The Direct Tax Code will overhaul India’s tax system starting in April 2025, introducing reforms that will simplify tax compliance for individuals and businesses. Replacing the Income Tax Act of 1961, this new framework promises a transparent and modernized tax environment. While the Income Tax Act served India for decades, its complexity demanded a fresh approach, leading to the introduction of the Direct Tax Code 2025.

The Direct Tax Code has been in the making for more than a decade. It was first drafted in 2009 and presented in 2010, but it faced numerous delays. The Income Tax Act had grown convoluted, featuring numerous sections, exemptions, and confusing provisions. As a result, compliance became challenging for many taxpayers. By implementing the Direct Tax Code 2025, the government aims to simplify tax laws, reduce litigation, and encourage more citizens to pay taxes.

One of the key goals of the Direct Tax Code is to expand India’s tax base. Currently, only around 1% of the population pays income tax. With the streamlined regulations, the government plans to increase this figure to 7.5%, ensuring broader participation in the tax system.

The Direct Tax Code introduces several changes that make the taxation process easier to follow while broadening the scope of taxable income. Here are the significant updates:

The Direct Tax Code 2025 simplifies how taxpayers are classified. Now, individuals will be classified as either residents or non-residents, eliminating terms like "Resident but Not Ordinarily Resident (RNOR)." This change removes ambiguity and makes it easier for taxpayers to understand their obligations.

The Direct Tax Code removes the concepts of the Assessment Year (AY) and Previous Year (PY). Taxpayers will now only need to focus on the Financial Year (FY), making tax filing more straightforward.

Under the new system, capital gains are included as part of normal income. This shift may result in higher taxes for those who earn substantial capital gains, but it also simplifies the classification of income.

While the Direct Tax Code retains the five heads of income, it renames several categories. For example, "Income from Salary" becomes "Employment Income," and "Income from Other Sources" is now "Income from Residuary Sources." These changes aim to make the tax system more intuitive.

The Direct Tax Code 2025 introduces a uniform tax rate for domestic and foreign companies. This move simplifies compliance, especially for multinational corporations operating in India.

By reducing the number of deductions and exemptions, the Direct Tax Code makes tax filing simpler and closes loopholes that taxpayers previously exploited.

The Direct Tax Code 2025 applies Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) to most forms of income. This will increase regular tax payments and reduce the chance of evasion.

The Direct Tax Code may expand the scope of tax audits, allowing professionals like Company Secretaries (CS) and Cost and Management Accountants (CMA) to conduct these audits. Previously, only Chartered Accountants (CAs) could perform this task.

While the Income Tax Act contained 298 sections, the Direct Tax Code 2025 will have 319 sections and 22 schedules, streamlining the overall structure.

One controversial aspect of the Direct Tax Code is that it continues to exempt political parties from paying taxes, raising concerns among the public about fairness in the system.

If you're preparing for professional exams such as CA, CS, or CMA, you might wonder when the Direct Tax Code will be applicable. For exams scheduled before March 2026, students will continue to study the Income Tax Act of 1961. The Direct Tax Code 2025 will only be relevant for exams held from April 2026 onwards. This provides clarity for students as they navigate the transition to the new tax code.