SUMMARY This paper investigates two-way relaying with direct link transmission. We propose to combine incremental relaying (IR) with the time division broadcast protocol (TDBC) to form a new scheme, termed TDBC-IR, to increase the spectral efficiency of TDBC. Assuming half-duplex decode-and-forward relaying, the performance of three protocols, that is, TDBC, TDBC-IR, and physical-layer network coding (PNC), are studied and compared, in terms of outage probability, expected rate (ER), and diversity-multiplexing tradeoff. First, we reveal that the outage probability performance of TDBC-IR is the same as that of TDBC and better than that of PNC. Second, we compare the ER and diversity-multiplexing tradeoff performance of the three protocols based on the derived outage probability. The numerical results reveal that (1) the ER of TDBC-IR is greater than that of TDBC and PNC in the whole signal-to-noise ratio (SNR) region, that is TDBC-IR has improved spectral efficiency performance; (2) the ER performance of TDBC is better than PNC in the low SNR region but worse in the high SNR region; (3) the maximum achievable diversity order of TDBC-IR and TDBC are both two whereas that of PNC is one; (4) the maximum achievable multiplexing gain of TDBC-IR is one, which is better than TDBC (its maximum achievable is 2/3) and achieves the maximum of PNC (its maximum achievable is one). Copyright © 2012 John Wiley & Sons, Ltd.