Direct Tax Code

India’s direct tax system has been significantly reformed with the introduction of the Income-tax Act, 2025. This legislation reflects the long-standing objectives of the Direct Tax Code and aims to modernise India’s taxation framework. Approved by Parliament in 2025, it replaces the Income-tax Act, 1961, and will take effect from 1 April 2026.

The new framework is designed to make tax laws simpler, clearer, and more transparent for both individuals and businesses. It streamlines tax provisions, reduces compliance-related complexities, and introduces easier-to-use forms and procedures. These measures are expected to improve administrative efficiency and encourage greater taxpayer participation.

Overall, the reform marks an important step towards a more efficient and accessible tax system, promoting better compliance and strengthening trust between taxpayers and the government.

What is direct tax code?

The direct tax code refers to India’s legislative effort to reform its outdated tax system. By replacing the Income Tax Act of 1961, the DTC seeks to simplify tax regulations, reduce complexity, and make tax compliance more transparent. The code introduces a streamlined approach to calculating taxes, eliminating many of the exemptions and deductions that previously complicated the process. The DTC aims to increase voluntary compliance and minimise tax disputes, thereby ensuring a more efficient tax system for both individuals and businesses.

The long-anticipated Direct Tax Code reforms have now been realised through the Income‑tax Act, 2025, which Parliament passed in 2025 and which is set to come into effect from 1 April 2026. This new legislation replaces the decades-old Income‑tax Act, 1961, and marks a major step toward simplifying India’s direct tax framework. Unlike earlier proposals that were largely conceptual, the Income‑tax Act, 2025 is a fully enacted law designed to streamline tax provisions, reduce litigation, and make compliance easier for taxpayers. While the structure of income tax slabs and rates remains largely unchanged under Budget 2026, the focus is on clarity, transparency, and operational efficiency. Key features include simplified tax forms, a redesigned approach to TDS/TCS, consolidation of existing sections for easier understanding, and a move toward a single tax year concept. These reforms reflect the government’s commitment to creating a taxpayer-friendly, trust-based system while maintaining continuity in the tax regime. Taxpayers can now look forward to a smoother filing experience and clearer rules under this modernised framework, marking the operational rollout of India’s version of the Direct Tax Code.

Key takeaways

• The Income-tax Act, 2025 was approved by Parliament and received presidential assent in August 2025. It is scheduled to come into effect from 1 April 2026.
• The new Act introduces a simplified structure with clearer and more organised provisions, making it easier for taxpayers to understand and follow.
• It focuses on reducing disputes and litigation by removing ambiguities and improving clarity in tax rules and procedures.
• Enhanced compliance mechanisms have been introduced to encourage timely and accurate tax reporting.
• The framework aligns India’s direct taxation system more closely with modern global standards and practices.
• It emphasises transparency in tax administration, aiming to build greater trust between taxpayers and authorities.
• While expanding the scope of TDS (Tax Deducted at Source) and TCS (Tax Collected at Source), the Act avoids drastic or disruptive reforms.
• Overall, the legislation aims to create a balanced, efficient, and taxpayer-friendly system without major structural overhauls.

Budget 2026 updates on the new Direct Tax Code

The new Direct Tax Code, introduced through the Income Tax Act, 2025, came into effect from 1 April 2026 and replaces the Income Tax Act, 1961. Its main objective is to simplify tax laws, reduce compliance burden, and make tax provisions easier to understand. Key changes include the introduction of a single “Tax Year” concept, simplified language, streamlined TDS and TCS provisions, and a reduced number of sections. Budget 2026 did not introduce major changes to income tax slabs or rates, but it focused on improving tax administration, compliance processes, and taxpayer convenience. The reforms aim to create a simpler and more transparent tax system. 

Latest updates on Direct Tax Code: Budget 2026

The Union Budget 2026 introduced important updates to the Direct Tax Code (DTC), aiming to simplify taxation and improve compliance. The government has focused on reducing complexity by streamlining tax slabs and minimising exemptions, making the system more transparent and easier to understand for taxpayers.

One of the key highlights is the continued push towards a simplified tax regime, encouraging individuals to opt for lower tax rates without multiple deductions. There is also an increased emphasis on digital tracking and reporting to reduce tax evasion and enhance efficiency in tax administration.

For businesses, the updates aim to support growth by maintaining competitive corporate tax rates and offering incentives for investment and innovation. Overall, the changes reflect a balanced approach to boosting economic growth while ensuring fair tax collection.

Highlights of the direct tax code bill

The Income‑tax Act, 2025, which implements the Direct Tax Code reforms, introduces key changes aimed at simplifying tax compliance and improving transparency:

• Implementation from April 1, 2026: The new law replaces the Income‑tax Act, 1961, bringing a modernized framework into effect.
• Simplified tax compliance: Redesigned ITR forms and procedures reduce paperwork and make filing easier for both individuals and businesses.
• Retention of existing tax slabs and rates: While structural reforms are introduced, income tax rates remain unchanged under Budget 2026.
• Consolidation of deductions and exemptions: Existing deductions are streamlined into clearer categories to reduce confusion and disputes.
• TDS/TCS rationalization: Rules are simplified, improving compliance and reducing administrative burden.
• Single tax year system: Replaces the traditional previous year/assessment year framework, making record-keeping more straightforward.

Focus on ease of filing and transparency: Measures aim to reduce litigation, enhance trust between taxpayers and the government, and ensure smooth implementation.

Alignment with international standards: Includes provisions to minimize tax evasion and prevent double taxation.

Why was direct tax code introduced?

The direct tax code 2025 was introduced to address the growing complexity of India’s tax system. The Income Tax Act of 1961 had become overly complicated due to numerous amendments over the years. The government recognised the need for simpler, more transparent tax regulations that would increase the taxpayer base and improve compliance. By implementing the DTC 2025, the government aims to broaden the tax net, simplify the tax filing process, and reduce tax evasion, while making the system more equitable for all taxpayers.

• According to government data released in 2023, only 2% of India’s population pays income tax.
• This figure is significantly lower compared to developed nations.
• A simplified Direct Tax Code can contribute to making tax laws more equitable and transparent.
• Expanding the taxpayer base may support India’s overall economic growth.

Background and need for the direct tax code

India’s tax laws, governed by the Income Tax Act of 1961, had become complicated due to frequent amendments and the inclusion of numerous exemptions and deductions. This made tax compliance challenging for both taxpayers and administrators. The direct tax code was proposed to streamline and simplify these laws, making them easier to understand and follow. The new system addresses the need for transparency, reduces litigation, and encourages better compliance by offering a more straightforward tax structure.

Key features of the direct tax code

The direct tax code introduces several important features aimed at modernising India’s tax system. These include simplification of tax structure, rationalisation of tax rates, increased compliance, and changes to wealth and capital gains taxes. Below are the key features:

Simplification of tax structure

The direct tax code simplifies the existing tax structure by reducing the number of exemptions and deductions. This broadens the tax base and makes the tax system more transparent and easier to navigate. The elimination of complex rules and provisions ensures that taxpayers can file returns with greater clarity. The simplified structure also helps reduce tax evasion, as fewer loopholes exist for individuals and companies to exploit.

Rationalisation of tax rates

The direct tax code proposes rationalised tax rates to align with global standards, making India more competitive for businesses. For both domestic and foreign companies, the DTC introduces a unified tax rate, simplifying compliance for multinational corporations. Individual tax slabs are also revised to offer relief to middle-income earners while ensuring that higher-income earners contribute proportionally. This rationalisation encourages better tax compliance and reduces the burden of filing taxes for different income groups.

Increased compliance and reduced litigation

The direct tax code focuses on increasing compliance by simplifying tax laws and reducing the scope for disputes. By eliminating complex exemptions and deductions, the DTC makes it easier for taxpayers to understand their obligations. This approach not only boosts voluntary compliance but also reduces litigation between taxpayers and authorities. The streamlined process and clear guidelines reduce the need for lengthy legal battles, ensuring that tax disputes are resolved more efficiently.

Taxation of foreign income

The direct tax code introduces clear provisions for the taxation of foreign income earned by Indian residents. Under the new system, all global income of residents will be taxed in India, regardless of where it is earned. This shift from source-based taxation to residence-based taxation aligns India’s tax laws with international practices. The DTC removes ambiguities regarding foreign income, ensuring that individuals with global interests can comply with Indian tax laws more easily.

Wealth tax and capital gains tax

The direct tax code makes significant changes to the treatment of wealth tax and capital gains tax. Wealth tax is abolished, simplifying tax compliance for high-net-worth individuals. The DTC also alters the way capital gains are taxed, with the holding period of assets being a key factor in determining tax rates. Short-term capital gains may attract higher rates, while long-term gains are taxed at a lower rate. These changes ensure that the tax system is fairer and encourages long-term investment.

Minimum alternate tax (MAT)

The direct tax code revises the minimum alternate tax (MAT) to ensure that companies declaring low taxable income but reporting profits contribute a fair share of taxes. By introducing a more structured MAT framework, the DTC ensures that all profitable companies, including those using tax-saving measures, pay a minimum level of tax. This provision encourages transparency in corporate accounting and prevents companies from avoiding taxes through creative accounting methods.

Anti-avoidance rules

The direct tax code includes general anti-avoidance rules (GAAR) to curb aggressive tax planning and avoid loopholes. These rules allow tax authorities to investigate and deny tax benefits for transactions that lack substantial commercial purpose beyond achieving tax advantages. The inclusion of GAAR aims to reduce tax evasion and ensure that the tax system is fair. By cracking down on artificial transactions designed solely for tax benefits, the DTC ensures a more equitable tax environment.

Residence-based taxation

The direct tax code shifts India’s taxation system from a source-based to a residence-based model, meaning that Indian residents will be taxed on their global income. This approach ensures that residents, regardless of where their income is earned, contribute to India’s tax base. The new system simplifies the taxation of foreign income and brings India in line with global tax standards, reducing confusion and making compliance easier for residents with international earnings.

Why is the Direct Tax Code important?

India’s current tax system is often criticised for being overly complex and difficult to understand. For individuals, the process of filing returns and interpreting exemptions and deductions can be overwhelming. Businesses—especially small and medium enterprises—face high compliance costs due to layered regulations and taxation structures.

The Direct Tax Code (DTC) seeks to resolve these challenges by simplifying tax laws and consolidating provisions. Key focus areas include:

• Simplifying tax deducted at source (TDS)

  
  

  The existing TDS structure is complicated. The DTC could streamline it into broader categories—possibly three to five—with clearer, simplified rates.

• Reducing tax-related litigation

  
  

  A large portion of government revenue is stuck in tax disputes. By making laws easier to understand, the DTC may help lower the number of legal cases.

• Promoting transparency

  
  

  A more streamlined tax code can eliminate ambiguity, encourage better compliance, and minimise loopholes that allow for tax evasion.

Benefits of the Direct Tax Code

The Direct Tax Code (DTC) is set to offer several key advantages for both individuals and businesses:

• Simplified Tax Structure: The DTC aims to reduce the number of exemptions and deductions, retaining only essential ones to make the tax system easier to understand and navigate.
• Enhanced Compliance: By streamlining the tax process, the DTC is expected to encourage higher compliance among taxpayers, thereby reducing the need for frequent audits and penalties.
• Harmonized Tax Rates: The proposed tax rates under the DTC are designed to align more closely with global standards, which could improve India’s appeal as a destination for foreign investments and businesses.
• Fewer Legal Disputes: The simplification of tax laws under the DTC will help minimize ambiguities, leading to fewer disputes and a more equitable system for taxpayers.

Simplified residential status

The direct tax code 2025 simplifies the classification of taxpayers by removing complex categories like "Resident but Not Ordinarily Resident." Taxpayers will now be classified as either residents or non-residents, making it easier to determine tax obligations based on residential status. This simplification reduces confusion and ensures taxpayers are clear about their status under the tax code. By streamlining the rules for residency, the DTC improves clarity and compliance, particularly for individuals with complex living arrangements or those who work abroad.

Removal of assessment year and previous year concepts

One of the key reforms under the budget 2025 was the removal of the concepts of assessment year and previous year. Tax filings in Budget 2026 are now based solely on the financial year, aligning with modern accounting practices and simplifying the filing process. This change reduces confusion for taxpayers, who previously had to deal with multiple terms when filing taxes. By focusing on the financial year, the DTC ensures that tax filings are straightforward and consistent with the financial reporting period.

Changes in capital gains taxation

Previously, the content suggested all capital gains would be taxed at higher rates under normal income. Budget 2026 update: Capital gains are consolidated for certain types of income but existing exemptions and lower rates for equity LTCG and other long-term gains remain unchanged. This simplifies reporting while ensuring fairness.

New definitions for income categories

The direct tax code 2025 introduces new terminology for income categories to reflect modern income structures. "Income from Salary" is now referred to as employment income, while "Income from Other Sources" becomes income from residuary sources. These changes make it easier for taxpayers to understand and categorise their income, reducing ambiguity in tax filings. The updated definitions reflect a more modern approach to categorising income, ensuring clarity and simplicity for taxpayers, especially those with multiple income streams.

Unified tax rates for companies

The direct tax code 2025 introduces unified tax rates for both domestic and foreign companies. This reform simplifies the tax process for multinational corporations operating in India, ensuring that all companies are taxed at the same rate, regardless of their origin. The aim is to make India more attractive for foreign investment by creating a level playing field. By unifying tax rates, the DTC reduces complexity in corporate tax filings and makes compliance easier for businesses operating across borders.

Budget 2026 update: While tax rules are simplified for corporates, full unification did not happen. SMEs may enjoy lower rates (e.g., 15% for certain manufacturing units), but standard corporate rates for others (22–30%) remain.

Reduction in deductions and exemptions

The direct tax code 2025 reduces the number of deductions and exemptions available to taxpayers. This move simplifies the tax filing process, as fewer exemptions mean less room for tax avoidance and complex calculations. By streamlining the system, the DTC aims to create a more equitable tax environment where everyone contributes their fair share. The reduction in deductions and exemptions also makes it easier for taxpayers to file returns without needing to navigate numerous exceptions and special cases.

Tax audit changes

The direct tax code 2025 introduces changes to tax audit rules, allowing not only chartered accountants but also company secretaries and cost and management accountants to conduct tax audits. This expands the pool of qualified professionals who can carry out audits, making the process more accessible and efficient for businesses. By widening the scope of professionals authorised to conduct audits, the DTC ensures that more businesses can comply with audit requirements, reducing bottlenecks in the system.

TDS and TCS on most income

The direct tax code 2025 expands the application of tax deducted at source (TDS) and tax collected at source (TCS) to cover most forms of income. This change ensures that taxes are collected regularly and at the point of income generation, rather than relying solely on year-end filings. By applying TDS and TCS to a broader range of income sources, the DTC improves the efficiency of tax collection and reduces the risk of tax evasion, ensuring a more consistent flow of revenue to the government.

Simplified structure

The direct tax code 2025 reduces the number of sections in the tax code while increasing the number of schedules to provide more clarity and structure. By simplifying the layout and removing unnecessary complexity, the DTC makes it easier for taxpayers to navigate the tax code and comply with their obligations. This simplified structure reduces cross-referencing and makes the code more user-friendly, ensuring that taxpayers can understand and fulfil their responsibilities without needing to interpret overly complex legal language.

Impact on political parties

Despite the many changes introduced by the direct tax code 2025, political parties remain exempt from taxation. This provision has raised concerns among taxpayers, as the DTC aims to reduce exemptions for individuals and businesses. Some argue that political parties should also contribute to the tax system, given the focus on expanding the tax base and improving compliance across other sectors. The continued exemption for political parties remains a point of debate, as the code seeks to create a more equitable tax environment.

Purpose of direct tax code

• Simplify India’s direct tax system by consolidating laws into one framework.
• Eliminate excessive exemptions and deductions.
• Enhance tax compliance with clear and transparent rules.
• Reduce litigation and tax disputes.
• Modernise the tax structure to align with international practices.
• Ensure equitable taxation and broaden the tax base.

Challenges under direct tax code

The direct tax code faces challenges in implementation, transition complexities, political resistance, and concerns about economic impact. While it aims to simplify the tax system, stakeholders have raised concerns about the practical execution and its potential effects on growth and investments.

Implementation issues

The direct tax code requires substantial adjustments from taxpayers, tax professionals, and authorities. Implementing the code involves training, updating administrative systems, and ensuring smooth operations during the transition. These changes may initially create confusion and delays, impacting overall compliance.

Complexity in transition

Shifting from the current Income Tax Act to the direct tax code introduces complexities in transitioning to new rules and terms. Taxpayers and administrators must adapt, and extensive re-education is required to ensure smooth compliance. The risk of misunderstanding new obligations can disrupt compliance in the short term.

Political and legislative hurdles

The direct tax code has encountered significant political and legislative challenges, delaying its implementation. Various stakeholders, including businesses and political entities, have expressed concerns over its impact, especially on existing tax benefits. Balancing these interests has prolonged its adoption process.

Economic considerations

Certain provisions in the direct tax code, such as changes in capital gains and wealth tax, may affect investment and economic growth. Critics argue that increasing tax burdens on investments might deter foreign investments and limit economic growth, requiring careful consideration in policy implementation.

Tax structure under direct tax code 2026

• The Direct Tax Code (DTC) 2025 proposes a revised income tax slab system, aiming to simplify taxation for individuals and corporate entities.
• Individual income tax is streamlined, with fewer tax brackets and competitive rates designed to enhance compliance and reduce evasion.
• Corporate tax rates are aligned to foster a business-friendly environment, with exemptions for sectors fostering innovation, sustainable practices, and infrastructure.
• The code eliminates several existing deductions, favouring a standard deduction model for individual taxpayers.
• Focuses on enhanced transparency, leveraging digitalisation for accurate, hassle-free filing processes and quicker refunds.
• Introduces specific anti-avoidance rules (GAAR) to prevent tax evasion through artificial arrangements.
• Encourages investment in specified sectors by offering limited tax incentives.
• Aligns capital gains tax rates with income tax slabs, introducing consistency in tax liability across asset classes.
• Emphasises dispute resolution mechanisms to reduce litigation and expedite tax dispute settlements.

Evolution of direct tax code

• The concept of a Direct Tax Code (DTC) was first introduced in 2009 to simplify and consolidate direct tax laws in India.
• It aimed to replace the Income Tax Act of 1961 with clearer, modern tax regulations.
• Over the years, various DTC drafts proposed changes in tax slabs, corporate taxation, and deductions to align with global standards.
• The 2010 draft received feedback, leading to revisions emphasising transparency and ease of compliance.
• In 2017, further recommendations included reducing litigation and improving taxpayer services.
• The Direct Tax Code 2025 marks the latest attempt, focusing on simplification, digitalisation, and taxpayer-friendly reforms.

Conclusion

The direct tax code represents a significant reform aimed at simplifying and modernising India’s tax system. Though challenges remain in terms of political approval and economic impact, its long-term benefits include increased transparency, improved compliance, and a fairer taxation process. Implementing the code will be crucial for India’s economic growth and equitable taxation system. Start your mutual fund investments with confidence on the Bajaj Broking website, one of the trusted and secure platforms in India.