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Direct Tax Code 2025: Key Changes and Its Impact on Taxpayers

Q: What is the proposed minimum alternate tax under DTC?

The DTC suggests changes to the MAT framework to ensure profitable companies pay minimum tax, even if the taxable income is low due to deductions.

The direct tax code is set to bring about significant change in India’s tax system. To simplify the taxation process and ensure a more transparent and efficient framework. The direct tax code 2025 promises to impact individual and corporate taxpayers.

Whether you are a salaried employee, a small business owner or a tax professional. Understanding the upcoming changes is important for effective tax planning and compliance. In this blog, we will dive into important changes introduced by direct tax code 2025 and explore how these changes will reshape the taxation system of India.

What is a Direct Tax Code?

The direct tax code is the modern tax framework that is designed to change India’s tax system. To make it more simple, efficient and transparent. This code introduces a more streamlined approach to calculating tax, removing the various exemptions and deductions that complicate the process. This new tax code will bring all the direct tax laws under one framework, introduce a dispute mediation resolution and expand the audit roles beyond Chartered Accountants.

Direct Tax Code 2025: Why is it being introduced?

The direct tax code is being introduced by the government to increase the number of people who contribute to the taxes in India. According to the data shared by the government in 2023, only 2% of the population in India are income taxpayers which is very low as compared to the developed economies. So this simplified version of the direct tax code will help in making the tax laws equitable, and transparent and an improved taxpayer base will be beneficial for the economic growth of India.

Direct Tax Code 2025 Highlights

The important highlights of the direct tax code are listed below:

The code bill will increase the tax slabs for individuals. The income between Rs 2 to 5 lakhs will get taxed at 10%and between Rs 5 and Rs 10 lakhs will be taxed at 20% and 10 lakhs at 30%.

Companies will be taxed at 30% of the business income. Foreign companies may pay the additional branch profits tax and non-profit organisations at 15%.

It will remove the various tax breaks and deductions that are presently allowed for the companies but will retain most of them which are for individuals.

The code will also remove the difference between short-term and long-term capital gains for the assets except the securities listed on the stock exchanges.

The wealth tax exemption limit will increase from Rs 15 lakhs to Rs 1 crore.

The code introduces a general anti-avoidance rule that allows tax authorities to classify the arrangement into which one entered for tax avoidance.

Expectations of Taxpayers from Direct Tax Code 2025

As the code aims to simplify the taxes for everyone, it is expected to bring various changes. Some of them are listed below-

Simple residence rule

Income Tax Act includes various implications for residents, residents but not ordinary and non-residents. So, it creates confusion among the taxpayers about the tax on the income earned. A simplified tax structure for all types of residents is needed so that people understand and pay the taxes accordingly.

Financial year versus assessment year

Usually, people outside the tax domain are confused between the financial and assessment year. The new code must speak about the one or so that the taxpayers can gain a better understanding and it's easier to file ITR without the worry about right or wrong financial year or assessment year.

Single tax structure

The new code must bring parity between the tax rates applicable for domestic as well as international companies. To avoid confusion and improve compliance for multinational businesses.

Simplified tax structure

Currently, the Income Tax Act has 298 sections that are followed by several sub-sections, clauses and schedules. The new code must try to ease the structure that is easy to read, understand and decode.

Compliance ease

This new direct tax code must be designed that makes compliance more simple for both individuals and businesses that operate in India. With diverse deadlines for filing income tax returns, TDS returns, tax audits, and transfer pricing. There are chances to miss the dates that lead to penalties.

Direct Tax Code Implementation

According to the latest information available, the new tax code is under discussion and in review with the concerned stakeholders and expected to be introduced in budget 2025. The government is to follow the collaborative approach to improve the code that creates tax procedures simply like never before.

Direct Tax Code 2025 Aims

The new direct tax code aims to:

Unify the income tax, dividend distribution tax, fringe benefits tax and wealth tax into one streamlined framework that simplifies the tax rules for efficiency and compliance ease.

It seeks to increase the taxpayer base from 1% to 7.5% of the population by phasing out several tax breaks and deductions. It also marks tax compliance as straightforward to encourage wider participation.

The code also clarifies the tax laws to decrease legal disputes, promote fairness by aligning with international standards and establish fair treatment across taxpayer groups

It also introduces the updated reassessment rules and mediation mechanism between the taxpayers and the central board of direct taxes.

Direct Tax Code 2025 Major Changes

Removal of RNOR category in the residential status. Taxpayers will now be classified as either residents or non-residents.
Domestic and foreign companies will be taxed at the same rate. To simplify compliance and to foster foreign investment.
Assessment and previous year removal. Now the year will be termed as a financial year only for ITR filings.
Capital gains tax will be updated. The revenue will get taxed as regular income. The short-term gains will be increased to 20% and long-term gains will be reduced to 12.5%.
New income category names will be introduced. Income from salary will be renamed to employment income and income from other sources to income from residuary sources.
Simple and one structure in DTC 2025 includes 319 sections and 22 schedules in a straightforward and less fragmented format.
Tax deductions on most income like TDS or TCS will apply to all types of income and will promote more regular tax payments. The TDS rate will be reduced from 5 to 2%. For the e-commerce operators, the TDS rate will be lowered significantly from 1% to 0.1% which will provide relief to taxpayers and simplify the compliance for the e-commerce businesses.
Audit role expansion will be there like company secretary and cost and management accountants will be allowed to conduct the tax audits.
Reduction in the deductions and exemptions will be removed to streamline tax filing. But the standard deduction for the salaried employees in the new tax regime will be increased from 50% to Rs 75,000.

Difference between Direct Tax Code and Income Tax Act

Concepts	Income Tax Act 1961	Direct Tax Code 2025
Residential status	ROR (Resident and Ordinarily Resident), RNOR (Resident but Not Ordinarily Resident), and NR (Non-Resident)	Resident and Non-Resident
Tax audit	Conducted by a Chartered Accountant	Conducted by CA, CS and CMA
Concept terms	Both terms previous year and assessment year are applicable.	Only the financial year will be used.
Dividends taxation	15%	Taxed at 15% without DDT
Distributed income tax	Income from LIC and mutual funds is exempted	Will get taxed at 5%
Tax rate for income above Rs 10 crores	30% + surcharge at 15%	Taxable at 35%

Conclusion

Direct tax code introduction is a good move. As it will slowly remove the complex laws and sections in the Income Tax Act 1961. To make it more equitable, easy to understand and fair for all the taxpayers in India. Also, the change in the new tax code will include careful management at diverse levels and will outweigh the issues in the long run.

FAQ

Q1. What is a direct tax in India?

A direct tax is a type of tax imposed directly on the taxpayer and paid directly to the government by the persons on whom it is imposed. A direct tax cannot be shifted by the taxpayer to someone else.

Q2. What is a tax code?

A tax code is a system used by the tax authorities to check the tax amount of an individual. It usually includes a set of rules, rates and classifications based on income, deductions, exemptions and other factors that impact tax liability.

Q3. What is a direct tax code?

The direct tax code is an initiative by the Indian government to simplify, streamline and standardise the current complex income tax laws for all.

Q4. Why is a direct tax code being introduced?

It has been introduced to simplify the tax rules and make them more transparent. The government hopes to encourage more people to contribute to taxes and help in economic growth.

Q5. How will the Direct Tax Code benefit individual taxpayers?

The DTC 2025 will offer a simplified tax structure, clarify the residential rules and remove the confusion around financial and assessment year to make it easy for individuals to file returns and comply with tax laws.

Q6. When will the direct tax code come into effect?

The direct tax code is expected to be introduced in budget 2025. The government is following a consultative process to ensure smooth implementation.

Q7. Is the new direct tax code good for company secretaries?

Yes, it enables company secretaries to conduct tax audits along with CAs. This expansion of the rights will identify the CS’s expertise in corporate governance and legal compliance creating new chances for them to offer tax-related services.

Q8. What are the proposed changes in the income tax slabs under DTC?

DTC proposes the revised income tax slabs that aim to provide relief to middle-income taxpayers to ensure high contributions from high-income earners and to promote equal taxation.

Q9. What changes are proposed for corporate taxes under DTC?

DTC proposes unified tax rates for domestic and foreign companies to simplify corporate tax filings and make India more attractive for multinational businesses.

Q10. What is the proposed minimum alternate tax under DTC?

The DTC suggests changes to the MAT framework to ensure profitable companies pay minimum tax. Even if the taxable income is low due to deductions.

Q11. Why is the implementation of the direct tax code delayed?

Implementation is delayed due to political resistance, legislative challenges and concerns from the stakeholders. Related to the effect on businesses and existing tax structure.

Q12. What are new tax regime slabs?

Income Tax Slabs for FY 2024-25 (AY 2025-26) The income tax slabs under the new tax regime are as follows: Rs. 0 to Rs. 3,00,000 - 0%, Rs. 3,00,001 to Rs. 7,00,000 - 5%, Rs. 7,00,001 to Rs. 10,00,000 - 10%, Rs. 10,00,001 to Rs. 12,00,000 - 15%, Rs. 12,00,001 to Rs. 15,00,000 - 20% and Above Rs. 15,00,001 - 30%.

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