Direct Tax Code 2025: New Income Tax Law Update

Approved by the Union Cabinet, the Bill will be introduced in the Lok Sabha by Finance Minister Nirmala Sitharaman today i.e. 13th February, 2025 and reviewed by a House panel. The legislation, first announced in the July 2024 Budget, will not impose new taxes but will streamline existing laws, cut legal complexities, reduce litigation, and be 50% shorter than the current law.

Key Features of the Income Tax Act, 2025

1. Simplified Language and Structure: The Act employs clearer and more concise language, reducing the length of the legislation from 880 to 622 pages. This simplification is expected to make the law more understandable for taxpayers and reduce reliance on legal experts.
2. Introduction of ‘Tax Year’: The Act introduces the concept of a ‘tax year,’ defined as the 12-month period beginning from April 1. For new businesses or professions, the tax year starts from the date of establishment and ends on March 31. This replaces the previous ‘assessment year’ system, aiming to streamline tax reporting.
3. Elimination of Obsolete Provisions: Outdated sections and explanations have been removed to reduce complexity and potential ambiguities, thereby minimizing legal disputes.
4. Enhanced Clarity on Digital Assets: The Act includes specific provisions for virtual digital assets, categorizing them as part of undisclosed income during searches. This move aims to address the evolving digital economy and ensure appropriate taxation of digital transactions.
5. Consolidation of Deductions: Deductions from salaries, such as standard deductions, gratuity, and leave encashment, have been consolidated into a single section. This reorganization simplifies the process for taxpayers to identify and claim applicable deductions.

The Union Cabinet approved the Income Tax Bill, 2025, and it was introduced in the Lok Sabha on February 13, 2025. Following its introduction, the Bill is expected to be referred to a parliamentary committee for detailed examination. After incorporating recommendations, the government will finalize the rollout date. Given the comprehensive nature of the overhaul, the new Act is anticipated to come into effect from the financial year 2025-26.

This reform represents a pivotal step towards a more transparent and efficient tax system in India, aiming to foster voluntary compliance and reduce legal disputes.

The Direct Tax Code 2025

The DTC 2025 is set to replace the Income Tax Act of 1961, introducing a more streamlined and transparent tax structure. The primary objectives of this reform are to reduce complexities, minimize ambiguities, and create a tax environment that is both taxpayer-friendly and conducive to economic growth.

Implementation Timeline DTC 2025

The journey towards the DTC 2025 has been extensive:

• 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 2025 is expected to be implemented from the financial year 2025-26, marking a new era in India’s taxation landscape.

Key Features of the DTC 2025

The Direct Tax Code (DTC) 2025 introduces significant reforms aimed at simplifying and modernizing India’s tax system. Key changes include:

1. Simplified Tax Structure:

• The DTC reduces the number of complex sections, utilizing schedules to streamline tax filing, making it more accessible for individuals and businesses.
• By reducing the number of sections and incorporating more schedules, the code aims to make tax filing more straightforward for individuals and businesses alike.

2. Redefinition of Residential Status:

• Taxpayers are now classified as either residents or non-residents, eliminating the previous categories of Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR).

3. Unified Capital Gains Taxation:

• Capital gains are taxed as regular income. Short-term gains on financial assets are taxed at 20% (up from 15%), while long-term gains are taxed at 12.5% (down from 20%).

4. Broader Scope for TDS and TCS:

• Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) now apply to nearly all forms of income, ensuring timely tax payments and reducing evasion. The TDS rate for many transactions has decreased from 5% to 2%, and for e-commerce operators, from 1% to 0.1%.

5. Fewer Deductions and Exemptions:

• Many existing deductions and exemptions have been reduced or eliminated to close loopholes, enhancing transparency and equity. However, the standard deduction for salaried employees has increased by 50% to ₹75,000.

6. Renamed Income Categories:

• The DTC provides updated definitions for various income categories, including salaries, business profits, and capital gains, to reduce ambiguities and improve clarity.
• “Income from Salary” is now termed “Employment Income,” and “Income from Other Sources” is renamed “Income from Residuary Sources,” providing clearer definitions.

7. Expanded Tax Audit Roles:

• In addition to Chartered Accountants (CAs), Company Secretaries (CS) and Cost and Management Accountants (CMAs) are now authorized to conduct tax audits, increasing accessibility.

8. Standardized Company Tax Rates:

• Domestic and foreign companies now face a unified tax rate, simplifying compliance and potentially encouraging more foreign investment.
• In a bid to attract more foreign investment, the DTC 2025 proposes a uniform tax rate for both domestic and foreign companies. This move is expected to level the playing field and make India a more appealing destination for international businesses.

9. Removal of Surcharge

The DTC 2025 plans to eliminate the surcharge currently levied on income tax, simplifying the tax structure and potentially reducing the tax burden on higher-income individuals and corporations.

10. Modernization and Transparency:

By updating definitions and tax structures, the DTC seeks to create a more transparent and efficient tax environment.

These reforms aim to create a clearer, more efficient tax system that benefits both taxpayers and the government.

Frequently Asked Questions

What is the Direct Tax Code 2025?

The Direct Tax Code (DTC) 2025 is a proposal to simplify India’s tax system by replacing the outdated Income Tax Act of 1961. It aims to streamline income tax rules, reduce complexity, and introduce clearer tax brackets. The new code is expected to be easier for individuals and businesses to navigate, with changes in exemptions, deductions, and tax slabs, making the process more transparent and efficient.

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What will tax rates be in 2025?

The tax rates under the Direct Tax Code (DTC) 2025 are expected to be more simplified, with lower rates for individuals and a streamlined process. The new system might reduce income tax slabs and provide greater clarity on tax exemptions, though the exact details will be confirmed closer to implementation.

What is the DTC in income tax?

The Direct Tax Code (DTC) is a proposed overhaul of India’s income tax system, aiming to simplify tax laws, reduce ambiguities, and improve compliance. It seeks to replace the current Income Tax Act of 1961. Key features include revised tax brackets, changes to capital gains, and simplified filing processes. The goal is to create a tax system that is more transparent and efficient.

Will the old tax regime be discontinued in 2025?

No, the old tax regime is not expected to be discontinued in 2025. Taxpayers will still have the option to choose between the old tax regime with deductions and exemptions, and the new tax regime, which offers lower tax rates without exemptions. The Direct Tax Code (DTC) aims to simplify the process but does not mandate the discontinuation of the old regime.