Have you ever struggled to understand the complicated terminology surrounding Income Tax, along with the various exemptions and deductions linked to it? To make taxation more straightforward and accessible for everyone, from those with little financial knowledge to seasoned professionals, the government has introduced the new Direct Tax Code.
Unveiled by Finance Minister Nirmala Sitharaman on August 21, 2024, the Direct Tax Code aims to simplify laws, promote consistent tax rates for businesses, and decrease legal disputes. Although discussions surrounding it have been ongoing since 2009, it is set to be implemented in the next six months, replacing the original Income Tax Act of 1961.
In this comprehensive blog, let’s break down the newly introduced Direct Tax Code 2025, exploring its key features, objectives, tax structure, and how it differs from the existing Income Tax Act of 1961.
What is Direct Tax Code (DTC)?
The full form of DTC is Direct Tax Code. The Direct Tax Code is intended to simplify the existing tax system and make it easier, more transparent, and modern. The Direct Tax Code 2025 will replace the Income Tax Act of 1961, simplifying the current tax system by reducing complexity and eliminating redundant exemptions and deductions. It will take effect from the financial year 2025-26. The new code reduces legal disputes, simplifies the existing complex laws, and encourages better tax compliance.
The first draft of the Direct Tax Code was prepared in 2009 and was introduced in the parliament in 2010. Since 2010, feedback has been collected from stakeholders and will be introduced finally in the next 6 months as said by the Finance Minister, Nirmala Sitharaman.
Evolution of Direct Tax Code
Timeline of the Direct Tax Code (DTC) Development:
- 2009: The first draft of the DTC was proposed to replace the Income Tax Act.
- 2010: A revised discussion paper was released, leading to the introduction of the Direct Tax Code Bill in the Lok Sabha.
- 2013: The DTC was revised based on feedback from various stakeholders.
- 2017: A six-member task force was formed to draft a new Direct Tax Law.
- 2024: Finance Minister Nirmala Sitharaman announced that the DTC would be introduced soon.
- 2025: The DTC is expected to be implemented alongside the Budget for 2025.
Goals of Direct Tax Code
- Simplify tax rules to make them easier to understand.
- Increase the number of taxpayers from 1% to 7.5% of the population.
- Make it easier for people to follow and comply with tax regulations.
- Reduce legal disputes by clarifying tax laws.
Tax Structure Under Direct Tax Code 2025
- The Direct Tax Code 2025 is designed to make India’s tax system easier to understand and follow. It reduces the number of sections and adds more schedules, making tax filing simpler for everyone.
- Taxpayers are now classified as either residents or non-residents. Confusing terms like ROR, RNOR (Resident but Not Ordinarily Resident) are being removed.
- Most deductions and exemptions are being removed to close loopholes and streamline the process, making the tax system fairer and more transparent.
- TDS (Tax Deducted at Source) or TCS (Tax Collected at Source) will now apply to almost all income types, ensuring more regular tax payments and helping to prevent tax evasion.
- Capital gains will be taxed as regular income, which might mean higher taxes for some, but it ensures all types of income are treated equally.
Major Changes in Direct Tax Code 2025
- Removal of Assessment and Previous Year Concepts: The code removes the terms “Assessment Year” and “Previous Year”. Only the term- “Financial Year” will be applicable for tax filing.
- Capital Gains Tax Changes: Capital gains will be taxed as regular income. Short-term gains on financial assets will be taxed at 20% (up from 15%), while long-term gains will be taxed at 12.5% (down from 20%).
- Simplified Residential Status: Taxpayers will be classified as either residents or non-residents, eliminating the RNOR (Resident but Not Ordinarily Resident) category.
- New Income Category Names: “Income from Salary” is now called “Employment Income,” and “Income from Other Sources” is renamed “Income from Residuary Sources.”
- Expanded Tax Audit Roles: Company Secretaries (CS) and Cost and Management Accountants (CMA) may now be allowed to conduct tax audits, which was previously limited to Chartered Accountants (CAs), making tax audits more accessible.
- Unified Company Tax Rates: Both domestic and foreign companies will now pay the same tax rate, making compliance easier and encouraging foreign investment.
- TDS and TCS on Most Income: Under the new tax system, Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) will apply to nearly all types of income. This ensures taxes are paid more regularly. The TDS rate for many payments will drop from 5% to 2%. For e-commerce operators, the TDS rate will significantly decrease from 1% to 0.1%, offering relief to taxpayers and simplifying compliance for e-commerce businesses.
- Fewer Deductions and Exemptions: Most deductions and exemptions will be removed, streamlining tax filing. However, the standard deduction for salaried employees in the new tax regime has increased to ₹75,000, a 50% rise.
How is Direct Tax Code Different from Income Tax Act?
| Parameters | Income Tax Act, 1961 | Direct Tax Code, 2025 |
|---|---|---|
| Residential Status | ROR (Resident and Ordinarily Resident), RNOR (Resident but Not Ordinarily Resident), NR (Non-Resident) | Resident and Non Resident |
| Tax Audit | Conducted by Chartered Accountant (CA) | Conducted by CA, CS, and CMA |
| Concept Terms | Both terms- ‘Previous Year’ and ‘Assessment Year’ are applicable | Only ‘Financial Year’ would be used |
| Taxation on Dividends | Divident Distribution Tax @ 15% | Taxed @ 15% without DDT |
| Tax on Distributed Income | Income from LIC, mutual fund, etc are exempted | Taxable @ 5% |
| Tax Rate for Income above 10 crore | 30% + surcharge @ 15% | Taxable @ 35% |
| Capital Gains | Capital Gains are taxable at a Special Rate | Capital Gains will become part of Normal Income |
| Heads of Income Names | Income from Salary, Income from Other Sources | Renamed as Employment Income, Income from Residuary Sources |
| Sections and Subsections | 298 Sections, several sub-sections, clauses, and sub-clauses, and 14 schedules | Remove all clauses and sub-clauses. Consists of only 319 sections and 22 schedules. |
What is the DTC income tax?
The DTC income tax is Direct Taxes Code. The government intends to simplify India’s direct tax laws by introducing the Direct Taxes Code (DTC), which will replace the Income Tax Act of 1961.
Which act will be replaced by a direct tax code?
The Direct Tax Code is designed to replace the current Income Tax Act 1961 and encompasses all tax categories, including corporate and personal income taxes.
What are the benefits of direct tax code?
Benefits of direct tax code include simplifying and consolidating all direct tax laws of the central government, enhancing the effectiveness and efficiency of the tax system, ensuring fairness, improving compliance by making tax laws simple and stable, and reducing the number of exemptions and deductions to broaden the tax base.