The Centre is expected to unveil the Direct Tax Code 2025, the simplified version of the income tax laws, in the upcoming Union Budget to be presented on February 1 next year. Once implemented, the Direct Tax Code will replace the Income Tax Act, 1961.

Experts are of the view that the Direct Tax Code (DTC) will completely revamp the income tax laws, which will result in easing legal hurdles and reducing the litigation burden for individuals, the government and the industry.

The new simplified tax regime is likely to revolutionize India’s taxation framework, feel experts. With a focus on simplifying tax laws, reducing compliance burdens, and aligning with modern economic realities, the DTC 2025 promises significant relief for middle-class taxpayers, they say. According to them, key provisions are expected to include streamlined tax regimes, fewer slabs, and reduced complexities, benefiting individuals with annual incomes between Rs 5 lakh and Rs 15 lakh.

SIMPLIFYING INDIA’S TAX FRAMEWORK

Niyati Shah, Vertical Head – Personal Tax, 1 Finance, emphasizes on the pressing need for reform, pointing out that the Income Tax Act, 1961, despite numerous amendments, has become “bulky and less effective, creating challenges for taxpayers and administrators alike.” She highlighted that the DTC 2025 aims to “simplify the tax framework, reduce compliance burdens, and align tax laws with other regulations.”

For individual taxpayers, Shah outlined several key benefits:

Streamlined tax rates and filing processes: “For individual taxpayers, the DTC promises a unified and rationalized tax structure, simplified tax rates, and a more streamlined filing process.”

Clarity in residential status: The categorization will be limited to “Resident” and “Non-resident,” removing the complexities of multiple residential categories like R-OR and R-NOR.

Rationalized tax regime for middle-income earners: “Those with annual incomes between Rs 5 lakh and Rs 15 lakh stand to benefit from the DTC 2025.” However, Shah warned of the transition to a single tax regime, stating that the flexibility to choose between the old and new systems would eventually be withdrawn.

While the government plans to phase out deductions and exemptions, Shah noted that “lower tax rates and ease of compliance are designed to offset this shift.”

ADDRESSING MIDDLE-CLASS TAXPAYER CONCERNS

Akhil Chandna, Partner, Grant Thornton Bharat, highlighted that middle-income earners represent a significant portion of India’s taxpayer base. According to him:

Upgrading outdated provisions: “Some of the provisions in salary taxation have not undergone any changes for a long time, e.g., children's education allowance exemption is paid at Rs 100 per month. Similarly, limits on allowances like hostel expenditure, meal cards, and car benefits need to be re-looked.”

Simplifying TDS/TCS provisions: Chandna pointed out that these provisions are particularly burdensome for the middle class, often necessitating professional help for compliance. “Simplified compliance requirements would help reduce mistakes and ensure better adherence.”

Rethinking deductions: Chandna noted that “many deductions have reached sunset clauses, such as tax deduction on the purchase of EVs and affordable housing,” and removing such outdated provisions would enable more accurate claims.

TRANSITION TO A UNIFIED TAX REGIME

Both experts agree that the old tax regime is likely to be phased out gradually. Shah observed, “The current option to choose between the old and new regimes based on financial circumstances will eventually be withdrawn.” Similarly, Chandna referenced government data showing that “about 72% of taxpayers have opted for the New Tax Regime for the financial year 2023-24.” He added that this gradual transition would “allow taxpayers to adapt to the new system while maintaining flexibility.”

However, Chandna noted that while the DTC 2025 might simplify the tax code, “it would not necessarily mean that tax rates would be reduced. The government would ensure that tax revenues do not decrease due to the simplification of language.”

BALANCING SIMPLICITY AND COMPLIANCE

The DTC 2025 represents a critical reform aimed at making India’s tax laws “simpler, fairer, and more transparent,” as Shah summarised. While transitioning to this system may limit flexibility, the focus on lower tax rates and streamlined compliance processes is expected to outweigh the challenges. For middle-class taxpayers, these changes promise to reduce ambiguity, simplify compliance, and offer long-term financial benefits.