Major Updates: New Direct Tax Code 2025 Simplifies Income Tax

Direct Tax Code

Simplifying India’s Tax Landscape: Key Changes Proposed in the Direct Tax Code 2025

Direct Tax Code

Have you ever found Income Tax complex, with confusing exemptions and deductions? To make taxation more user-friendly and accessible, the government has introduced the new Direct Tax Code (DTC), aimed at streamlining tax laws for everyone, from novices to experts.

Unveiled by Finance Minister Nirmala Sitharaman on August 21, 2024, the Direct Tax Code is set to simplify tax laws, encourage a more consistent business tax rate, and reduce legal disputes. Discussions on the DTC began in 2009, and it will replace the Income Tax Act of 1961 when implemented in the next six months.

What is the Direct Tax Code (DTC)?

The Direct Tax Code (DTC) simplifies the tax system, making it more transparent, modern, and user-friendly. Taking effect in the 2025-26 financial year, it will replace the Income Tax Act of 1961, cutting down complexity by eliminating redundant exemptions and deductions. The DTC also aims to reduce legal disputes and improve compliance by simplifying tax laws.

Key Milestones in the Development of the DTC

 

  • 2009: The first draft of the DTC was introduced, intending to replace the Income Tax Act.
  • 2010: A revised draft was presented, leading to the DTC Bill’s introduction in Parliament.
  • 2013: The DTC was further revised based on stakeholder feedback.
  • 2017: A task force was formed to draft a new direct tax law.
  • 2024: Finance Minister Nirmala Sitharaman announced the DTC’s introduction.
  • 2025: The DTC is expected to launch alongside the 2025 Budget.

Goals of the Direct Tax Code

The Direct Tax Code 2025 is designed to make India’s tax system easier to understand and more efficient. Its primary goals include:

  • Simplifying tax rules to make them accessible to all.
  • Increasing the taxpayer base from 1% to 7.5% of the population.
  • Promoting compliance by making tax regulations easier to follow.
  • Reducing legal disputes through clearer tax laws.

Tax Structure in the Direct Tax Code 2025

The DTC 2025 aims to modernize the tax system by reducing the number of sections and adding more schedules for simpler tax filing. Key changes include:

  • Simplified Classification: Taxpayers are classified as residents or non-residents, eliminating terms like ROR and RNOR.
  • Fewer Deductions and Exemptions: Most deductions and exemptions are removed, closing loopholes and ensuring fairness.
  • Expanded TDS and TCSTax Deducted at Source (TDS) and Tax Collected at Source (TCS) will apply to nearly all income, encouraging more regular tax payments.
  • Capital Gains as Regular Income: Capital gains will be taxed as part of regular income, ensuring equal treatment for all income types.

Major Changes in the Direct Tax Code 2025

Here’s a look at the notable updates in the DTC 2025:

  1. Removal of Assessment and Previous Year Concepts
    The terms “Assessment Year” and “Previous Year” are removed. Now, only the “Financial Year” will apply for tax filings.

  2. Changes in Capital Gains Tax

    • Short-term capital gains on financial assets will be taxed at 20% (up from 15%).
    • Long-term gains will be taxed at 12.5% (down from 20%).
  3. Simplified Residential Status
    Taxpayers are now classified simply as residents or non-residents, removing the RNOR (Resident but Not Ordinarily Resident) category.

  4. Renaming Income Categories
    “Income from Salary” is now “Employment Income,” and “Income from Other Sources” is renamed “Income from Residuary Sources.”

  5. Expanded Tax Audit Roles
    Company Secretaries (CS) and Cost and Management Accountants (CMA) can now conduct tax audits, previously limited to Chartered Accountants (CAs).

  6. Unified Company Tax Rates
    Domestic and foreign companies will now have the same tax rate, encouraging foreign investment.

  7. New TDS and TCS Rules
    TDS and TCS will apply to almost all income types, helping prevent tax evasion. TDS rates for most payments will decrease from 5% to 2%. For e-commerce operators, the TDS rate will drop from 1% to 0.1%, easing compliance.

  8. Reduced Deductions and Exemptions
    While most deductions and exemptions are removed, the standard deduction for salaried employees in the new tax regime has increased to ₹75,000, a 50% rise.

How the Direct Tax Code Differs from the Income Tax Act of 1961

ParametersIncome Tax Act, 1961Direct Tax Code, 2025
Residential StatusROR, RNOR, NRResident, Non-Resident
Tax AuditConducted by Chartered Accountants (CAs)Conducted by CAs, CS, and CMAs
Concept TermsUses “Previous Year” and “Assessment Year”Only “Financial Year”
Taxation on DividendsDividend Distribution Tax at 15%Taxed at 15% without DDT
Tax on Distributed IncomeExemptions for income from LIC, mutual funds, etc.Taxable at 5%
High-Income Tax Rate30% + surcharge at 15% for income over ₹10 croreTaxable at 35%
Capital Gains TaxSpecial rate for capital gainsCapital gains taxed as normal income
Heads of Income NamesIncome from Salary, Income from Other SourcesEmployment Income, Income from Residuary Sources
Sections and Schedules298 sections, multiple sub-sections and schedules319 sections, 22 schedules

The new Direct Tax Code 2025 represents a major shift towards a more transparent, simplified, and inclusive tax system. By reducing complexity and enhancing compliance, it aims to create a fairer tax landscape for individuals and businesses alike. As the new code takes effect, taxpayers can expect easier compliance and improved clarity on tax obligations.

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CBDT Issues Revised Guidelines for Compounding Offences Under Income-tax Act

CBDT Issues Revised Guidelines for Compounding Offences Under Income-tax Act

The Central Board of Direct Taxes (CBDT) has introduced revised guidelines for the compounding of offences under the Income-tax Act, 1961, effective from October 17, 2024. These new guidelines aim to simplify the process, reduce complexities, and make it easier for taxpayers to comply with the law. This is part of a broader initiative to streamline tax regulations, following the Finance Minister’s budget announcement focused on simplifying the compounding procedure.

Key Highlights of the Revised Guidelines

  • Simplification of Offence Categorization: The revised guidelines eliminate the categorization of offences, providing a unified framework that simplifies the overall process for compounding.

  • No Time Limit for Filing Applications: The previous 36-month time limit for submitting applications has been removed, offering taxpayers greater flexibility. This applies to both new and pending applications, encouraging more applicants to seek compounding.

  • Defect Cure Process: Taxpayers now have the opportunity to submit fresh applications after curing any defects, which was not permitted under the previous guidelines.

  • Extended Coverage of Compounding: The revisions now allow for compounding of offences under sections 275A (related to wrongful seizure) and 276B (failure to deposit TDS), further expanding the scope of offences that can be compounded.

  • Simplified Compounding for Companies and HUFs: Companies and Hindu Undivided Families (HUFs) no longer need the main accused to file the compounding application. The offences can now be compounded by either the main accused or any of the co-accused, streamlining the process for entities.

  • Rationalization of Charges: The revised guidelines bring down compounding charges, including a reduction in interest for late payments. In cases of TDS defaults, the multiple rates of 2%, 3%, and 5% have been standardized to a single rate of 1.5% per month.

  • Removal of Separate Fee for Co-accused: The guidelines have abolished the separate compounding fee that was previously applicable to co-accused, further simplifying the fee structure.

These changes are aimed at promoting ease of compliance by reducing procedural complexities and financial burdens on taxpayers. The revised guidelines offer a more streamlined approach to resolving tax offences, in line with the government’s ongoing efforts to make tax laws more taxpayer-friendly.

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Consequences of Non-Compliance under the Income Tax Act, 1961

Consequences of Non-Compliance under the Income Tax Act, 1961

Many individuals remain unaware of the serious repercussions of misreporting or underreporting their income under the Income Tax Act, 1961. The notion that “everything will somehow be managed” still persists among some, leading them to hide income or evade taxes, hoping to pay less or none at all. However, in today’s increasingly digital and interconnected world, finding loopholes to evade taxes is becoming more difficult. Rather than taking these risks, it’s always better to maintain clean records and avoid penalties or legal consequences.

Below, we outline some of the major consequences of misreporting, non-reporting, and other tax-related errors under the Income Tax Act, 1961:

1. Providing Incorrect PAN

If an individual provides an incorrect Permanent Account Number (PAN), they may face a penalty of ₹10,000 under Section 272B of the Income Tax Act.

2. Excessive Cash Transactions

Any single cash transaction exceeding ₹2 lakh can attract a penalty equal to 100% of the amount received in cash, as per Section 271DA of the Act.

3. Late Filing of Income Tax Return

Failure to file your tax return by the due date will result in a penalty of ₹5,000 under Section 234F of the Income Tax Act.

4. Non-Deduction of TDS on Purchase of Property

If TDS is not deducted on the purchase of property valued at ₹50 lakh or more, an interest charge of 1% per month of delay is applicable under Section 201 of the Income Tax Act.

5. Failure to Deposit TDS

If TDS has been deducted but not deposited with the government, an interest charge of 1.5% per month from the date of deduction will be applied under Section 201(1A).

6. Late Payment of Tax

If your tax liability exceeds ₹10,000 and you have failed to pay or have short-paid your advance tax, interest of 1% per month will be charged under Section 234B of the Income Tax Act.

7. Concealment of Income

For cases of income concealment, if the amount evaded exceeds ₹25 lakh, the penalty can range between 100% and 300% of the tax evaded, as per Section 271(1)(c).

8. Failure to Conduct Mandatory Audit

If you are required to have your accounts audited but fail to do so, the penalty under Section 271B is the highest of the following:

  • 0.5% of total sales,
  • 0.5% of gross receipts, or
  • ₹1,50,000.

Summary of Penalties for Common Errors

ErrorRelevant SectionPenalty
Providing incorrect PAN272B₹10,000
Cash transaction over ₹2 lakh271DA100% of the amount received
Late filing of tax return234F₹5,000
Non-deduction of TDS on property purchase201Interest @1% per month
Non-deposit of TDS201(1A)Interest @1.5% per month
Late payment of taxes234BInterest @1% per month
Concealment of income (evaded amount over ₹25 lakh)271(1)(c)100% to 300% of tax evaded
Failure to audit accounts271BHighest of 0.5% of sales, 0.5% of receipts, or ₹1,50,000

With the growing reliance on technology and digitization in the tax system, the chances of escaping penalties for tax evasion or misreporting are shrinking. It is always better to maintain proper records and comply with tax regulations to avoid these significant financial penalties and legal consequences.

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