Finance Minister Nirmala Sitharaman announced that a new Direct Tax Code (DTC), designed to simplify compliance for individual taxpayers, will be introduced next week alongside the Union Budget 2025. The proposed law is expected to be easier to understand and reduce tax-related litigation.
As part of the budget, Sitharaman also offered substantial relief for India’s low-income earners, stating that no income tax would be applicable for earnings up to ₹12.75 lakh (including standard deductions) under the new tax regime.
Reports earlier this week suggested that the new tax code might be introduced during this Parliament session. The idea of a direct tax code was first raised in July when Sitharaman presented the 2024/25 Budget. Her goal is to simplify existing tax laws and reduce the Income Tax Act of 1961 by 60%, significantly trimming its 23 chapters and 298 sections.
Before this announcement, the Central Board of Direct Taxes (CBDT) formed an internal committee to oversee the review of the Act, including 22 sub-committees focused on various aspects of the law. The government also invited public input from stakeholders and experts, gathering over 7,000 responses by January.
How Will the DTC Differ from the I-T Act?
The new Direct Tax Code aims to simplify tax laws by reducing the complexity that has grown over the years due to numerous amendments to the Income Tax Act, 1961. The 1961 Act, with its 23 chapters and 298 sections, will likely see a significant reduction in length.
One of the key changes may be the elimination of the concepts of Financial Year (FY) and Assessment Year (AY), which have often caused confusion. The DTC may also introduce a 5% tax on income from LIC policies, which was previously exempt under the 1961 Act.
Also Read- 5 Income Tax Changes to Expect from Budget 2025
Additionally, while tax audits are currently only allowed by Chartered Accountants, the DTC may expand this role to include company secretaries and cost management accountants.
The tax on dividend income, currently taxed at varying slab rates, may be standardized at 15%. High-income earners could also face a uniform tax rate of 35%, replacing the current system of surcharges on top of the 30% tax rate.
For capital gains, the DTC may remove the differences in taxation across various asset classes.
The Direct Tax Code may also streamline tax regimes by eliminating the option to choose between different tax systems and reducing deductions and exemptions, following the pattern of the new income tax regime.