Revamping The Income Tax Act: New Tax on Exempt Categories

The Finance Ministry is accelerating efforts to review and streamline the Income Tax Act of 1961.

The main aims to simplify the tax system and processes by removing redundant sections, sub-sections, and clauses.

New Act Expected to be announced

A new Income Tax Act i.e., Direct Tax Code is expected to be announced in the February 2025 to replace the existing one and bring about more streamlined and efficient tax system.

Under this new act, special provisions might be introduced for senior citizens, small business and startups to encourage economic growth.

What is Direct Tax Code (DTC)?

Direct Tax Code is a proposed legislative reform aimed at replacing the Income Tax Act 1961. The DTC is expected to modernise India's laws, encouraging transparency and increasing the taxpayer base.

Key Focus

The main focus is to bring more individuals under the tax net by simplifying and making tax filing easier on rationalizing exemptions and deductions.

Sections expected to be abolished

Upto 120 sections and sub-sections of the existing Income Tax Act are expected to be abolished

Structure of the Income Tax Act

The Income Tax Act, was originated in 1922 and took its current form in 1961, currently has 298 sections and 23 chapters.

The revamped Act will be written in clearer language to improve taxpayer services and reduce litigation.

Exploring Global Best Practices

The committee is studying international tax systems to implement a more taxpayer-friendly law, aiming for greater simplicity, improved taxpayer services, tax certainty, and reduced litigation.

Income Heads in the Direct Tax Code

There are two Income Heads in the New Direct Tax Code

• Special Source Income
• Ordinary Source Income

But in the current IT Act it has only one income source "Ordinary Source" which include

1. Income from employment
2. Income from the house property
3. Income from business
4. Capital gains
5. Income from residuary sources.

New Tax on Exempt Categories

Under the new code, certain incomes may now attract a tax rate between 5% and 10% may now attract which were previously exempt under section 10 (such as - Life Insurance Corporation policies, Mutual Funds).