The Indian government is set to introduce a new Direct Tax Code next week, aimed at simplifying tax laws and reducing legal disputes. Finance Minister Nirmala Sitharaman confirmed Today (Feb 1), while presenting the Union Budget 2025 that the new tax law will be “simple to understand” and could bring major changes, including scrapping financial years, taxing LIC policy income, and standardizing dividend and high-income tax rates. This move follows extensive public consultation and review by expert committees.
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NEW DELHI: The government is set to introduce a new income tax law next week, aimed at making tax compliance easier for individuals. Finance Minister Nirmala Sitharaman, while presenting the Union Budget 2025, said that the new tax law would be “simple to understand” and would also help reduce tax-related legal disputes.
On Thursday, sources informed media that this new direct tax code might be introduced in the current parliament session.
The idea of a new direct tax code was first discussed in July 2024 when Ms. Sitharaman presented the full budget for the financial year 2024-25. At that time, she had stated that the objective was to simplify existing income tax laws and reduce the Income Tax Act, 1961, by an impressive 60 percent.
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The Income Tax Act of 1961, which currently governs direct taxation in India—including personal and corporate income tax, taxes on securities transactions, gifts, and wealth—has a total of 23 chapters and 298 sections.
Before announcing this major overhaul of the tax system, the Finance Minister had tasked the Central Board of Direct Taxes (CBDT) with reviewing the existing laws. To ensure a thorough analysis, the CBDT set up an internal committee that formed 22 specialized sub-committees to evaluate various sections of the old law.
Additionally, in October, the government sought inputs from the public, inviting stakeholders, tax experts, and individuals to share their suggestions and feedback on the proposed changes. By January, nearly 7,000 responses had been received.
The Direct Tax Code (DTC) is expected to simplify tax laws, as multiple amendments over the years have made the Income Tax Act, 1961, quite complicated. Since the old law consists of 23 chapters and 298 sections, the new law is expected to significantly reduce this volume.
One of the biggest expected changes is the removal of the existing concept of the financial year (FY) and assessment year (AY), which has often caused confusion for taxpayers. Additionally, under the new system, income from LIC policies—previously exempt from tax—may now be taxed at a 5% rate.
Under the 1961 law, only Chartered Accountants were allowed to conduct tax audits. However, under the proposed Direct Tax Code, company secretaries and cost management accountants may also be permitted to handle tax audits.
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Dividend income, which is currently taxed based on income slabs, may be standardized at a 15% rate. For high-income earners, the tax rate may be fixed at 35%, replacing the current system where a surcharge is imposed in addition to the 30% tax slab.
Capital gains taxation rules may also undergo significant changes, with differences in taxation across asset classes potentially being removed.
Furthermore, the Direct Tax Code may not offer taxpayers the choice between the old and new tax regimes, as it aims to streamline the tax structure.
Deductions and exemptions may also be reduced in line with the new regime.
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