As an individual taxpayer eagerly anticipating Budget 2026 for potential revisions in income tax slabs, rates, exemptions, or deductions, you might find the announcements somewhat underwhelming. The budget did not introduce any major alterations in these fundamental areas. However, it has proposed a series of significant modifications aimed at streamlining compliance, reducing litigation, and fostering a more taxpayer-friendly environment. These changes include immunity from penalty or prosecution for under-reporting or misreporting of income, the introduction of fees for late revision of Income Tax Returns (ITR), and the partial decriminalisation of certain prosecution provisions. Let us delve into these proposals in detail.
Immunity from Penalty for Misreporting of Income
At times, individuals may inadvertently or deliberately under-report their income. Currently, Section 440 of the Income Tax Act provides a waiver of penalty and immunity from prosecution specifically for cases of under-reporting of income. Budget 2026 proposes to extend this provision to encompass cases of misreporting of income as well. To avail of this immunity, taxpayers must fulfill specific conditions: they are required to pay the outstanding tax, the applicable penalty, and an additional income tax equivalent to 100% of the tax payable on the under-reported or misreported income, which serves as a substitute for the penalty.
Furthermore, there exists a separate penalty for unexplained credits, unexplained investments, and unexplained assets. The budget proposes to classify such instances as cases of misreporting income. In these scenarios, taxpayers can seek immunity by paying the tax, the penalty, and an additional income tax equal to 120% of the tax payable on the misreported income, again in lieu of the penalty.
The primary objective behind granting this immunity is to offer taxpayers an opportunity to resolve disputes at an early stage by settling the additional tax, thereby alleviating the burden of litigation and enhancing compliance. To apply for immunity, taxpayers must submit an application within one month from the end of the month in which they receive the assessment order. It is important to note that immunity will only be granted if no appeal has been filed against the assessment order. These amendments are set to take effect from April 1, 2026.
Fee for Late Revision of ITR
Currently, individuals are permitted to file a revised Income Tax Return up to December 31. Budget 2026 proposes to extend this deadline to March 31. This revised return can be either an original return or a belated return. However, individuals filing a revised return after December 31 will be subject to a nominal fee, structured as follows:
- A fee of ₹1,000 if the total income is up to ₹5 lakh.
- A fee of ₹5,000 if the total income exceeds ₹5 lakh.
Conversion of Penalty into Fees for Failure to Furnish SFT
Section 454 of the Income Tax Act currently imposes a penalty on individuals who fail to furnish a Statement of Financial Transaction (SFT) or reportable account. Budget 2026 proposes to replace this penalty with a fee. The new fee will be ₹200 per day for each day the failure persists, with a maximum cap of ₹1,00,000.
Increase in Penalty for Non-Cooperation
Section 254 of the Income Tax Act empowers Income Tax authorities to collect information from business or professional premises. Authorities can direct the proprietor, an employee, or any other person present to furnish specific authorised information. If the individual fails to provide the required information, a penalty can be imposed. Currently, the Income Tax Joint Commissioner, Deputy Director, Assistant Director, or Assessing Officer can impose a maximum penalty of ₹1,000.
Budget 2026 proposes to increase this maximum penalty amount to ₹25,000 from the existing ₹1,000. The rationale behind this increase is to ensure that the penalty is proportionate and serves as an adequate deterrent, thereby promoting voluntary compliance.
Partial Decriminalisation of Specific Prosecution Provisions
Budget 2026 proposes amendments to Sections 475 to 478 and Section 494 of the Income Tax Act, 2025. These amendments involve the partial decriminalisation of certain offences, full decriminalisation of others, and modifications to the nature and duration of prescribed punishments. The principles guiding this decriminalisation exercise are as follows:
- Changing the nature of punishment from rigorous imprisonment to simple imprisonment.
- Limiting the maximum punishment for any offences from the existing 7 years to 2 years. For subsequent offences, the punishment will be reduced from 7 years to 3 years.
- Introducing a new grading system for offences and their corresponding punishments, particularly where punishment is based on the amount of tax evaded.
The new grading system is structured as follows:
- If the amount of tax involved is less than or equal to ₹10 lakh, the punishment for offences will be limited to a fine, with no imprisonment.
- If the amount of tax involved exceeds ₹10 lakh but is less than ₹50 lakh, the maximum imprisonment for offences will be 6 months.
- If the amount of tax involved exceeds ₹50 lakh, the maximum imprisonment for offences will be 2 years.
Additionally, the imposition of a fine is being introduced either in lieu of or in addition to imprisonment. Certain offences will be fully decriminalised. This progressive and inclusive grading system aligns with global practices and embodies the spirit of Jan Viswas, aiming to foster trust and ease of compliance.
Gopal Gidwani is a freelance personal finance content writer with over 15 years of experience. He can be reached on LinkedIn.
