The Indian taxation landscape is on the verge of a transformative change. For over six decades, the Income Tax Act, 1961 has been the bedrock of direct taxation in India. However, its complexity, due to frequent amendments and layered provisions, has led to mounting compliance burdens and ambiguities for taxpayers. The proposed Direct Tax Code (DTC), expected to be enacted in 2025, aims to overhaul and modernize India’s direct tax regime. This article offers a detailed comparison of the DTC and the Income Tax Act, 1961, focusing on structure, objectives, tax rates, compliance, and practical implications for individuals and businesses.
The Income Tax Act, 1961 was enacted to consolidate and amend the law relating to income tax and super tax. Over time, it has become increasingly complex, spanning 52 chapters, 823 pages, and numerous amendments. Its layered structure and technical language have made it challenging for taxpayers to interpret and comply without professional assistance.
The Direct Tax Code (DTC), on the other hand, is designed as a modern, streamlined, and simplified code. With just 23 chapters and 16 schedules, the DTC aims to eliminate obsolete provisions, consolidate related content, and use plain language to enhance clarity and reduce litigation. The DTC is expected to come into effect from FY 2025-26, aligning India’s tax system with global best practices.
| Aspect | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Chapters | 52 | 23 |
| Schedules | 14 | 16 |
| Sections | 298 | 319 |
| Language | Technical, legalistic | Plain, simple, user-friendly |
| Redundancies | Many obsolete/overlapping clauses | Eliminated, consolidated |
Case Example:
A small business owner finds it challenging to interpret the Income Tax Act’s provisions on deductions due to cross-references and legal jargon. Under the DTC, the same provisions are presented in straightforward language, reducing the need for professional intervention and minimizing errors
| Parameter | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Tax Year Concept | Previous Year & Assessment Year | Unified “Tax Year” (12 months) |
| Residential Status | Resident, Non-Resident, RNOR | Resident, Non-Resident |
The DTC removes the dual system of ‘Previous Year’ and ‘Assessment Year’, opting for a single “Tax Year” to simplify compliance and align financial reporting.
| Income Bracket | Income Tax Act, 1961 | DTC Proposal |
|---|---|---|
| Up to ₹2.5 lakh | Nil | Nil |
| ₹2.5 lakh – ₹5 lakh | 5% | 5% |
| ₹5 lakh – ₹10 lakh | 20% | 10% |
| Above ₹10 lakh | 30% | 20% |
Note: DTC aims to broaden slabs and lower rates, reducing the effective tax burden for middle-income taxpayers.
| Corporate Income | Income Tax Act, 1961 | DTC Proposal |
|---|---|---|
| Base Rate | 25-30% | 25% flat |
| Surcharge & Cess | Yes | Yes |
| Exemptions | Multiple sectoral exemptions | Phased out for simplicity |
Case Example:
A domestic company with ₹15 crore profit currently pays 30% tax plus surcharge and cess. Under DTC, the same company would pay a flat 35% if income exceeds ₹10 crore, but with fewer compliance requirements and minimal exemptions.
| Aspect | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Classification | Short-term, Long-term | Uniform treatment |
| Tax Rate | Varies by asset and holding period | Normal income tax rates |
| Indexation Benefit | Available for long-term gains | Indexed cost for all gains |
| Exemptions | Multiple (e.g., Section 54, 54EC) | Largely removed |
Case Example:
An investor sells a property after 3 years. Under the Income Tax Act, long-term capital gains tax applies with indexation and possible exemptions. Under DTC, gains are taxed as ordinary income with uniform indexation, eliminating the need to navigate multiple exemption clauses.
| Feature | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Section 80C, 80D, etc. | Numerous deductions | Significantly reduced |
| Complexity | High | Low |
| Tax Base | Narrow | Broader |
The DTC seeks to widen the tax base by reducing the number of deductions and exemptions, making tax computation easier and more transparent.
| Tax Type | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Wealth Tax | Abolished in 2015 | Not applicable |
| Dividend Distribution Tax | 15% (company pays, then taxed again at shareholder) | 15% (taxed in hands of recipient, no DDT) |
The DTC removes the concept of DDT, ensuring dividends are taxed only once in the hands of the recipient, thereby eliminating double taxation.
| Parameter | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Assessment Process | Lengthy, manual, high litigation | Digital, efficient, reduced litigation |
| Dispute Resolution | Multiple appellate forums | Alternate Dispute Resolution (ADR) |
| Backlog | High | Expected to reduce |
Case Example:
A taxpayer’s assessment under the Income Tax Act can take years due to manual scrutiny and multiple appeals. Under DTC, digital assessments and ADR mechanisms are expected to resolve disputes faster, reducing litigation backlog.
| Compliance Aspect | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Filing Complexity | High, multiple forms and annexures | Simplified, fewer forms |
| Digitalization | Partial (e-filing, some processes) | Enhanced digital compliance |
The DTC leverages digital technology to make compliance easier, including e-filing, digital assessments, and online dispute resolution.
| Category | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Income Heads | Salary, House Property, Business, Capital Gains, Other Sources | Employment, House Property, Business, Capital Gains, Residuary |
| Taxation of LIC/MF Income | Exempt | Taxable at 5% |
| Taxation of Distributed Income | Exempt | Taxable at 5% |
| Feature/Parameter | Income Tax Act, 1961 | Direct Tax Code (DTC) 2025 |
|---|---|---|
| Chapters | 52 | 23 |
| Schedules | 14 | 16 |
| Sections | 298 | 319 |
| Language | Technical, complex | Plain, simple |
| Tax Year | Previous & Assessment Year | Unified Tax Year |
| Residential Status | Resident, Non-Resident, RNOR | Resident, Non-Resident |
| Personal Tax Slabs | Progressive, multiple slabs | Broader, fewer slabs |
| Corporate Tax | 25-30% + surcharge | 25% or 35% (above ₹10 crore) |
| Capital Gains | Short/Long term, special rates | Uniform, indexed, fewer exemptions |
| Deductions/Exemptions | Numerous, complex | Minimal, simplified |
| Wealth Tax | Abolished (2015) | Not applicable |
| Dividend Tax | DDT + recipient tax | Taxed only in recipient’s hands |
| Assessment | Manual, slow, high litigation | Digital, efficient, ADR mechanisms |
| Compliance | High burden | Simplified, digital |
Case Study 1: Middle-Income Taxpayer
Scenario:
Ravi, a salaried individual with ₹12 lakh annual income, currently files under the Income Tax Act, availing deductions under Sections 80C, 80D, and HRA. He spends hours navigating forms and documentation.
Under DTC:
Ravi faces broader tax slabs, minimal deductions, and a single, easy-to-understand form. His compliance time and professional fees reduce significantly, and his effective tax rate is more predictable.
Case Study 2: Corporate Entity
Scenario:
ABC Pvt Ltd claims various sectoral exemptions and deductions, leading to disputes and lengthy assessments.
Under DTC:
The company faces a flat tax rate, minimal exemptions, and digital assessments. Disputes are resolved quickly through ADR, and compliance costs drop.
Case Study 3: Investor in Mutual Funds
Scenario:
Priya invests in mutual funds and life insurance, currently enjoying tax-free distributed income.
Under DTC:
Distributed income from such investments is taxed at 5%, but the process is transparent and uniform, reducing ambiguity.
• Simplification: Fewer provisions, clear language, and minimal exemptions.
• Transparency: Digital processes and reduced manual intervention.
• Broader Tax Base: Fewer deductions mean more taxpayers contribute.
• Reduced Litigation: ADR and digital assessments speed up resolutions.
• Predictability: Stable tax rates and slabs aid long-term planning.
• Transition Challenges: Taxpayers and professionals must adapt to new rules.
• Loss of Exemptions: Some may pay more tax due to loss of deductions.
• Implementation Hurdles: Technology and training are crucial for smooth rollout.
The Direct Tax Code (DTC) represents a paradigm shift in India’s approach to direct taxation. By simplifying the law, reducing exemptions, leveraging digital technology, and streamlining compliance, the DTC aims to address the longstanding challenges of the Income Tax Act, 1961. While the transition will require adjustment, the DTC promises a more transparent, efficient, and taxpayer-friendly regime, broadening the tax base and supporting India’s economic growth.
As India prepares for this landmark reform, understanding the differences and preparing for the new compliance environment will be essential for individuals, businesses, and tax professionals alike.
The primary reason for the proposed DTC is to simplify and modernize India’s direct tax system, which has become complex due to numerous amendments and layered provisions in the Income Tax Act, 1961. The DTC aims to reduce compliance burdens, eliminate ambiguities, and align India’s tax regime with global best practices.
The DTC is designed to be significantly simpler in structure. It proposes to have around 23 chapters and 16 schedules, compared to the Income Tax Act, 1961, which has 52 chapters and 14 schedules. The DTC also aims to use plain and user-friendly language, unlike the technical and legalistic language of the current act.
The DTC proposes a unified “Tax Year” of 12 months, replacing the current dual system of “Previous Year” (the year in which income is earned) and “Assessment Year” (the year in which income is assessed and taxed) under the Income Tax Act, 1961. This aims to simplify compliance and align financial reporting with the tax year.
The DTC proposes to have broader income tax slabs with potentially lower tax rates, especially for middle-income taxpayers. For example, the article suggests a 10% rate for the ₹5 lakh – ₹10 lakh income bracket and a 20% rate for income above ₹10 lakh, compared to the current 20% and 30% rates respectively. The aim is to reduce the effective tax burden for many individuals.
The DTC proposes a flat corporate income tax rate of 25%. While the current base rate under the Income Tax Act varies between 25-30%, the effective tax rate often increases with surcharges and cess. The DTC might introduce a higher rate (e.g., 35% as mentioned for income above ₹10 crore) but with a focus on fewer exemptions for simplification.
The DTC aims for a uniform treatment of capital gains, eliminating the distinction between short-term and long-term capital gains. Capital gains under the DTC are proposed to be taxed at the normal income tax rates applicable to the taxpayer. However, it also suggests providing an indexed cost for all capital gains, and largely removing the specific exemptions currently available under the Income Tax Act (like Sections 54 and 54EC).
The DTC intends to significantly reduce the number of tax exemptions and deductions currently available under the Income Tax Act (like those under Sections 80C and 80D). The goal is to broaden the tax base, simplify tax computation, and increase transparency by having fewer deductions to navigate.
The DTC proposes to remove the Dividend Distribution Tax (DDT), which was a 15% tax paid by companies on distributed dividends. Under the DTC, dividends will be taxed in the hands of the recipient at a rate of 15%, ensuring that dividends are taxed only once.
The DTC aims to make the assessment process more digital and efficient, reducing the reliance on manual scrutiny that often leads to delays and litigation under the Income Tax Act. It also proposes the introduction of Alternate Dispute Resolution (ADR) mechanisms to resolve tax disputes faster and reduce the backlog of cases.
The DTC is designed to simplify tax compliance through clearer language, fewer forms, and enhanced digitalization of processes like e-filing and digital assessments. This is expected to reduce the compliance burden and the need for extensive professional assistance for taxpayers compared to the current complex system.
Yes, the article points out potential limitations such as the challenges of transitioning to the new rules for taxpayers and tax professionals, the possibility of some taxpayers facing a higher tax burden due to the removal of certain exemptions, and the need for robust technology and adequate training for a smooth implementation.
Presently it is in a bill form, expected to pass in parliament and become Act before 2026.
