Union Budget 2026—Proposed Amendments under the Income Tax Act, 2025
The Union Budget has proposed a comprehensive overhaul of India’s direct tax framework with the introduction of the Income Tax Act, 2025, replacing the six-decade-old Income Tax Act, 1961. The new law is set to come into force from 1 April 2026 and aims to simplify taxation, reduce litigation, and improve ease of compliance for taxpayers.
This article provides a structured overview of the key reforms and their implications.
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Introduction of the Income Tax Act, 2025
The existing Income Tax Act, 1961, will be replaced by modern, simplified legislation.
Key highlights:
- Effective from 1 April 2026
- Reduced number of sections and simplified language
- Clearer tax provisions with less interpretational ambiguity
- Redesigned and simplified return forms to be notified shortly
Income Tax Slabs – New Tax Regime
As per Budget 2026, there has been no change in the income tax slab rates applicable for return filing. Taxpayers will continue to compute their tax liability based on the existing slab structure as notified earlier. Accordingly, while filing Income Tax Returns for the relevant assessment year, the same slab rates will apply, and no revision has been introduced on this front.
Slab Comparison (New Regime)
Taxable Income (₹) Budget 2025 (FY 2025–26) Budget 2026 (FY 2026–27) Up to ₹400,000 Nil Nil ₹4,00,001 to ₹8,00,000 5% 5% ₹8,00,001 to ₹12,00,000 10% 10% ₹12,00,001 to ₹16,00,000 15% 15% ₹16,00,001 to ₹20,00,000 20% 20% ₹20,00,001 to ₹24,00,000 25% 25% Above ₹24,00,000 30% 30% Income Tax Slab Rates – Old Tax Regime
(Individuals & HUFs – Comparison: Budget 2025 vs Budget 2026)
Taxable Income (₹) Budget 2025 (FY 2025–26) Budget 2026 (FY 2026–27) Up to ₹2,50,000 Nil Nil ₹2,50,001 to ₹5,00,000 5% 5% ₹5,00,001 to ₹10,00,000 20% 20% Above ₹10,00,000 30% 30% This reform is intended to make tax laws more accessible and compliance-friendly for individuals and businesses alike.
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MACT Interest Exemption (Complete Relief for Accident Victims)
Under the old law, interest awarded by a Motor Accident Claims Tribunal to individuals was taxable income, with TDS applicable even on modest amounts. This created an absurd situation where accident victims receiving compensation had to manage TDS outgo.
The new law completely exempts interest awarded by MACT to natural persons from income tax, and no TDS applies. This is a direct relief measure targeting vulnerable populations—accident victims no longer face tax complications while recovering from trauma.
These amendments will take effect from the 1st day of April, 2026 and shall accordingly, apply in relation to the tax year 2026-27 and subsequent tax years.
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Rationalisation of TCS & Liberalised Remittance Scheme (LRS)
One of the most impactful changes for taxpayers is the reduction in TCS (Tax Collected at Source) on overseas remittances—affecting lakhs of Indians sending children abroad for education or relatives for medical care.
For a family planning a ₹20L international holiday, the old law imposed ₹4L TCS outgo; the new law imposes just ₹40k—a game-changer for middle-class families. This directly benefits NRI parents sending children to US universities or families remitting for cancer treatment abroad. The reduction from 5% to 2% on ₹25L becomes ₹75,000 savings.
Nature of Remittance Budget 2025 Budget 2026 Overseas tour packages 5% / 20% TCS 2% TCS (no threshold) Education (LRS) 5% 2% Medical (LRS) 5% 2% Objective Revenue-oriented Cash-flow friendly -
TDS on Manpower Supply – Removing Ambiguity (Major Cost Reduction)
The most significant TDS relief affects labour-intensive industries. Under the old law, TDS on manpower supply was ambiguous—often treated as “professional fees” (10% TDS) or contractor payments (1-2% TDS), creating disputes between agencies and manufacturers.
The new law explicitly classifies manpower supply as “work” under Section 402(47), making it subject to contractor TDS at 1% or 2%—a reduction of 80-90% for labour-heavy sectors like manufacturing, construction, and facility management.
Real-World Impact: A manufacturing unit outsourcing 1,000 workers to a staffing agency:
- Old law: 10% TDS = ₹50L TDS (on ₹5Cr annual manpower cost)
- New law: 2% TDS = ₹10L TDS
- Annual savings: ₹40L
This change energizes labour-intensive sectors and aligns with the government’s MSME support agenda.
The amendment will take effect from the 1st day of April, 2026.
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Automated Lower/Nil TDS Certificates (Digital Revolution for Small Taxpayers)
Historically, obtaining a “lower/nil TDS certificate” required filing Form 10A with the Assessing Officer, who would discretionarily approve or reject based on subjective criteria. This process took 3-4 weeks and favored those with political connections.
The new law introduces an automated, rule-based online system: small taxpayers simply apply online, and the system electronically verifies eligibility (cross-checking ITR) and issues a certificate within days—no AO interaction required.
The amendment will take effect from the 1st day of April, 2026.
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Form 15G/15H via Depositories (Multi-Company Investors Rejoice)
Previously, investors holding securities in multiple mutual funds or companies had to submit separate Form 15G/15H to each payer—tedious for someone invested in 20 mutual fund houses.
The new law allows filing once with the depository (CDSL/NSDL), which automatically shares with all relevant payers. This particularly benefits salaried professionals with diversified portfolios, eliminating 15-20 separate form submissions annually.
The amendment will take effect from the 1st day of April, 2027.
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Extended & Rationalised Return Filing Timelines
Revised Return Deadline Extended to March 31
- Old law:Revised returns must be filed by 31 December
- New law:Extended to 31 March (with nominal fee if revised after 31 December: ₹1,000 for income ≤₹5L; ₹5,000 for higher income)
This provides an extra 3-month window for taxpayers to correct mistakes—critical for those with complex income sources or international transactions.
Staggered ITR Due Dates
- ITR-1 & ITR-2 (salaried, simple cases):31 July (unchanged)
- Non-audit business & trusts:31 August (extended from 31 July)
This staggered approach reduces June-July filing congestion and acknowledges that business taxpayers need more time than salaried employees. For trust trustees preparing accounts and ITRs simultaneously, the extra month is invaluable.
Category Budget 2025 Budget 2026 ITR-1 & ITR-2 due date 31 July 31 July (retained) Non-audit business & trusts 31 July 31 August This staggered approach eases pressure on both taxpayers and the tax administration.
It is proposed that the amendments made in Income-tax Act, 2025 shall come into force from the 1st day of April, 2026 for tax year 2026-27 and subsequent tax years.
It is proposed that the amendments made in Income-tax Act, 1961 shall come into force from the 1st day of March, 2026 for assessment year 2026-27(previous year 2025-26).
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Relaxation of conditions for prosecution in case non disclosure of Foreign Assets:
When should foreign income or assets be disclosed?
Foreign income and assets must be disclosed at the time of filing the Income Tax Return (ITR) for the relevant assessment year. Disclosure is made in Schedule FA (Foreign Assets) of the ITR and, wherever applicable, the related foreign income must also be reported in the income schedules.
Key points to note:
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Disclosure is required even if the foreign asset does not generate any income.
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All resident and ordinarily resident (ROR) taxpayers are required to disclose foreign assets and income.
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The details must relate to assets held or income earned at any time during the relevant financial year.
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Non-disclosure or incorrect disclosure may attract penalty and prosecution under the Black Money Act, subject to the latest relaxations for minor assets.
Important clarification (post Budget amendment):
While prosecution may not apply for certain foreign assets (other than immovable property) with an aggregate value up to ₹20 lakh, the obligation to disclose such assets in the ITR continues.These amendments shall take effect retrospectively from the 1st day of October, 2024.
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One-Time Foreign Asset Disclosure Scheme (6 Months)
Many Indians hold small overseas assets—a flat in the UK, a US savings account, retirement funds abroad—that were never disclosed due to complexity or oversight. The old law provided no settlement mechanism; non-disclosure attracted penalties and prosecution.
The new FAST-DS 2026 offers a one-time, 6-month window (post-April 1, 2026) for small taxpayers to voluntarily disclose with immunity.
Two Categories:
Category Taxpayer Type Limit Settlement Cost Immunity A Never disclosed overseas income/asset Up to ₹1 Cr 30% of FMV + 30% additional tax Penalty + Prosecution B Disclosed income/paid tax, but asset not declared Up to ₹5 Cr ₹1,00,000 fixed fee Penalty + Prosecution Example: A tech professional relocated to India in 2023 has a US bank account with $50,000 (~₹41L) that was never disclosed.
- Category B Approach:Pay fixed ₹1L fee + 0 additional tax = clean slate with immunity
- Old law approach:Risk of ₹41L + 50% penalty + prosecution
This scheme is particularly generous for Category B—anyone who already paid tax on the income but forgot to disclose the asset can settle for a flat ₹1L, regardless of whether the asset is ₹5Cr or ₹5L.
The proposed scheme shall form part of the Finance Bill, 2026 and shall come into force from the date to be notified by the Central Government.
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Buyback Taxation (Minority Shareholder Protection)
Old Law:
Under the earlier provisions, the consideration received by shareholders on buyback of shares was treated as dividend income, taxable in the hands of shareholders at their applicable slab rates (0%–30%). The cost of acquisition of the shares extinguished on buyback was allowed separately as a capital loss.New Law:
Under the revised framework, buyback consideration is now treated as capital gains in the hands of shareholders. While this results in lower and more equitable taxation for minority shareholders, an additional buyback tax has been introduced for promoters to prevent tax arbitrage.Shareholder Old Treatment New Treatment Rate Minority Dividend (slab dependent) 12.5% LTCG / 20% STCG Lower for minorities Corporate Promoter Dividend 22% effective Effective 42% Non-Corporate Promoter Dividend 30% effective Effective 50% Purpose: Prevent promoters from extracting cash via buyback at lower tax rates than minorities. The higher promoter tax discourages misuse of buyback as a dividend-equivalent.
These amendments shall take effect from the 1st day of April, 2026, and shall apply in relation to the tax year 2026-27 and subsequent tax years.
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Securities Transaction Tax (STT) on Derivatives Increased
Instrument Old Rate New Rate Purpose Futures 0.02% 0.05% Course correction (reduce excessive leverage) Options Premium 0.1% 0.15% Reduce retail options trading (speculation risk) Options Exercise 0.125% 0.15% Align with premium Higher STT discourages retail options trading (which has exploded in India, often leading to losses). This is a regulatory measure disguised as taxation.
These amendments shall take effect from the 1st day of April, 2026, and the revised rates shall apply to transactions in options and futures in securities entered into on or after that date.
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Sovereign Gold Bonds (SGB) Exemption – Restricted to Original Subscribers
Old Law: Exemption on redemption gains available broadly.
New Law: Exemption available only if (1) original subscriber, (2) held till maturity, (3) uniform across all SGB issues.
Impact: Secondary market buyers lose the exemption—dampening secondary trading. This discourages speculation and benefits original subscription
These amendments shall take effect from the 1st day of April, 2026, and shall apply in relation to the tax year 2026-27 and subsequent tax years.
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Minimum Alternate Tax (MAT) – Final Tax Status (Structural Reform)
Old Framework: MAT is an alternate minimum tax—if MAT > regular tax, you pay MAT but can carry forward excess as credit against future regular tax. Perpetual carry-forward possible.
New Framework (From April 1, 2026):
- MAT is final tax (no credit; terminal position)
- MAT rate reduced from 15% to 14% (to make it more palatable)
- No new MAT credit accumulation post-April 1, 2026
- Set-off allowed only in new regime (not old regime) → Pushes companies toward new regime adoption
- Set-off capped at 25% of tax liability in new regime → Slower utilization of old credits
Why this shift? The old MAT system created perpetual disputes—companies would argue they shouldn’t be in MAT, or that MAT should be offset. The new system closes this off, making it a final, definitive tax for low-profit corporations.
Example: A company with profit of ₹100 Cr paying 10% tax (₹10Cr) would face 15% MAT (₹15Cr) under the old law. Under the new law, it pays 14% final MAT (₹14Cr) and cannot carry forward excess to future years. This accelerates revenue but is cleaner administratively.
This amendment is proposed to take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-27 and subsequent tax years
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Integrated Assessment-Penalty Orders (Faster Dispute Resolution)
Old System: Assessment completed (10-15 months) → Notice of assessment issued → Penalty proceedings started separately (another 6-10 months) → Penalty order issued → Each proceeded with separate appeals. Timeline: 24-36 months from assessment to final closure.
New System: Single integrated order covering both assessment and penalty, issued after reasonable opportunity. Timeline: 12-18 months to closure.
For taxpayers with ₹1Cr+ assessments where penalty could be ₹50L-₹1Cr, the old dual-proceeding approach meant years of litigation uncertainty. The new integrated order accelerates closure by 50%.
It is further proposed that these proposed amendments shall come into force in the Income-tax Act, 1961 from the 1st day of March, 2026 and shall be effective from 1st day of April, 2027.
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Interest on Penalty Abated During Appeal (Cashflow Relief)
Old law: If you appealed an assessment with a ₹50L penalty, interest accumulated on that penalty at 12% p.a. (~₹5L/year) during the appeal process.
New law: Interest on penalty is kept in abeyance during the first appellate stage—regardless of appeal outcome. If the appeal succeeds, no interest on penalty ever. If it fails, interest is charged only post-appeal.
Example: ₹50L penalty appealed for 18 months:
- Old law: ₹9L interest charge (even if appeal succeeds)
- New law: ₹0 interest during appeal (unless appeal fails, then 12% p.a. post-appeal)
This is a game-changer for corporations managing large tax exposures.
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Pre-Deposit for Appeal Halved (Major Liquidity Relief)
Old law: To appeal an assessment of ₹1Cr tax + ₹30L penalty + ₹10L interest = ₹1.4Cr demand, you had to deposit 20% = ₹28L upfront before the appellate authority could hear you.
New law: Reduced to 10% of core tax demand only = ₹10L (excludes interest/penalty from the deposit calculation).
50% reduction in upfront burden. For mid-sized companies, this converts a ₹28L cash blockage to ₹10L—critical for working capital management.
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Rationalisation of Penalties into Fee
Failure to get accounts audited and furnish audit report
Under the proposed changes, the penalty for failure to get accounts audited under section 446 is converted into a mandatory graded fee under section 428(c). Where the delay in getting the accounts audited or furnishing the audit report is up to one month, a fee of ₹75,000 will be levied. Where the delay exceeds one month, the fee will be ₹1,50,000. Similarly, the penalty for failure to furnish an accountant’s report in respect of international transactions or specified domestic transactions under section 447 is converted into a fee under section 428(4). In such cases, a fee of ₹50,000 will apply where the delay is up to one month, and ₹1,00,000 where the delay exceeds one month.
Failure to furnish statement of financial transactions
The penalty for failure to furnish a statement of financial transactions or reportable accounts under section 454(1) is also proposed to be converted into a fee under section 427(3), replacing the existing per-day penalty structure. Further, in cases where the statement is not furnished even after issuance of a notice, an overall cap of ₹1,00,000 is proposed for the fee under section 454(2). These changes are intended to treat such delays as compliance-related lapses rather than offences, thereby reducing litigation and providing certainty to taxpayers.
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Rationalisation of Tax and Penalty on Unexplained Income under the Income-tax Act, 2025
The Income-tax Act, 2025 contains specific provisions dealing with income from unexplained sources such as unexplained cash credits, unexplained investments, unexplained assets, unexplained expenditure, and certain transactions through negotiable instruments or hundi, covered under sections 102 to 106. Historically, such income has been subjected to stringent tax and penalty provisions to curb concealment and tax evasion.
Under the existing framework, income covered under these sections is taxed at a high rate of 60% under section 195, along with a separate penalty of 10% of the tax payable under section 443. This combination results in a heavy and inflexible tax burden, often leading to disputes and prolonged litigation.
To bring greater proportionality and simplify the regime, it is proposed to reduce the tax rate on unexplained income from 60% to 30%. Simultaneously, the separate penalty provision under section 443 is proposed to be omitted, and such income will be treated as misreporting of income under section 439(11).
Under the revised framework, while the base tax rate is lowered, unexplained income will continue to attract penalty exposure under the misreporting provisions. Taxpayers are also provided an option to seek immunity from penalty and prosecution under section 440 by paying additional income-tax equal to 120% of the tax payable on such income, enabling early settlement and reduced litigation.
Overall, the proposed amendments restructure the tax and penalty framework without diluting deterrence, aiming to create a more balanced, predictable, and compliance-friendly regime. These changes will take effect from 1 April 2026 and apply from Tax Year 2026-27 onwards.
Assume unexplained income of ₹10,00,000 is identified by the Assessing Officer.
Earlier provisions:
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Tax @ 60% = ₹6,00,000
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Penalty @ 10% of tax = ₹60,000
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Total outgo = ₹6,60,000
Proposed provisions (with immunity):
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Tax @ 30% = ₹3,00,000
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Additional tax @ 120% of tax = ₹3,60,000
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Total outgo = ₹6,60,000
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No penalty or prosecution
Key point:
While the overall tax outflow remains similar, the new framework offers lower headline tax, structured additional tax, and an option to avoid litigation and prosecution. -
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Immunity Extended from Underreporting to Misreporting
Old framework: Under section 270A, penalty for under-reporting of income is levied at 50% of the tax payable on the under-reported income, while in cases of under-reporting due to misreporting, the penalty is 200% of the tax payable on such income. Currently, immunity under section 270AA is available only in cases of under-reporting (50% penalty), subject to payment of assessed tax and interest and non-filing of appeal. In cases of misreporting, immunity is not available
New framework (Extended): This immunity now extends to misreporting (e.g., falsely claiming deductions, inflating expenses). Payment: 100% of tax as additional income tax (vs. 200% penalty earlier).
This amendment will take effect from 1 March 2026 and shall apply for Assessment Year 2026-27 and earlier assessment years.
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Minor DIN Lapses Not to Invalidate Income-tax Assessments
To avoid assessments being invalidated on purely technical grounds, the law has been clarified to provide that income-tax assessments shall not be treated as invalid merely due to any mistake, defect, or omission in quoting the computer-generated Document Identification Number (DIN).
As long as the assessment order is referenced by a DIN in any manner, it will be considered valid, even if there are minor procedural lapses. This clarification has been introduced to reduce unnecessary litigation and ensure consistency in interpretation, and it will apply retrospectively from 1 October 2019 under the Income-tax Act, 1961. Corresponding amendments have also been proposed in the Income-tax Act, 2025, effective from 1 April 2026.
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Clarification on Jurisdiction for Issuance of Reassessment Notices under Sections 148 and 148A
Only the jurisdictional Assessing Officer can conduct pre-assessment enquiries and issue notices under sections 148A and 148; NaFAC’s role begins only after reassessment proceedings start.
The clarification in Income-tax Act, 1961 shall come into force with retrospective effect from 1st day of April, 2021. The amendment in Income-tax Act, 2025 shall come into force with effect from 1st day of April, 2026.
