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Comprehensive Comparison of Direct Tax Code (DTC) vs Income Tax Act 1961: Simplified Taxation System for India

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.

1. Purpose and Legislative Framework

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.

2. Structural and Conceptual Simplification

AspectIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Chapters5223
Schedules1416
Sections298319
LanguageTechnical, legalisticPlain, simple, user-friendly
RedundanciesMany obsolete/overlapping clausesEliminated, 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

3. Year of Assessment and Residential Status

ParameterIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Tax Year ConceptPrevious Year & Assessment YearUnified “Tax Year” (12 months)
Residential StatusResident, Non-Resident, RNORResident, 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.

4. Tax Rates and Slabs

4.1 Personal Income Tax

Income BracketIncome Tax Act, 1961DTC Proposal
Up to ₹2.5 lakhNilNil
₹2.5 lakh – ₹5 lakh5%5%
₹5 lakh – ₹10 lakh20%10%
Above ₹10 lakh30%20%

Note: DTC aims to broaden slabs and lower rates, reducing the effective tax burden for middle-income taxpayers.

4.2 Corporate Taxation

Corporate IncomeIncome Tax Act, 1961DTC Proposal
Base Rate25-30%25% flat
Surcharge & CessYesYes
ExemptionsMultiple sectoral exemptionsPhased 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.

5. Capital Gains Taxation

AspectIncome Tax Act, 1961Direct Tax Code (DTC) 2025
ClassificationShort-term, Long-termUniform treatment
Tax RateVaries by asset and holding periodNormal income tax rates
Indexation BenefitAvailable for long-term gainsIndexed cost for all gains
ExemptionsMultiple (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.

6. Exemptions and Deductions

FeatureIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Section 80C, 80D, etc.Numerous deductionsSignificantly reduced
ComplexityHighLow
Tax BaseNarrowBroader

The DTC seeks to widen the tax base by reducing the number of deductions and exemptions, making tax computation easier and more transparent.

7. Wealth Tax and Dividend Distribution Tax (DDT)

Tax TypeIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Wealth TaxAbolished in 2015Not applicable
Dividend Distribution Tax15% (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.

8. Assessment and Dispute Resolution

ParameterIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Assessment ProcessLengthy, manual, high litigationDigital, efficient, reduced litigation
Dispute ResolutionMultiple appellate forumsAlternate Dispute Resolution (ADR)
BacklogHighExpected 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.

9. Compliance and Digitalization

Compliance AspectIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Filing ComplexityHigh, multiple forms and annexuresSimplified, fewer forms
DigitalizationPartial (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.

10. Treatment of Special Incomes and Assets

CategoryIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Income HeadsSalary, House Property, Business, Capital Gains, Other SourcesEmployment, House Property, Business, Capital Gains, Residuary
Taxation of LIC/MF IncomeExemptTaxable at 5%
Taxation of Distributed IncomeExemptTaxable at 5%

11. Comparison Table: DTC vs Income Tax Act 1961

Feature/ParameterIncome Tax Act, 1961Direct Tax Code (DTC) 2025
Chapters5223
Schedules1416
Sections298319
LanguageTechnical, complexPlain, simple
Tax YearPrevious & Assessment YearUnified Tax Year
Residential StatusResident, Non-Resident, RNORResident, Non-Resident
Personal Tax SlabsProgressive, multiple slabsBroader, fewer slabs
Corporate Tax25-30% + surcharge25% or 35% (above ₹10 crore)
Capital GainsShort/Long term, special ratesUniform, indexed, fewer exemptions
Deductions/ExemptionsNumerous, complexMinimal, simplified
Wealth TaxAbolished (2015)Not applicable
Dividend TaxDDT + recipient taxTaxed only in recipient’s hands
AssessmentManual, slow, high litigationDigital, efficient, ADR mechanisms
ComplianceHigh burdenSimplified, digital

12. Practical Impact: Case Studies

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.

13. Advantages and Limitations

13.1 DTC Advantages

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.

13.2 DTC Limitations

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.

14. Conclusion

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.

frequently asked questions (faq's) related to Direct Tax Code (DTC) vs. Income Tax Act 1961

Q What is the main reason for proposing the Direct Tax Code (DTC) in India?+

Q How does the structure of the Direct Tax Code (DTC) compare to the Income Tax Act, 1961?+

Q What is the concept of the "Tax Year" under the DTC, and how does it differ from the current system?+

Q How are personal income tax rates expected to change under the DTC compared to the Income Tax Act, 1961?+

Q What are the proposed changes to corporate tax rates under the DTC?+

Q How will capital gains be taxed under the DTC compared to the Income Tax Act, 1961?+

Q What changes are expected in terms of tax exemptions and deductions under the DTC?+

Q How will dividends be taxed under the DTC compared to the Dividend Distribution Tax (DDT) regime under the Income Tax Act?+

Q What improvements are expected in the assessment and dispute resolution processes under the DTC?+

Q How is the DTC expected to impact tax compliance for individuals and businesses?+

Q Will the implementation of the DTC have any limitations or challenges?+

Q When is the Direct Tax Code (DTC) expected to be enacted and come into effect?+