Union Budget 2026: Key Income Tax Proposals Impacting Taxpayers

Super User

The Union Budget 2026 places strong emphasis on stricter compliance by replacing discretionary penalties with mandatory fees for non-compliance or delay in compliance. Measures relating to non-disclosure of foreign assets and foreign income have also been proposed as key changes. These proposals are expected to have a significant impact on taxpayers who are non-compliant, habitual late filers, or those who have ignored disclosure requirements, while at the same time providing certainty and clarity in penalty provisions. These proposals will come into effect once enacted and notified. Below is a structured overview of the key proposals that are relevant for individual taxpayers and NRIs.

1. Expansion of the Scope of Immunity from Penalty

It is proposed to expand the scope of granting immunity from penalty to cover cases where penalty proceedings are initiated for under-reporting of income in consequence of misreporting. Such immunity shall be available provided the taxpayer pays an additional income-tax equal to 100% of the tax payable in respect of such income, in lieu of the penalty.

This proposal is aimed at reducing prolonged litigation by allowing taxpayers to settle misreporting-related disputes upon payment of a 100% additional tax.

2. Combining of Assessment Order and Penalty Order

It is proposed to combine the assessment order and the penalty order by providing that penalty under section 270A shall be part of the assessment order itself. Accordingly, separate penalty proceedings shall be eliminated.

Further, it is proposed that interest on outstanding demand arising out of the assessment shall be deferred till the outcome of appellate proceedings, providing relief to taxpayers during the pendency of appeals.

3. Reduced Tax on Unexplained Income and Cash Credits

It is proposed to reduce the tax rate on cash credits, unexplained investments, money, bullion, etc. from 60% to 30%. The separate penalty under section 443 has been omitted. Instead, penalty will now be covered under misreporting provisions, attracting a levy of 120% of the tax payable.

4. Mandatory Fee for Failure to Get Accounts Audited

Where an assessee fails to get accounts audited:

• ₹75,000 for delay up to one month

• ₹1,50,000 for delay beyond one month

This replaces discretionary penalties with a fixed and predictable compliance cost.

5. Mandatory Fee for Delay in Filing Transfer Pricing Report

It is proposed to introduce a mandatory fee structure for delay in filing tax audit report:

• ₹50,000 for delay up to one month

• ₹1,00,000 for delay beyond one month

This provision emphasizes timely compliance with tax audit requirements.

6. No TAN Requirement for TDS on Purchase of Property from NRIs

It is proposed that in cases where the seller of immovable property is a non-resident, the buyer shall not be required to obtain a TAN. The buyer can deduct TDS using his PAN and report the transaction by quoting the PAN of the seller in the challan-cum-statement. This amendment is proposed to be effective from 1 October 2026.

7. Extended Due Date for Filing Return of Income

It is proposed to extend the due date for filing return of income from 31 July to 31 August for:

• Non-audit business cases

• Partners of non-audit firms

This provides additional time for accurate compliance

8. Single Declaration for Non-Deduction of TDS on Investments

It is proposed that investors earning dividend or interest income from multiple securities or units may submit one declaration for non-deduction of TDS to the depository, instead of submitting declarations to multiple payers.

9. Reduction in TCS Rates under LRS

It is proposed to reduce TCS rates on Liberalised Remittance Scheme (LRS) remittances for:

• Education

• Medical purposes

• Overseas tour packages

have been reduced to 2%, easing cash flow for taxpayers

10. Updated Return Allowed Even After Reassessment Notice

It is proposed to allow taxpayers to file an updated return even after receipt of a reassessment notice, subject to payment of:

• Additional tax of 10%

• Applicable interest

This provides an opportunity to settle disputes early.

The total additional income-tax in that case shall be as under:

• 35% (25% + 10%) of the aggregate of tax and interest, if the updated return is furnished within 12 months;

• 60% (50% + 10%), if furnished after 12 months but before 24 months;

• 70% (60% + 10%), if furnished after 24 months but before 36 months;

• 80% (70% + 10%), if furnished after 36 months but before 48 months.

Accordingly, taxpayers who have not declared correct income or have claimed excess deductions will be required to pay a substantially higher amount if mismatches in reported income or deductions are identified by the Income-tax Department at a later stage. The proposal therefore imposes a heavy cost on non-compliance or delayed correction, while strongly incentivising early and voluntary disclosure.

11. Employees’ Contribution to PF – Relief Granted

It is proposed that employees’ contribution to Provident Fund shall be allowed as deduction if paid up to the due date of filing the return of income. This aligns the due date for employee contribution with that of employer contribution.

12. Updated Return for Reducing Loss Permitted

It is proposed to permit taxpayers to file an updated return for reducing losses reported in the original return, a relief particularly beneficial in genuine error cases

13. Taxation of Buy-back Consideration

It is proposed that buy-back consideration received by shareholders shall be taxed as capital gains instead of dividend, bringing clarity and uniformity in taxation.

14. Reduced Upfront Payment for Filing Appeals

It is proposed to reduce the requirement of upfront tax payment while filing an appeal from 20% to 10%, lowering the financial burden on taxpayers pursuing legitimate appeals.

15. Revised Return Allowed up to 31st March

It is proposed to allow filing of a revised return after 31st December but before 31st March, subject to payment of an additional fee:

• ₹1,000 where total income is up to ₹5 lakh

• ₹5,000 where total income exceeds ₹5 lakh

16. Foreign Assets of Small Taxpayers – Disclosure Scheme 2026 (FAST-DS)

It is proposed to introduce a one-time Disclosure Scheme 2026 (FAST-DS) to allow eligible taxpayers to disclose:

• Undisclosed foreign income

• Undisclosed foreign assets

• Specified foreign assets acquired during non-resident status or from income already taxed in India but not reported in the return

Amount Payable under FAST-DS

Amount Payable under FAST-DS

Where undisclosed foreign income or assets are declared:

• Tax @ 30% of value of the undisclosed Foreign assets on 31 March 2026 or undisclosed foreign income

• Additional amount equal to 100% of such tax

Total outflow will be 60% of the value of the asset or foreign income.

17. Flat Fee for Certain Undisclosed Foreign Assets

Where foreign assets were acquired during non-resident status or from income already taxed in India but not disclosed in return schedules, a flat fee of ₹1,00,000 shall be payable.

18. No Deduction for Interest Expense on Dividend / MF Income

It is proposed that no deduction shall be allowed for interest expenditure incurred for earning:

• Dividend income

• Income from mutual fund units

where such income is taxable under Income from Other Sources.

19. Exemption for Compensation on Compulsory Acquisition of Land

It is proposed that any income arising from compulsory acquisition of land under the RFCTLARR Act shall be fully exempt, irrespective of whether the land is agricultural or non-agricultural.

Concluding Remarks

Concluding Remarks

The proposals contained in the Union Budget 2026 clearly indicate a strong policy shift towards strict compliance, reduced discretion, and early voluntary disclosure. Replacement of discretionary penalties with mandatory fees, higher additional tax for incorrect reporting, and stringent measures for non-disclosure of foreign income and assets will have a significant impact on taxpayers who are non-compliant, habitual late filers, or those who ignore statutory disclosure requirements.

Taxpayers are advised to review past filings, ensure accuracy in reporting income and deductions, and take timely corrective action wherever required, particularly in view of enhanced data matching and information exchange mechanisms available with the Income-tax Department.

Professional Advisory

Professional Advisory

The above are Budget proposals and are subject to enactment of the Finance Bill, 2026 and subsequent notifications. The practical impact may vary based on individual facts and applicable provisions.

For assistance in understanding how these proposals may affect you, including matters relating to assessments, penalty exposure, updated returns, foreign asset disclosures, NRI taxation, or appellate proceedings, you may contact:

Balakrishna & Co. Chartered Accountants Email: prakasha@balakrishnaandco.com

Balakrishna & Co.

Chartered Accountants

Email: prakasha@balakrishnaandco.com

prakasha@balakrishnaandco.com

This article is intended for general guidance and does not constitute a legal opinion.