will respect their rights and handle their data responsibly. Excessive powers that can be misused will create fear and may even push economic activity outside the country. The Income Tax Act, 2025, weakens the boundary between lawful investigation and privacy violation, harming honest taxpayers. The fight against tax evasion does not require sacrificing fundamental rights. Without proper checks and balances,s a law meant to ensure financial accountability can turn into a tool for surveillance and control.¹²

¹ Frontline, Income Tax Act 2025: Digital Search Powers Raise Privacy Risks, The Hindu (Aug. 30, 2025)

² Income-Tax Bill, 2025, Bill No. 104 of 2025 (India), introduced in Lok Sabha, Feb. 13, 2025 (as revised and passed Aug. 11–12, 2025)

³ Income-Tax Bill, 2025, Bill No. 104 of 2025 (India), introduced in Lok Sabha, Feb. 13, 2025 (as revised and passed Aug. 11–12, 2025)

⁴ Suvarna Mandal & Akshobhya Reddy, The Digital Trail: What the Draft Income Tax Bill, 2025 Means for Privacy and Search, Sai Krishna & Associates (Aug. 2025)

⁵ Lokesh Shah, Shreya Suri & Abhijit Chakrabarti, ‘Virtual Digital Space’ Under the Income-Tax (No. 2) Bill, 2025: Another Onslaught on the Right to Privacy?, CMS INDUSLAW (Aug. 20, 2025)

⁶ Justice K.S. Puttaswamy (Retd.) v. Union of India, (2017) 10 S.C.C. 1 (India)

⁷ M.P. Sharma v. Satish Chandra, Dist. Magistrate, (1954) S.C.R. 1077 (India).

⁸ District Registrar & Collector, Hyderabad v. Canara Bank, (2005) 1 S.C.C. 496 (India).

⁹ Lokesh Shah, Shreya Suri & Abhijit Chakrabarti, ‘Virtual Digital Space’ Under the Income-Tax (No. 2) Bill, 2025: Another Onslaught on the Right to Privacy?, CMS INDUSLAW (Aug. 20, 2025)

¹⁰ Suvarna Mandal & Akshobhya Reddy, The Digital Trail: What the Draft Income Tax Bill, 2025 Means for Privacy and Search, Sai Krishna & Associates (Aug. 2025)

¹¹ Apar Gupta, Indumugi C. & Naman Kumar, India’s New Tax Law Raids Your Cloud, Internet Freedom Foundation (Sept. 3, 2025)

¹² ibid