The parliamentary budget session will be held from January 31 to April 4. Along with the Union Budget 2025-26 Finance Minister Nirmala Sitharaman is expected to propose the Direct Tax Code 2025. This is brought in to replace the existing Income Tax Act, of 1961 and the Wealth Tax Act of 1957. The first draft of the Direct Tax Code bill was introduced in 2009, and the Revised Discussion Paper in Parliament in 2010. Since then, the Govt. of India has formed a Standing Finance committee to discuss it with various stakeholders. The final version of the bill is expected to be presented in the next budget session.

The primary purpose of the Direct Tax code is to simplify the tax compliance systems for individuals and businesses by reducing exemptions and deductions. It will unify income tax, dividend distribution tax, fringe benefit tax, and wealth tax into a single framework. According to data shared by the government in 2023, only 2% of the population are income taxpayers. The Direct Tax Code 2025 seeks to expand the tax base to 7.5% of the population by reducing the tax breaks and deductions, hence encouraging broader participation. It will clarify tax laws that promote fairness by aligning with international standards and intend fair treatment across the taxpayer groups. It will introduce updated reassessment rules and mechanisms to mediate between taxpayers and the Central Board of Direct Taxes (CBDT).

Changes expected in the Direct Tax Code 2025

The Income Tax Act 1961 has different categories for residential, non-residential and resident but not ordinarily resident categories. It creates confusion among taxpayers. The Direct Tax Act intends to remove the resident but ordinarily non-resident categories and classify taxpayers into resident and non-resident categories.

Both domestic and foreign companies will have unified tax rates making compliance easier and in turn boosting foreign investment.

The code will do away with the concept terms of the Previous Year and Assessment Year and will replace them with the Financial Year.

In capital gain tax, short-term gains on financial assets will see a tax rate increase to 20%, rising from the earlier 15%, while long-term gains will have a reduced rate of 12.5% coming down from 20%.

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) will apply to almost all types of income.

Earlier a tax audit was conducted by a Chartered Accountant (CA), now a tax audit can be conducted by both Company Secretaries (CS) and Cost and Management Accountants (CMA).

Income from salary has been termed as ‘Employment Income’ while income from other sources is termed as ‘Residual Income'.

The Direct Tax Code (DTC) has 22 schedules, and 319 sections organised in a clearer, less disjointed manner. DTC 2025 intends to streamline and simplify the structure, reducing the need for cross-referencing various sections and simplifying the tax filing and refund procedures for individuals, corporations, and tax experts.