The Direct Tax Code(DTC) 2025: Overall analysis and Key Changes

The journey of the Direct Tax Code, 2025, began in the year 2009 when the first draft of the said code was introduced by the then Government of India. The main aim of the direct tax code was to simplify and consolidate India’s existing tax regimes. After 2009, a discussion paper was released when the Direct Tax Code was finally introduced in the Parliament in 2010. This bill was eventually referred to the Standing Committee of Finance who submitted its report in 2012. Unfortunately, the bill ultimately lapsed because of the change of government.

In 2025, while presenting the Union Budget, our Finance Minister Nirmala Sitaraman announced the introduction of a new income tax bill to replace the existing Income Tax Act 1961. The new income tax bill was formally introduced in the Lok Sabha by Nirmala Sitaraman on 13th February. After its introduction, the bill was referred to a Parliamentary Select Committee, chaired by MP Baijayant Panda. The committee’s task was to analyse all the clauses, suggest changes, and receive feedback. The Select Committee presented more than 285 recommendations, aimed at improving the bill’s legal drafting and clarity. On 8th August, the government formally withdrew the income tax bill due to the Select Committee’s multiple recommendations to avoid any confusion. The revised version of the bill was again introduced in Parliament on 11th August, incorporating the Select Committee’s recommendations and improving legal drafting. In August 2025, the bill was passed by both houses of Parliament, i.e., the Lok Sabha and the Rajya Sabha, and it received presidential assent on 21st August, 2025. The Income Tax Act 2025, also known as the direct tax code, will be enforced from the upcoming financial year, i.e., 1st April 2026.

Major changes in the new income tax act

Introduction of tax year or financial year

In the earlier Income Tax Act 1961, there was a concept of the previous year and assessment year, which at times became difficult for a non-professional person to understand.

The previous year refers to the year in which the actual income is earned, for which no tax filing is required. It is the assessment year in which the income is assessed and taxed.

To remove the confusion between the two years, in the Direct Tax Code, 2025, there will be a single concept of the financial or tax year

Revised Tax slabs

The new income tax act aims to remove many deductions and exemptions. Income earned by individuals between Rs 2 and Rs 5 lakhs would now be taxed at 10%, between Rs 5 and Rs 10 lakhs at 20%, and any income over Rs 10 lakhs at 30%.

Companies would be taxed at 30% on income earned by the business. The wealth tax would now be exempted up to 1 Cr. An additional 15% branch profits tax would be levied on income earned by foreign companies through their permanent establishment or branch office in the host country.

On financial assets, short-term capital gains would be taxed at 20% (earlier taxed at 15%), and long-term capital gains at 12.5% (earlier taxed at 15%).

Tax audit expansion

Tax audits would now be conducted by Chartered Accountants, Company Secreataries and even by a Certified Management Accountant.

Two-Tier Residential status

The earlier three-tier residency classification, which included Residents, resident but not ordinarily resident and non resident, would now be changed to a two tier residency status, removing the category of RNOR(Resident but not ordinarily resident)

Introduction of alternate dispute resolution as a mechanism to settle disputes

Alternate dispute resolution, as we all know, is a mechanism by which cases are disposed of outside the court. These are known as out-of-court settlements. Just as in family-related matters, the courts themselves urge the parties to go for mediation (one of the ways for alternate dispute resolution), the new Income Tax Act 2025 is going to set up a Dispute Resolution Panel (DRP) to dispose of disputes of the assesses. The main objective of the formation of DRPs is to reduce the pendency of cases.

Expansion of General Anti-Avoidance Rules (GAAR)

The General Anti-Avoidance Rules (GAAR) are particularly designed to combat aggressive tax planning. The main target of GAAR is tax avoidance. Tax avoidance refers to an arrangement in which people legally change their affairs to pay less tax. It is considered legal but ethically questionable. The Income Tax Act 2025 allows tax authorities to reopen old assessment years if they discover any sort of impermissible avoidance arrangement (IAA) under GAAR, superseding the earlier 5-year + 3-month limit. Stronger action would now be taken against aggressive tax avoidance.

Advantages of the Direct Tax Code

1. The Direct Tax Code aims to simplify the complexity the previous Income Tax Act posed. The earlier Income Tax Act had around 891 sections, which are now reduced to just 536 sections. This reduction in the number of deductions and exemptions in the act signifies that the new Income Tax Act would have a simplified structure.

2. The Direct Tax Code simplifies procedures and lowers tax rates, which in turn encourages compliance and reduces the need for audits and penalties.

3. With the introduction of a new Income Tax Act, a step towards modernisation has been observed. The old law, inconsistent with the ever-evolving society, has been updated, which has improved overall tax management.

4. The Direct Tax Code has provided a more concise tax code, reducing ambiguity and leading to minimal disputes between taxpayers and tax authorities. The introduction of ADR as a mechanism for dispute resolution has also reduced the burden on appellate tribunals.

5. The rationalised and lower corporate tax rate would attract both foreign and domestic investors, which would boost the economic growth of your country as a whole.

Conclusion

The introduction of the new Income Tax Act 2025 is a major shift from the traditional tax regime to a more simplified and taxpayer-centric system. It is expected to bring positive reforms in the taxation landscape, which. would also contribute to the growth at an international level. This transformative step would turn out to be more transparent and effective for the general public and would lay down a strong foundation for the upcoming fiscal system.

Posted on: January 21st, 2026