Income Tax Act, 1961 vs. Direct Tax Code, 2025: What’s Changed and Why It Matters

India is preparing for a significant shift in its tax landscape with the introduction of the Direct Tax Code (DTC) 2025. Back in 2017, the Ministry of Finance formed a task force to draft a new direct tax law. The goal of this law is to simplify tax regulations, expand the tax base, and make doing business easier in the country.

So, what exactly is the Direct Tax Code? Let’s explore the key aspects.

What is the Direct Tax Code?

The Direct Tax Code (DTC) aims to simplify the current direct tax laws in India. While it shares similarities with the Income Tax Act, the DTC focuses on making tax compliance easier for everyone. It simplifies rules, removes unnecessary sections, and helps reduce confusion in tax filings.

Evolution and Objective of the Direct Tax Code

India’s tax system has long been known for its complexity, mainly due to:

A large number of exemptions and deductions.
Confusing tax provisions.
The cascading effect of multiple tax layers.

The DTC was designed to replace the outdated Income Tax Act, which has been in place for over five decades. The goal is to modernize and simplify tax laws. Here are some key milestones in its evolution:

August 12, 2009: The first draft of the DTC was released for public feedback.
June 15, 2010: A revised discussion paper was published after incorporating suggestions.
August 30, 2010: The Direct Tax Code Bill was introduced in Parliament.
November 22, 2017: A task force was formed to draft the new tax law.

Key Features of the Direct Tax Code

The Direct Tax Code 2025 brings much-needed improvements to India’s tax structure. It focuses on:

Simplification: The DTC combines all direct tax laws, including wealth tax, into one code. This change makes compliance easier for taxpayers and businesses alike.
Clarity: The DTC uses clearer language and groups related sections together, reducing the chances of misunderstanding.
Reduced Legal Disputes: By simplifying rules, the DTC reduces the likelihood of tax-related lawsuits.

Major Differences Between the Income Tax Act (1961) and Direct Tax Code (2025)

Simplification and Clarity
The Income Tax Act has grown complex with time due to frequent changes. On the other hand, the DTC simplifies these rules, merging and removing unnecessary sections. This approach makes tax compliance much easier.
Tax Slabs and Rates
Unlike the Income Tax Act, which often changes tax rates, the DTC suggests more stable rates with broader tax slabs. This will benefit middle-income groups by lowering their tax burden.
Income Definition
The DTC simplifies the categorization of income. Instead of multiple categories like salary, business income, and capital gains, the DTC merges them under one category. This change will make calculating taxes easier and less confusing.
Corporate Taxation
The DTC proposes uniform corporate tax rates, making compliance simpler and reducing disputes over exemptions and deductions.
Dispute Resolution
The DTC introduces quicker ways to settle disputes, including options like alternate dispute resolution. This move will save time and reduce legal battles.
Global Income and Residency Rules
The DTC provides clearer rules for taxing global income, especially for NRIs and individuals earning abroad. This will minimize confusion over tax liabilities.

Things to Keep in Mind

As India transitions to the Direct Tax Code, here’s what taxpayers should keep in mind:

Transition Period: During the shift from the Income Tax Act to the DTC, both systems may be active for a short period. Taxpayers need to stay informed and comply with both as required.

Impact on Investments: The DTC changes some rules around capital gains and deductions. Reviewing investment strategies will help maximize tax-saving opportunities under the new system.

Digital Compliance: The DTC emphasizes digital tax filing. Taxpayers should adapt to new online platforms for submitting returns, as this will make the process faster and more efficient.

Conclusion

The Direct Tax Code 2025 will bring about a much-needed reform to India’s outdated tax system. While the Income Tax Act, 1961, served the country for decades, it has become outdated. The DTC simplifies tax laws, reduces disputes, and introduces more efficient compliance methods for individuals and businesses alike.

By understanding the differences between the two systems and preparing for the change, taxpayers can ensure a smooth transition to the new tax regime. Staying informed will help you take advantage of the Direct Tax Code’s benefits and make your tax compliance simpler.

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This article is only a knowledge-sharing initiative and is based on the Relevant Provisions as applicable and as per the information existing at the time of the preparation. In no event, RMPS & Co. or the Author or any other persons be liable for any direct and indirect result from this Article or any inadvertent omission of the provisions, update, etc if any.

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