Union Budget 2025: New Income Tax Bill To Be Introduced Next Week

Finance Minister Nirmala Sitharaman announced that a new income tax bill, the Direct Tax Code (DTC), will be introduced next week as part of the Union Budget 2025.

The aim of this new code is to simplify compliance for individual taxpayers, making it easier to calculate taxes and file returns.

One of the key changes expected is the scrapping of the distinction between the financial year (FY) and the assessment year (AY).

The discussion around the introduction of the DTC began when Sitharaman presented the full 2024/25 budget in July, with the objective of simplifying the current income tax laws and significantly reducing the length of the Income Tax Act of 1961 by as much as 60%.

The Income Tax Act of 1961, which governs the imposition of direct taxes such as personal and corporate taxes, as well as taxes on securities transactions, gifts, and wealth, contains 23 chapters and 298 sections.

In preparation for the overhaul, the Central Board of Direct Taxes (CBDT) established an internal committee, which included 22 sub-committees to review different aspects of the existing law. In October, the government also invited public input, receiving over 7,000 suggestions by January.

The new Direct Tax Code is expected to streamline the tax laws and reduce complexity, as numerous amendments over the years have made the 1961 Act difficult to navigate.

Notably, the DTC may introduce a tax of 5% on income from LIC policies, which is currently exempt under the 1961 law.

In terms of tax audits, the DTC may allow company secretaries and cost management accountants to conduct audits, whereas previously only Chartered Accountants were authorised to do so.

Dividend income, which is currently taxed at varying slab rates, may also be standardised at a flat 15%. For high-income earners, the tax rate may be unified at 35%, replacing the variable surcharge that is added to the 30% tax slab.

Additionally, the DTC may eliminate differences in the taxation of various asset classes when it comes to capital gains.

The option to choose between two tax regimes may also be removed, and deductions and exemptions may be reduced, following the structure of the new tax regime.