The Union Budget 2026–27 does not focus on major tax rate reductions. Instead, it introduces a series of changes aimed at simplifying the law, easing compliance, and resolving issues that have led to disputes over the years. Several proposals in the Finance Bill, 2026 will have a direct impact on taxpayers and professionals, particularly from Tax Year 2026–27 onwards. The important changes in Direct and Indirect Taxes are discussed below.
Direct Tax Proposals
Income Tax Act, 2025 to be effective from 1 April 2026
The Budget confirms that the Income Tax Act, 2025 will replace the Income-tax Act, 1961 with effect from 1 April 2026. The Government has stated that the review of the existing Act has been completed and that simplified Income Tax Rules and redesigned return forms will be notified shortly, giving sufficient time for transition.
The intention is to reduce complexity in drafting and remove redundant provisions.
Return forms are proposed to be simpler and more user-friendly.
While the basic concepts of taxation are expected to remain familiar, taxpayers and professionals will need to get accustomed to a new structure and section references once the new Act is notified.
Foreign Assets of Small Taxpayers: Disclosure Scheme, 2026 (FAST-DS 2026)
The Finance Bill, 2026 proposes a time-bound disclosure scheme for small taxpayers who have undisclosed foreign assets or foreign-sourced income. Declarations can be made on payment of tax or a prescribed fee, depending on how the asset was acquired.
Limited immunity from penalty and prosecution under the Black Money Act is provided.
Cases involving prosecution or proceeds of crime are excluded.
This scheme appears to offer an opportunity to regularise past non-disclosures before enforcement relating to foreign assets becomes more stringent.
Minimum Alternate Tax (MAT) - Reforms
Changes are proposed in the MAT framework with effect from 1 April 2026. MAT is proposed to become a final tax and the applicable rate has been reduced.
MAT rate reduced from 15% to 14%.
Set-off of MAT credit allowed only under the new tax regime.
Set-off restricted to one-fourth of the tax liability.
MAT credit accumulated up to 31 March 2026 to remain available subject to these limits.
These changes significantly affect MAT planning, as MAT credit will no longer function fully as a timing difference.
Increase in Securities Transaction Tax (STT) on Futures
The Budget proposes an increase in STT on futures contracts.
STT on futures increased from 0.02% to 0.05%.
While hedging transactions may continue due to their risk-management nature, the increase in STT is likely to affect frequent traders who operate on thin margins.
Reduction in TCS under Liberalised Remittance Scheme (LRS)
TCS rates under LRS have been reduced to ease the cash-flow burden on individuals making foreign remittances.
- Overseas tour programme packages: TCS reduced to 2%, replacing earlier rates of 5% and 20%, without any threshold limit.
- Education and medical remittances: TCS reduced from 5% to 2%.
This change reduces excess tax collection at the time of remittance and brings TCS closer to actual tax liability.
Staggered Timelines for Filing Income-tax Returns
The Budget proposes staggered due dates for filing returns to reduce pressure during the peak filing period.
ITR-1 and ITR-2 for individuals: Due date remains 31 July.
Non-audit business cases and trusts: Due date extended to 31 August.
This will provide operational relief to both taxpayers and professionals.
Taxation of Buy-back of Shares Rationalised
The Finance Bill, 2026 proposes to tax consideration received on buy-back of shares under the head “Capital Gains” instead of treating it as dividend income.
- Effective tax rate for promoters: approximately 30%.
- Effective tax rate for promoter companies: 22%.
Since buy-back income will now be taxable as capital gains, rebate provisions will not be available on such income. Earlier, when taxed as dividend under “Income from Other Sources”, rebate could be claimed where total income was within the specified threshold. Under the proposed regime, even if the total income of an individual falls within the rebate limit, tax would still be payable on capital gains arising from buy-back of shares.
Automated Lower / Nil TDS Certificates
A rule-based automated system is proposed for issuance of lower or nil TDS certificates to small taxpayers.
Certificates will be issued electronically without approaching the Assessing Officer.
This reduces manual intervention and simplifies the process.
Extended Timeline for Filing Revised Returns
Taxpayers will be permitted to file revised returns up to 31 March, subject to payment of a nominal fee.
This encourages voluntary correction of errors and reduces disputes arising from minor mistakes.
Disallowance of Interest Deduction on Dividend and Mutual Fund Income
The Finance Bill, 2026 proposes to disallow deduction of interest expenditure against dividend income and income from units of mutual funds.
This removes the benefit of claiming interest deduction against passive income generated from borrowed funds.
Employee Contribution to PF / ESI - Deduction Allowed
Employee contribution to PF, ESI and other welfare funds will be allowed as a deduction if deposited on or before the due date of filing the return of income.
Applicable from Tax Year 2026–27.
This amendment settles long-pending disputes by aligning employee contribution with employer contribution.
Indirect Tax (GST) Proposals
Post-sale Discounts - Valuation Simplified
The requirement of a pre-existing agreement for post-sale discounts has been removed.
Discounts can be excluded from the value of supply if a credit note is issued and corresponding ITC is reversed by the recipient.
This aligns GST valuation with normal commercial practices and reduces disputes.
Intermediary Services - Place of Supply Rationalised
Section 13(8)(b) of the IGST Act is proposed to be omitted.
Place of supply for intermediary services to be determined as per the general rule, i.e., location of the recipient.
This allows intermediary services provided to foreign clients to qualify as exports and be treated as zero-rated supplies.
Refund Provisions Streamlined
Certain changes have been proposed to improve the refund mechanism under GST.
Provisional refunds extended to inverted duty structure cases.
Threshold limits for the sanction of certain refunds removed.
These changes are expected to ease working capital pressure for businesses.
Overall, the Union Budget 2026–27 focuses on simplifying compliance and addressing long-standing issues rather than introducing sweeping changes. Many of the amendments will apply from Tax Year 2026–27, giving taxpayers and professionals time to understand their implications. Careful review and advance planning will be important to ensure smooth compliance under the revised provisions.
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