India is on the brink of a major tax reform. The government is preparing to introduce the Direct Tax Code (DTC) 2025, which aims to replace the archaic Income Tax Act of 1961 with a modern, streamlined, and simplified taxation system. While the Income Tax Act has served the country for over six decades, it’s become overly complex and outdated in today’s digital, fast-paced economy.
The new Direct Tax Code is expected to be tabled in the Union Budget 2025 by Finance Minister Nirmala Sitharaman, signaling a significant overhaul in how income tax is understood, applied, and managed in India. This article explores the DTC’s historical evolution, proposed structural changes, and what it means for taxpayers and businesses alike.
A Long Road: The History of the Direct Tax Code
The journey of the Direct Tax Code began in 2009, when the first draft and concept paper were released by the Ministry of Finance. In 2010, then-Finance Minister P. Chidambaram introduced the DTC Bill in Lok Sabha. However, after multiple revisions, the bill was eventually shelved due to political transitions and resistance to sweeping tax changes.
A fresh push came in 2017 when a six-member task force was appointed to draft a modern direct tax law aligned with global best practices. Fast forward to 2024, the current government announced its intention to implement the DTC in 2025, marking a new beginning in India’s direct taxation framework.
Key Features of the Direct Tax Code 2025
The DTC 2025 proposes several sweeping reforms aimed at simplifying tax compliance, broadening the tax base, and easing the burden on middle-class taxpayers. Here’s a look at its major features:
1. Simplified Income Heads
- The DTC reduces the number of income categories to just two:
- Income from Employment (including salary, allowances, and perks)
- Income from Residuary Sources (including capital gains, interest, dividends, etc.)
This change is intended to make tax filing easier and more intuitive for individuals.
2. Removal of Deductions & Exemptions
- Unlike the current regime that is packed with deductions (Section 80C, 80D, etc.) and exemptions (HRA, LTA, etc.), the DTC proposes a “zero-exemption, zero-deduction” model, aiming to ensure clarity and fairness. It mirrors the government’s push toward the new tax regime introduced earlier.
3. Unified Tax Rates for Companies
- The DTC will likely eliminate the differential tax treatment for domestic and foreign companies, offering uniform corporate tax rates. This could improve India’s attractiveness as an investment destination.
4. Wider TDS and TCS Applicability
- The code proposes a broader application of TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) to reduce tax evasion. These will be applicable to more transaction types and collected at the source of income.
5. Faceless and Technology-Driven Taxation
- The new system will continue to promote faceless assessments, reducing human intervention and improving transparency in scrutiny and processing.
Comparison: Income Tax Act 1961 vs. Direct Tax Code 2025
| Feature | Income Tax Act, 1961 | Direct Tax Code, 2025 |
| Number of Sections | 298 Sections, 14 Schedules | 298 Sections, 14 Schedules |
| Heads of Income | 5 major heads | Only 2 (Employment & Residuary) |
| Capital Gains Tax | Taxed at special rates | No special rate – part of regular income |
| Deductions & Exemptions | Extensive | Almost none |
| LIC Maturity | Generally exempt | Taxed at 5% (proposed) |
| Audit Eligibility | CA only | Likely extended to CMA and CS |
| Residential Status | 3 categories | Reduced to 2 – Resident & Non-resident |
| Year Concept | Assessment & Previous Year | Unified: Financial Year only |
Why Is This Reform Important?
Easier to Understand for Common Taxpayers
The current Income Tax Act is complex and full of legal jargon, making it difficult for the average taxpayer to understand. The DTC aims to simplify compliance for both individuals and small businesses.
Reduction of Middle-Class Tax Burden
Government data shows that less than 2% of India’s population pays income tax. The new system seeks to increase tax participation to around 7%, which could distribute the burden more fairly and potentially reduce rates for the middle class.
Boost to Compliance and Enforcement
With digital tracking, broader TDS/TCS rules, and the use of AI and automation, the DTC will make it harder to evade taxes and easier for honest taxpayers to stay compliant.
What Stays the Same?
Interestingly, some aspects remain untouched:
- Income of political parties remains tax-exempt, similar to the current law.
- High-income individuals may still face effective tax rates up to 35%, although surcharges might be removed, simplifying rate structures.
Expected Timeline
Here’s how the DTC has evolved over the years:
- 2009: First draft and concept paper released
- 2010: DTC Bill introduced in Lok Sabha
- 2012: Standing Committee presented its report
- 2017: Task force to draft new code set up
- 2024: Announcement of DTC in pipeline
- 2025: Expected introduction with Union Budget
Conclusion: A New Era in Taxation
The Direct Tax Code 2025 marks a monumental shift in India’s taxation landscape. By replacing a six-decade-old law with a clean, minimal, and efficient system, the DTC intends to empower taxpayers, increase transparency, and modernize the way taxes are collected and administered in India.
While the final shape of the bill will be known only in Budget 2025, one thing is clear: the government is committed to making India’s tax system simpler, fairer, and more future-ready. Taxpayers—individuals and businesses alike—should start preparing for this change, reviewing their financial planning, and understanding how the DTC will impact them.
