India is gearing up for one of its most significant tax reforms in decades — the Direct Tax Code (DTC) — set to replace the Income Tax Act of 1961. Slated for implementation by April 2025, the DTC aims to simplify tax laws, widen the taxpayer base, and bring India’s taxation framework closer to global standards.
Currently, India’s tax regime consists of 298 sections and numerous clauses, making compliance complex for both individuals and businesses. The DTC seeks to streamline this system with 319 sections, fewer exemptions, and more straightforward tax slabs. The move comes amid concerns that only 2% of the population currently pays income tax.
Key Highlights
- Replacement of Income Tax Act, 1961 with a simplified 319-section Direct Tax Code.
- Target to increase taxpayer base from 1% to 7.5% of the population.
- Lower rates for individuals earning up to ₹15 lakh annually.
- Reduced deductions and exemptions to cut complexity.
- Corporate tax overhaul, including a 35% flat rate for companies earning over ₹10 crore.
- Broader tax net covering income from insurance and mutual funds.
Why the DTC Matters
The DTC is designed to address long-standing challenges in India’s tax framework:
- Simplification: Fewer exemptions and clearer rules to make compliance easier.
- Transparency: Straightforward provisions to boost trust in the system.
- Fairness: Rationalised tax slabs for individuals and corporations.
- Global Alignment: Introduction of residence-based taxation and General Anti-Avoidance Rules (GAAR) to tackle aggressive tax planning.
Major Changes Under the DTC
1. Revised Tax Slabs for Individuals
Those earning up to ₹15 lakh annually are likely to see reduced rates, increasing disposable income for middle-class households. The standard deduction will rise by 50% to ₹75,000.
2. Corporate Tax Reforms
Large corporations (income above ₹10 crore) will face a flat 35% tax rate. The reform aims to support small and medium enterprises while encouraging new manufacturing units from FY 2025-26.
3. Capital Gains Overhaul
- Long-term capital gains tax: Reduced from 20% to 12.5%.
- Short-term capital gains tax: Increased from 15% to 20%.
Implementation Roadmap
- April 2025: Official rollout for the 2025-26 financial year.
- Gradual transition from the current system to minimise disruption.
- 22 sub-committees of the Central Board of Direct Taxes have been working on the framework since 2023, incorporating over 6,500 stakeholder suggestions.
Expected Benefits
- For Middle-Income Earners: Lower rates and simpler filing processes.
- For High-Net-Worth Individuals: Abolition of wealth tax, changes to capital gains rules, and a focus on fairness in high-income taxation.
- For Businesses: Reduced compliance burden and predictable tax rates.
Challenges Ahead
The government faces significant hurdles, including taxpayer awareness, administrative readiness, and managing the transition from the 1961 Act. Officials plan extensive workshops, online resources, and phased implementation to ensure a smooth shift.
The Bigger Picture
Experts say the DTC is not just a legal rewrite — it’s a modernisation of India’s economic architecture. By simplifying rules, broadening the tax base, and aligning with international norms, it aims to boost compliance, cut litigation, and strengthen revenue collection.
With Budget 2025 expected to outline the final provisions, the coming months will be crucial in determining how smoothly India moves into its new tax era.