The Finance Bill, 2026 proposes to rationalise several penalties under the Income Tax Act by converting them into mandatory fees. The objective is to reduce avoidable litigation arising from technical or procedural defaults, while ensuring certainty and predictability for taxpayers.
These amendments will take effect from 1st April 2026 and will apply from Tax Year 2026-27 onwards.
Background: Existing Penalty Provisions
Under the current framework, the Income Tax Act prescribes penalties for certain non-compliances, even when the default is procedural in nature:
Section 446: Penalty for failure to get accounts audited, capped at the lower of
- 0.5% of total turnover/gross receipts, or
- Rs 1,50,000
Section 447: Penalty of Rs 1,00,000 for failure to furnish an accountant's report under Section 172 relating to international or specified domestic transactions.
Section 454:
- Rs 500 per day for failure to furnish Statement of Financial Transactions (SFT) or reportable accounts
- Rs 1,000 per day where the default continues even after a notice is issued.
Such penalty provisions have frequently resulted in disputes, particularly where delays were unintentional or technical.
Key Proposal: Conversion of Penalties into Fees
To address this concern, the Finance Bill, 2026 proposes to convert select penalties into graded fees, thereby eliminating discretionary penalties for technical delays.
1. Audit Failure: Section 446 → Fee under Section 428(c)
The existing penalty under Section 446 is proposed to be omitted.
In its place, a graded fee structure is introduced under proposed Section 428(c):
- Rs 75,000 for shorter delays
- Rs 1,50,000 for longer delays
It is noteworthy that Section 446 will now be repurposed to cover penalties for failure to furnish information or furnishing inaccurate information relating to crypto asset transactions.
2. Transfer Pricing Report: Section 447 → Fee under Section 428(4)
Penalty of Rs 1,00,000 for failure to furnish a report under Section 172 is converted into a fee.
Proposed graded fee structure:
- Rs 50,000 for shorter delay
- Rs 1,00,000 for extended delay
This change is expected to provide relief to entities involved in international and specified domestic transactions.
3. Statement of Financial Transactions: Section 454(1) → Fee under Section 427(3)
- The daily penalty of Rs 500 under Section 454(1) for failure to furnish SFT or reportable accounts is proposed to be converted into a mandatory fee.
- This aligns procedural defaults with a non-adversarial compliance approach.
4. Cap on Penalty under Section 454(2)
- An upper monetary limit of Rs 1,00,000 is proposed to be introduced for the existing penalty under Section 454(2), which currently applies at Rs 1,000 per day after issuance of notice.
- This brings much-needed certainty and prevents disproportionate penalty exposure.
Effective Date
All the above amendments will come into force from 1st April 2026 and will apply for Tax Year 2026-27 and subsequent years.
Official copy of the Clause is as follows
Rationalisation of Penalties into Fee
Section 446 of the Act, provides penalty for failure to get accounts audited. It further provides that, if any person fails, without reasonable cause, to get his accounts audited in respect of any previous year or years relevant to an assessment year or to obtain a report of such audit as required under the aforesaid provision, the Assessing officer may direct that such person shall pay, by way of penalty, lesser of –
i. 0.5% of the total sales, turnover or gross receipts, in the business, or the gross receipts in the profession, for such tax year or years, or
ii. Rs 150000.
2. Further, section 447 provides penalty for failure to furnish report under section 172 of the Act, where section 172 relates to report from an accountant to be furnished by persons entering into international transaction or specified domestic transactions. Presently, a penalty of Rs 1,00,000/- is levied for such failure.
3. Further, section 454 provides for penalty for failure to furnish statement of financial transactions or reportable account. Presently, a penalty of Rs 500 is levied for everyday during which such failure continues. Further, 454(2) provides that if person referred to in sub-section (1), fails to furnish the statement within the period specified in the notice issued under section 508(7), then in that case a penalty of Rs 1000 is levied for everyday during which the failure continues.
4. In this regard, it is considered that penalties for technical delays should be converted into mandatory fee as fee reduces litigation for technical faults.
5. In view of the above it is proposed to convert following penalties into fee:
I. Penalty under section 446 for failure to get accounts audited is converted to a fee under proposed section of 428(c). Accordingly, Graded fee of Rs 75,000 and 1,50,000 is proposed depending upon the period of delay. It is pertinent to mention that this penalty under section 446 has been omitted but the same section has been replaced by the penalty for failure to furnish information or for furnishing inaccurate information on transactions of crypto asset.
II. Penalty under section 447 for failure to furnish report under section 172 is converted to a fee under section 428(4). Graded fee of Rs 50,000 and 1,00,000 is provided depending upon the period of delay.
III. Penalty under section 454(1) for failure to furnish statement of financial transaction or reportable account is converted to a fee under section 427(3).
6. Further, an upper limit of Rs 1,00,000/- is also proposed to be made in existing penalty under section 454(2) of the Act.
7. The above amendments will take effect from the 1st day of April, 2026 and shall apply for tax year 2026-27 and subsequent tax years.
[Clause 83, 88, 89]
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