Direct Tax Code To Be Introduced Separately From Union Budget 2025

The Direct Tax Code (DTC), a revolutionary income tax bill designed to streamline compliance for individual taxpayers, will be introduced on its own, independent of the Union Budget 2025. This decision, revealed by sources to NDTV, contradicts earlier reports suggesting its inclusion in Finance Minister Nirmala Sitharaman’s speech on Saturday morning.

Direct Tax Code: A Step Towards Simplification

The concept of the Direct Tax Code emerged when Sitharaman unveiled the 2024/25 budget in July. Her objective was to create a simpler and more accessible income tax system. The current Income Tax Act (I-T Act) of 1961 stands at 23 chapters and 298 sections, a labyrinth that the DTC aims to reduce by 60%. This ambitious project seeks to cut the number of pages from its current 1,300 to just 520, focusing on making the Act easier to understand.

Key Changes Likely Under DTC

The Direct Tax Code is expected to simplify the process of tax calculation and filing returns. One of the most significant proposed changes involves doing away with the current concept of financial year (FY) in favor of the accounting year (AY). This move aims to align tax assessment periods with business accounting practices.

Another anticipated modification will classify income from mutual funds and investments in the Life Insurance Corporation of India as taxable at a flat rate of five percent, compared to their current tax-free status.

A flat 15 percent tax on dividends is also on the table, which could significantly impact how income from various investments is assessed and taxed under the new regime.

Background and Process

Before Sitharaman’s announcement, the Central Board of Direct Taxes (CBDT) established an internal committee tasked with overhauling the I-T Act. This committee spawned 22 specialized sub-committees to evaluate various aspects of the existing tax law in October.

The CBDT also invited public feedback from stakeholders and subject experts, resulting in over 7,000 submissions by January 2023. These insights will likely inform the final design and implementation of the Direct Tax Code.

Timeline and Future of DTC

Initially, there were expectations that the DTC would be introduced during the next Budget session of Parliament, set to kick off on Friday with the release of the annual economic survey. However, recent reports clarify that the launch will be a standalone event, separate from the Union Budget 2025.

This phased approach allows for a more focused and effective implementation of the new tax law, ensuring its readiness and impact before broader fiscal decisions.

With input from agencies

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