Direct Tax Code 2025 impacts salaried employees in India

The Direct Tax Code (DTC) 2025 is set to bring significant changes in the taxation framework for salaried employees in India. The government aims to simplify the tax structure, enhance compliance, and broaden the tax base with this comprehensive reform. For salaried individuals, understanding the implications of the direct tax code 2025 is crucial for better financial planning and tax optimisation.

Apart from regular income tax provisions, the new code could also impact the short term capital gain tax on shares, a key consideration for salaried investors. This article explores the major elements of DTC 2025 affecting salaried employees and explains how individuals can align their finances with these reforms.

Overview of the direct tax code 2025

The direct tax code 2025 is a proposed legislative framework designed to replace the existing Income Tax Act, 1961. The objective is to create a more transparent, efficient, and equitable tax system. The government’s vision with DTC 2025 includes:

• Simplifying tax slabs and rates for easier comprehension  
• Rationalising deductions and exemptions to plug loopholes  
• Introducing progressive tax rates based on income brackets  
• Enabling better tax administration through technology  

For salaried employees, the focus will be on how the tax brackets are revised and which allowances or deductions remain valid.

Changes in tax slabs and rates

One of the headline features in DTC 2025 is the simplification of tax slabs. The new code may feature fewer slabs but with clearer thresholds. For example, salaried taxpayers could expect:

• A low exemption limit increase to reflect inflation  
• Distinct slabs for different income ranges with progressive rates  
• Higher tax savings opportunities within each slab  

Such changes aim to reduce the tax burden on middle-income earners while ensuring wealthier individuals contribute proportionately.

Implications of direct tax code 2025 for salaried employees

Salaried individuals will experience multiple shifts under the new code. Key impacts include:

Revision of taxable income components

The definition of taxable income might expand to include certain perquisites and allowances previously exempt under the Income Tax Act. Clubs and allowances related to fuel, telephone, and rent may face reclassification. Salaried employees need to carefully review their remuneration structures to anticipate changes.

Rationalisation of deductions and exemptions

Deductions under sections like 80C, 80D, and others are likely to be streamlined. The limit under section 80C may see enhancements or combined ceilings to avoid complexity. This will directly affect how salaried employees plan investments in tax-saving instruments.

Taxation on provident fund and gratuity

DTC 2025 could introduce clear rules for tax treatment of provident fund contributions and gratuity, potentially taxing interest accumulation or certain withdrawals if they exceed defined limits. This aspect holds importance for long-term salaried employees relying on these funds for retirement.

Impact on bonuses and perquisites

The taxability of bonuses, including performance-related incentives, might be revisited. Perquisites provided by employers, such as subsidised loans or accommodation, may attract closer scrutiny to ensure fair valuation and taxability.

Direct tax code 2025 and short term capital gain tax on shares

Salaried employees who invest in the stock market should pay attention to changes regarding the short term capital gain tax on shares. Currently, short term capital gains (STCG) from equity shares held for less than 12 months are taxable at a flat rate of 15%.

Potential adjustments in STCG tax rates

Under the direct tax code 2025 proposal, there could be modifications to the STCG tax structure:

• Possible integration of STCG into overall income, taxing it as per applicable slabs  
• Alternatively, retaining a separate rate but with a revised percentage based on market conditions  
• Introducing clearer definitions around shareholding periods and transaction types  

These changes will influence investment decisions of salaried employees who actively trade or invest in equities.

Alignment with long-term capital gains (LTCG)

The DTC 2025 may attempt to harmonise treatment of short term and long-term capital gains to reduce tax arbitrage. Changes to the holding period criteria and exemption limits for LTCG could indirectly affect the STCG regime.

Effect on salaried investors’ portfolios

A revision in STCG tax under DTC 2025 will necessitate re-evaluation of equity portfolios for tax efficiency. Salaried employees must consider holding periods, transaction frequency, and use of tax-saving avenues like Equity-Linked Saving Schemes (ELSS).

Planning strategies for salaried employees under direct tax code 2025

With numerous changes coming under DTC 2025, proactive tax planning becomes essential for salaried individuals.

Optimise income components

Review salary structures to take advantage of allowances and perquisites that remain tax-efficient. Dialogue with HR departments to explore revised salary packaging options will be vital.

Maximise eligible deductions

Closely monitor changes in deductions allowed under the new code. Invest in instruments that provide maximum tax benefits within the new limits.

Plan investment timing and portfolio composition

Adjust short-term and long-term equity investments considering the new short term capital gain tax on shares. Minimising frequent trading and adopting longer holding approaches can reduce tax liabilities.

Stay informed on compliance and filing requirements

The DTC 2025 aims to enhance digital tax administration. Salaried employees should keep updated on filing procedures, deadlines, and documentation to avoid penalties and audits.

Conclusion

The direct tax code 2025 heralds a significant reform that will reshape how salaried employees in India are taxed. From modifications in tax slabs and deductions to potential changes in the short term capital gain tax on shares, the code is designed to simplify and rationalise the tax regime. For salaried taxpayers, understanding these impacts and adopting prudent financial strategies will be key to optimising tax outgo and aligning with the new compliance framework.

By staying informed and planning effectively, salaried employees can ensure they benefit from the opportunities and navigate the challenges posed by the direct tax code 2025. This reform marks a step forward in India’s journey to a modern, equitable taxation system.