Budget 2026-27: Direct Tax Reforms for Ease of Living, Small Taxpayer Relief

The Union Budget 2026-27 has unveiled a comprehensive set of direct tax reforms aimed at rationalising penalty and prosecution provisions while improving ease of living and ease of doing business. Presented by Union Finance Minister Smt. Nirmala Sitharaman, the proposals focus on reducing litigation, eliminating procedural duplication, and introducing proportionate enforcement.

A key reform is the integration of assessment and penalty proceedings through a single common order, eliminating multiple parallel proceedings. The Budget also provides relief by removing interest liability on penalty amounts during the pendency of first appeal, reducing the pre-deposit requirement from 20% to 10% of core tax demand, and allowing updated returns even after reassessment proceedings have begun, on payment of an additional tax.

To further curb litigation, the framework for immunity from penalty and prosecution is extended to cases of misreporting, subject to payment of additional tax. Several technical defaults are proposed to be converted from penalties into fees, while the prosecution framework under the Income-tax Act is rationalised by decriminalising minor and procedural offences and reducing maximum imprisonment to two years, with enhanced powers for courts to levy fines instead.

The Budget also proposes retrospective immunity from prosecution for non-disclosure of non-immovable foreign assets up to ₹20 lakh, effective from 1 October 2024, addressing long-standing concerns of small taxpayers.

In parallel, a series of taxpayer-friendly measures have been announced to enhance ease of living, including exemption of MACT interest from income tax, reduction in TCS rates under LRS and overseas travel, introduction of a rule-based automated system for lower or nil TDS certificates, extension of the revised return filing deadline to 31 March, staggered return filing timelines, and a one-time six-month foreign asset disclosure scheme for small taxpayers with immunity from penalty and prosecution.

Collectively, these measures signal a decisive shift towards simplified, trust-based and proportionate tax administration, with special focus on reducing compliance burden, litigation, and hardship for small and honest taxpayers.

UNION BUDGET 2026-27 ANNOUNCES DIRECT TAX PROPOSALS FOR RATIONALIZING PENALTY AND PROSECUTION

ASSESSMENT AND PENALTY PROCEEDINGS TO BE INTEGRATED TO AVOID MULTIPLICITY OF PROCEEDINGS AND FACILITATING EASE OF DOING BUSINESS

IMMUNITY FROM PROSECUTION FOR NON-DISCLOSURE OF NON IMMOVABLE FOREIGN ASSETS WITH AGGREGATE VALUE LESS THAN Rs 20 LAKH WITH RETROSPECTIVE EFFECT FROM 01.10.2024

The Union Minister for Finance and Corporate Affairs, Smt Nirmala Sitharaman presented the Union Budget 2026-27 in the Parliament today. The Budget proposes set of Direct Tax proposals aiming at rationalizing penalty and prosecution.

The Finance Minister proposed to integrate assessment and penalty proceedings by way of a common order for both to avoid multiplicity of proceedings.  There will be no interest liability on the taxpayer on the penalty amount for the period of appeal before the first appellate authority irrespective of the outcome of appeal process. Further, queantum of pre-payment is being reduced from 20 percent to 10 percent and will continue to be calculated only on core tax demand.

As an additional measure for reducing litigation, the Finance Minister proposed to allow taxpayers to update their returns even after reassessment proceedings have been initiated, at an additional 10 percent tax rate over and above the rate applicable for the relevant year. The assessing officer will then use only this updated return in his proceedings.

There is already a framework for immunity from penalty and prosecution in the cases of underreporting. The Finance Minister proposed to apply this framework of immunity to misreporting too. However, in such a case the taxpayer will need to pay 100 percent of the tax amount as an additional income tax over and above the tax and interest due.

Penalties for certain technical defaults such as failure to get accounts audited, non-furnishing of transfer pricing audit report and default in furnishing statement for financial transactions, are proposed to be converted into fee.

The Finance Minister proposed to rationalise prosecution framework under the Income Tax Act while maintaining a careful balance for deterrence in some serious offences.

Non-production of books of account and documents, and requirement of TDS payment, where payment is made in kind, are being decriminalised. Further, minor offences will attract fine only. The remaining prosecutions will be graded commensurate with the quantum of offence. They will entail only simple imprisonment, with maximum imprisonment reduced to two years, and power to courts to convert even those into fine.

There is no penalty presently for non-disclosure of non immovable foreign assets with aggregate value less than 20 lakh rupees. The Finance Minister proposed to also provide them with immunity from prosecution with retrospective effect from 1.10.2024.

A range of proposals on Direct Taxes to ensure 'Ease of living' for taxpayers have been announced by Union Minister for Finance and Corporate Affairs Smt. Nirmala Sitharaman during the Union Budget 2026-27 speech in Parliament today.

Ease of Living

The Budget proposes that any interest awarded by the Motor Accident Claims Tribunal to a natural person will be exempt from Income Tax, and any TDS on this account will be done away with. It proposes to reduce TCS rate on the sale of overseas tour program package from the current 5 percent and 20 percent to 2 percent without any stipulation of amount.

It aims to reduce TCS rate for pursuing education and for medical purposes under the Liberalized Remittance Scheme (LRS) from 5 percent to 2 percent. Supply of manpower services is proposed to be specifically brought within the ambit of payment to contractors for the purpose of TDS to avoid ambiguity. Thus, TDS on these services will be at the rate of either 1 percent or 2 percent only.

Ease for Taxpayers

A scheme for small taxpayers is proposed wherein a rule-based automated process will enable obtaining a lower or nil deduction certificate instead of filing an application with the assessing officer. For the ease of taxpayers holding securities in multiple companies, the budget proposes to enable depositories to accept Form 15G or Form 15H from the investor and provide it directly to various relevant companies. It extends time available for revising returns from 31st December to up to 31st March with the payment of a nominal fee.

Relaxed Tax return Timeline

The Budget proposes to stagger the timeline for filing of tax returns. Individuals with ITR 1 and ITR 2 returns will continue to file till 31st July and non-audit business cases or trusts are proposed to be allowed time till 31st August. TDS on the sale of immovable property by a non-resident is proposed to be deducted and deposited through resident buyer's PAN based challan instead of requiring TAN.

Focus on Small Taxpayers

To address practical issues of small taxpayers like students, young professionals, tech employees, relocated NRIs, and such others, it aims to introduce a one-time 6-month foreign asset disclosure scheme for these taxpayers to disclose income or assets below a certain size. This scheme would be applicable for two categories of taxpayers namely, (A) who did not disclose their overseas income or asset and (B) who disclosed their overseas income and/or paid due tax, but could not declare the asset acquired.

For category (A), the limit of undisclosed income/asset is proposed to be up to 1 crore rupees. They need to pay 30 percent of Fair Market Value of asset or 30 percent of undisclosed income as tax and 30 percent as additional income tax in lieu of penalty and would thereby get immunity from prosecution. For category (B), asset value is proposed to be up to 5 crore rupees. Here, immunity from both penalty and prosecution will be available with the payment of fee of 1 lakh rupees.