The Upcoming Shift DTC 2025: Goodbye Income Tax Act, Hello Direct Tax Code

Hello everyone! How are you all doing? I am Naushad Ahmad, a Financial Consultant. Today, I bring you an important update on a hot topic that’s going to reshape the landscape of taxation in India: the abolition of the Income Tax Act and the introduction of the Direct Tax Code (DTC 2025).

The End of an Era: The Income Tax Act

The Income Tax Act has been a cornerstone of India’s tax system for decades. However, it’s now outdated and overly complex, with numerous exemptions, deductions, multiple tax rates, and a labyrinth of special rules. This complexity has made compliance difficult for many taxpayers, leading to widespread confusion and avoidance. Recognizing these challenges, the government has decided that it’s time for a change.

Enter the Direct Tax Code (DTC 2025)

The Direct Tax Code (DTC 2025) is poised to replace the Income Tax Act, bringing with it a host of changes designed to simplify and modernize the tax system. Although the Direct Tax Code (DTC 2025) has been in the works for many years—the first draft was prepared in 2009 and introduced in Parliament in 2010—it has taken time for the government to finalize it. The delay was partly due to the need for businesses to stabilize after the introduction of the Goods and Services Tax (GST). But now, the wait is almost over.

The final version of the Direct Tax Code (DTC 2025) is expected to be released within the next six months and will likely be introduced in the Budget 2025. The Code will become applicable from April 2025, marking the beginning of a new financial year and the dawn of a new era in taxation.

A Quick Note for Students

Before diving into the specifics of the Direct Tax Code (DTC 2025), I want to address the concerns of students. Many of you might be wondering whether to study the Income Tax Act or the new Direct Tax Code. Here’s some good news: the Direct Tax Code will be applicable for exams conducted on or after April 2026. So, for any exams up to March 2026, you’ll still need to focus on the Income Tax Act. This should bring some relief to students currently preparing for exams!

Why the Direct Tax Code?

The primary purpose of introducing the Direct Tax Code (DTC 2025) is to simplify the tax laws and make them more understandable and easier to comply with. The government wants to encourage more people to pay taxes by removing the complexities that currently deter many from doing so. While the GST was also introduced as a simplified tax, and you all know the mixed reactions it received, the government is aiming to avoid the same pitfalls with the Direct Tax Code.

Key Changes and Differences

Now, let’s delve into the key differences between the Income Tax Act and the upcoming Direct Tax Code:

1. Residential Status: The Direct Tax Code (DTC 2025) will simplify residential status categories. Currently, under the Income Tax Act, there are three categories: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). Under the new code, there will only be two categories: Resident or Non-Resident.
2. Elimination of Previous Year and Assessment Year: One of the most significant changes is the removal of the concepts of Previous Year and Assessment Year. Under the new system, only the Financial Year will be relevant.
3. Capital Gains Taxation: Capital gains might become part of your normal income under the Direct Tax Code, which could result in higher tax rates.
4. Changes in Income Heads: While the five heads of income will remain the same, two of them will be renamed. “Income from Salary” will be called “Employment Income,” and “Income from Other Sources” will be renamed “Income from Residuary Sources.”
5. Surcharge and Ultra-Rich Tax: There is a possibility that the surcharge might be removed. However, for the ultra-rich, a new, higher tax rate may be introduced.
6. Tax Audit Expansion: Currently, Chartered Accountants can only conduct tax audits. However, the Direct Tax Code might allow Company Secretaries (CS) and Cost and Management Accountants (CMA) to conduct tax audits as well. This is great news for CS and CMA professionals!
7. Reduction in Sections and Schedules: The Income Tax Act currently has 298 sections, along with numerous subsections, clauses, and sub-clauses, as well as 14 schedules. The Direct Tax Code aims to simplify this with 319 sections and 22 schedules. By reducing the complexity, the government hopes to decrease lawsuits and make the law more straightforward.
8. TDS and TCS: Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) will now be applicable on all types of income, with a reduction in rates. However, the scope of TDS will be expanded.
9. Exemptions and Deductions: The Direct Tax Code (DTC 2025) is expected to remove most exemptions and deductions, simplifying the tax filing process. Currently, only about 1% of people pay income tax, and the government aims to increase this to approximately 7.5% of the population.
10. Political Party Income: Despite these changes, one thing that remains unchanged is the tax exemption on political party income.
11. Corporate Tax Rates: The tax rates for domestic and foreign companies will be aligned, eliminating the differences in corporate tax rates that currently exist.
12. Benefits for Salaried Employees: Salaried employees can expect a significant reduction in their tax burden. This change is designed to address the long-standing grievances of salaried employees, who often feel they bear a disproportionate share of the tax burden.

What’s Next?

The Direct Tax Code (DTC 2025) is a major reform that will impact everyone—from students and professionals to businesses and individuals. It’s crucial to stay informed about these changes, as they will shape the future of taxation in India.

What changes would you like to see in the Direct Tax Code (DTC 2025)? Do you think it will simplify the tax system, or do you foresee new challenges? Share your thoughts in the comments below.

If you found this information helpful, please give this post a like—it motivates us to bring you more valuable content. And don’t forget to share this with others to keep them informed about the upcoming changes in tax law.

See you in the next post!

FAQs: The Direct Tax Code and Income Tax Act Transition