Direct Tax Code 2025

The direct tax code (DTC) is a proposed legislative reform aimed at replacing the Income Tax Act of 1961 in India. Its primary objective is to simplify the tax system by reducing exemptions and deductions, making tax compliance easier for individuals and businesses. The DTC is expected to modernise India’s tax laws, encouraging transparency and increasing the taxpayer base. Set to take effect in 2025, the DTC introduces key reforms in tax structures and compliance procedures, ensuring greater clarity and efficiency.

Direct tax code 2025 latest update

Individuals earning up to Rs. 15 lakh will benefit more from new tax laws, feel experts

The Direct Tax Code 2025 proposes revamped tax slabs, providing significant relief to middle-income earners. Individuals with annual earnings up to Rs. 15 lakh are likely to see a reduction in their effective tax rates, making the new tax regime more favourable. Experts highlight the streamlined compliance processes, reduced complexities, and simplified filing system as game changers.

The focus on expanding tax rebates and introducing lower rates for income brackets up to Rs. 15 lakh aims to increase disposable income and stimulate economic growth. Furthermore, enhanced provisions for deductions and exemptions are anticipated to promote long-term savings and investments. These updates cater to the aspirations of middle-class taxpayers while ensuring the government’s revenue goals are met through improved compliance. As experts observe, these changes align with global tax reforms and are likely to boost confidence among taxpayers.

What is direct tax code?

The direct tax code refers to India’s legislative effort to reform its outdated tax system. By replacing the Income Tax Act of 1961, the DTC seeks to simplify tax regulations, reduce complexity, and make tax compliance more transparent. The code introduces a streamlined approach to calculating taxes, eliminating many of the exemptions and deductions that previously complicated the process. The DTC aims to increase voluntary compliance and minimise tax disputes, thereby ensuring a more efficient tax system for both individuals and businesses.

Highlights of the direct tax code bill

The Direct Tax Code 2025 introduces transformative changes aimed at tax simplification and better compliance:

• Revised income tax slabs: Reduced rates for middle-income taxpayers, especially those earning up to Rs. 15 lakh.
• Focus on digital compliance: Enhances transparency and reduces paperwork through digital filing.
• Consolidation of deductions: Simplifies exemptions and deductions into uniform categories.
• Corporate tax reforms: Lowers rates for SMEs to boost business growth.
• Alignment with global standards: Implements measures to prevent tax evasion and double taxation.
• Special focus on ease of filing: Aims to benefit individual taxpayers and improve compliance.
  This Bill is expected to reshape tax structures, offering relief to individuals and businesses alike while supporting government revenue generation.

Why was direct tax code 2025 introduced?

The direct tax code 2025 was introduced to address the growing complexity of India’s tax system. The Income Tax Act of 1961 had become overly complicated due to numerous amendments over the years. The government recognised the need for simpler, more transparent tax regulations that would increase the taxpayer base and improve compliance. By implementing the DTC 2025, the government aims to broaden the tax net, simplify the tax filing process, and reduce tax evasion, while making the system more equitable for all taxpayers.

Also read: Income Tax Slabs for FY 24-25

Background and need for the direct tax code

India’s tax laws, governed by the Income Tax Act of 1961, had become complicated due to frequent amendments and the inclusion of numerous exemptions and deductions. This made tax compliance challenging for both taxpayers and administrators. The direct tax code was proposed to streamline and simplify these laws, making them easier to understand and follow. The new system addresses the need for transparency, reduces litigation, and encourages better compliance by offering a more straightforward tax structure.

Key features of the direct tax code

The direct tax code introduces several important features aimed at modernising India’s tax system. These include simplification of tax structure, rationalisation of tax rates, increased compliance, and changes to wealth and capital gains taxes. Below are the key features:

Simplification of tax structure

The direct tax code simplifies the existing tax structure by reducing the number of exemptions and deductions. This broadens the tax base and makes the tax system more transparent and easier to navigate. The elimination of complex rules and provisions ensures that taxpayers can file returns with greater clarity. The simplified structure also helps reduce tax evasion, as fewer loopholes exist for individuals and companies to exploit.

Also read: Income tax return extended date for AY 2024-25

Rationalisation of tax rates

The direct tax code proposes rationalised tax rates to align with global standards, making India more competitive for businesses. For both domestic and foreign companies, the DTC introduces a unified tax rate, simplifying compliance for multinational corporations. Individual tax slabs are also revised to offer relief to middle-income earners while ensuring that higher-income earners contribute proportionally. This rationalisation encourages better tax compliance and reduces the burden of filing taxes for different income groups.

Increased compliance and reduced litigation

The direct tax code focuses on increasing compliance by simplifying tax laws and reducing the scope for disputes. By eliminating complex exemptions and deductions, the DTC makes it easier for taxpayers to understand their obligations. This approach not only boosts voluntary compliance but also reduces litigation between taxpayers and authorities. The streamlined process and clear guidelines reduce the need for lengthy legal battles, ensuring that tax disputes are resolved more efficiently.

Taxation of foreign income

The direct tax code introduces clear provisions for the taxation of foreign income earned by Indian residents. Under the new system, all global income of residents will be taxed in India, regardless of where it is earned. This shift from source-based taxation to residence-based taxation aligns India’s tax laws with international practices. The DTC removes ambiguities regarding foreign income, ensuring that individuals with global interests can comply with Indian tax laws more easily.

Wealth tax and capital gains tax

The direct tax code makes significant changes to the treatment of wealth tax and capital gains tax. Wealth tax is abolished, simplifying tax compliance for high-net-worth individuals. The DTC also alters the way capital gains are taxed, with the holding period of assets being a key factor in determining tax rates. Short-term capital gains may attract higher rates, while long-term gains are taxed at a lower rate. These changes ensure that the tax system is fairer and encourages long-term investment.

Minimum alternate tax (MAT)

The direct tax code revises the minimum alternate tax (MAT) to ensure that companies declaring low taxable income but reporting profits contribute a fair share of taxes. By introducing a more structured MAT framework, the DTC ensures that all profitable companies, including those using tax-saving measures, pay a minimum level of tax. This provision encourages transparency in corporate accounting and prevents companies from avoiding taxes through creative accounting methods.

Anti-avoidance rules

The direct tax code includes general anti-avoidance rules (GAAR) to curb aggressive tax planning and avoid loopholes. These rules allow tax authorities to investigate and deny tax benefits for transactions that lack substantial commercial purpose beyond achieving tax advantages. The inclusion of GAAR aims to reduce tax evasion and ensure that the tax system is fair. By cracking down on artificial transactions designed solely for tax benefits, the DTC ensures a more equitable tax environment.

Residence-based taxation

The direct tax code shifts India’s taxation system from a source-based to a residence-based model, meaning that Indian residents will be taxed on their global income. This approach ensures that residents, regardless of where their income is earned, contribute to India’s tax base. The new system simplifies the taxation of foreign income and brings India in line with global tax standards, reducing confusion and making compliance easier for residents with international earnings.

Also read: Long Term Capital Gain Tax on Property

Major changes in direct tax code 2025

The direct tax code 2025 introduces key reforms aimed at simplifying tax regulations and expanding the taxpayer base. Changes include streamlined residential status classification, removal of outdated tax year concepts, new capital gains taxation methods, and unified corporate tax rates. These reforms are designed to increase transparency and compliance, reduce litigation, and make tax filing easier for both individuals and businesses. By reducing exemptions and deductions, the DTC seeks to create a more equitable tax environment.

Simplified residential status

The direct tax code 2025 simplifies the classification of taxpayers by removing complex categories like "Resident but Not Ordinarily Resident." Taxpayers will now be classified as either residents or non-residents, making it easier to determine tax obligations based on residential status. This simplification reduces confusion and ensures taxpayers are clear about their status under the tax code. By streamlining the rules for residency, the DTC improves clarity and compliance, particularly for individuals with complex living arrangements or those who work abroad.

Removal of assessment year and previous year concepts

One of the key reforms under the direct tax code 2025 is the removal of the concepts of assessment year and previous year. Tax filings will now be based solely on the financial year, simplifying the process and aligning it with modern accounting practices. This change reduces confusion for taxpayers, who previously had to deal with multiple terms when filing taxes. By focusing on the financial year, the DTC ensures that tax filings are straightforward and consistent with the financial reporting period.

Changes in capital gains taxation

Under the direct tax code 2025, capital gains will be included as part of normal income, potentially subjecting them to higher tax rates. Previously, capital gains were taxed separately, often at lower rates. This change simplifies the tax system by consolidating different forms of income under one structure. While it may result in higher taxes for some, the inclusion of capital gains in normal income aims to reduce tax planning and ensure a fairer distribution of the tax burden across different income types.

New definitions for income categories

The direct tax code 2025 introduces new terminology for income categories to reflect modern income structures. "Income from Salary" is now referred to as employment income, while "Income from Other Sources" becomes income from residuary sources. These changes make it easier for taxpayers to understand and categorise their income, reducing ambiguity in tax filings. The updated definitions reflect a more modern approach to categorising income, ensuring clarity and simplicity for taxpayers, especially those with multiple income streams.

Unified tax rates for companies

The direct tax code 2025 introduces unified tax rates for both domestic and foreign companies. This reform simplifies the tax process for multinational corporations operating in India, ensuring that all companies are taxed at the same rate, regardless of their origin. The aim is to make India more attractive for foreign investment by creating a level playing field. By unifying tax rates, the DTC reduces complexity in corporate tax filings and makes compliance easier for businesses operating across borders.

Reduction in deductions and exemptions

The direct tax code 2025 reduces the number of deductions and exemptions available to taxpayers. This move simplifies the tax filing process, as fewer exemptions mean less room for tax avoidance and complex calculations. By streamlining the system, the DTC aims to create a more equitable tax environment where everyone contributes their fair share. The reduction in deductions and exemptions also makes it easier for taxpayers to file returns without needing to navigate numerous exceptions and special cases.

Tax audit changes

The direct tax code 2025 introduces changes to tax audit rules, allowing not only chartered accountants but also company secretaries and cost and management accountants to conduct tax audits. This expands the pool of qualified professionals who can carry out audits, making the process more accessible and efficient for businesses. By widening the scope of professionals authorised to conduct audits, the DTC ensures that more businesses can comply with audit requirements, reducing bottlenecks in the system.

TDS and TCS on most income

The direct tax code 2025 expands the application of tax deducted at source (TDS) and tax collected at source (TCS) to cover most forms of income. This change ensures that taxes are collected regularly and at the point of income generation, rather than relying solely on year-end filings. By applying TDS and TCS to a broader range of income sources, the DTC improves the efficiency of tax collection and reduces the risk of tax evasion, ensuring a more consistent flow of revenue to the government.

Simplified structure

The direct tax code 2025 reduces the number of sections in the tax code while increasing the number of schedules to provide more clarity and structure. By simplifying the layout and removing unnecessary complexity, the DTC makes it easier for taxpayers to navigate the tax code and comply with their obligations. This simplified structure reduces cross-referencing and makes the code more user-friendly, ensuring that taxpayers can understand and fulfil their responsibilities without needing to interpret overly complex legal language.

Impact on political parties

Despite the many changes introduced by the direct tax code 2025, political parties remain exempt from taxation. This provision has raised concerns among taxpayers, as the DTC aims to reduce exemptions for individuals and businesses. Some argue that political parties should also contribute to the tax system, given the focus on expanding the tax base and improving compliance across other sectors. The continued exemption for political parties remains a point of debate, as the code seeks to create a more equitable tax environment.

Also read: How to Calculate Capital Gains Tax on Mutual Funds

Purpose of direct tax code

• Simplify India’s direct tax system by consolidating laws into one framework.
• Eliminate excessive exemptions and deductions.
• Enhance tax compliance with clear and transparent rules.
• Reduce litigation and tax disputes.
• Modernise the tax structure to align with international practices.
• Ensure equitable taxation and broaden the tax base.

Challenges and criticisms

The direct tax code faces challenges in implementation, transition complexities, political resistance, and concerns about economic impact. While it aims to simplify the tax system, stakeholders have raised concerns about the practical execution and its potential effects on growth and investments.

Implementation issues

The direct tax code requires substantial adjustments from taxpayers, tax professionals, and authorities. Implementing the code involves training, updating administrative systems, and ensuring smooth operations during the transition. These changes may initially create confusion and delays, impacting overall compliance.

Complexity in transition

Shifting from the current Income Tax Act to the direct tax code introduces complexities in transitioning to new rules and terms. Taxpayers and administrators must adapt, and extensive re-education is required to ensure smooth compliance. The risk of misunderstanding new obligations can disrupt compliance in the short term.

Political and legislative hurdles

The direct tax code has encountered significant political and legislative challenges, delaying its implementation. Various stakeholders, including businesses and political entities, have expressed concerns over its impact, especially on existing tax benefits. Balancing these interests has prolonged its adoption process.

Economic considerations

Certain provisions in the direct tax code, such as changes in capital gains and wealth tax, may affect investment and economic growth. Critics argue that increasing tax burdens on investments might deter foreign investments and limit economic growth, requiring careful consideration in policy implementation.

Also read: What Is Compound Annual Growth Rate (CAGR)

Tax structure under direct tax code 2025

• The Direct Tax Code (DTC) 2025 proposes a revised income tax slab system, aiming to simplify taxation for individuals and corporate entities.
• Individual income tax is streamlined, with fewer tax brackets and competitive rates designed to enhance compliance and reduce evasion.
• Corporate tax rates are aligned to foster a business-friendly environment, with exemptions for sectors fostering innovation, sustainable practices, and infrastructure.
• The code eliminates several existing deductions, favouring a standard deduction model for individual taxpayers.
• Focuses on enhanced transparency, leveraging digitalisation for accurate, hassle-free filing processes and quicker refunds.
• Introduces specific anti-avoidance rules (GAAR) to prevent tax evasion through artificial arrangements.
• Encourages investment in specified sectors by offering limited tax incentives.
• Aligns capital gains tax rates with income tax slabs, introducing consistency in tax liability across asset classes.
• Emphasises dispute resolution mechanisms to reduce litigation and expedite tax dispute settlements.

Evolution of direct tax code

• The concept of a Direct Tax Code (DTC) was first introduced in 2009 to simplify and consolidate direct tax laws in India.
• It aimed to replace the Income Tax Act of 1961 with clearer, modern tax regulations.
• Over the years, various DTC drafts proposed changes in tax slabs, corporate taxation, and deductions to align with global standards.
• The 2010 draft received feedback, leading to revisions emphasising transparency and ease of compliance.
• In 2017, further recommendations included reducing litigation and improving taxpayer services.
• The Direct Tax Code 2025 marks the latest attempt, focusing on simplification, digitalisation, and taxpayer-friendly reforms.

Budget 2025 may usher in major overhaul with Direct Tax Code reforms

Budget 2025 is poised to introduce landmark reforms under the Direct Tax Code (DTC), signalling a progressive shift in India’s tax structure. Key highlights include revamped tax slabs aimed at reducing the financial burden on middle-income earners and promoting economic equity. The new framework proposes tax rebates for individuals earning up to Rs. 15 lakh annually, making the new regime particularly advantageous for this demographic.

The reforms focus on simplifying compliance procedures, introducing digital platforms for seamless tax filing, and consolidating deductions into streamlined categories. Additionally, the corporate tax structure is set to encourage small and medium enterprises (SMEs) with lower rates, fostering growth and innovation.

By aligning with international best practices, the DTC aims to curtail tax evasion and broaden the tax base. With these reforms, Budget 2025 seeks to balance fiscal responsibility with economic inclusivity, enhancing ease of compliance for taxpayers while supporting long-term economic growth.

Key takeaways

• The Direct Tax Code (DTC) was introduced in 2009 to simplify India’s direct tax laws.
• DTC aimed to replace the Income Tax Act, 1961, with a modernised tax framework.
• Key proposals in drafts included adjustments to tax slabs, corporate taxes, and streamlined deductions.
• Revisions in 2010 and 2017 focused on transparency, compliance ease, and reduced litigation.
• The latest DTC in 2025 emphasises digitalisation and taxpayer-friendly reforms.
• Overall, the DTC evolution reflects India’s drive towards a simplified, efficient tax system aligned with global standards.

Conclusion

The direct tax code represents a significant reform aimed at simplifying and modernising India’s tax system. Though challenges remain in terms of political approval and economic impact, its long-term benefits include increased transparency, improved compliance, and a fairer taxation process. Implementing the code will be crucial for India’s economic growth and equitable taxation system.