Budget 2026 Tax Proposals: A Detailed Commentary on Income-tax Amendments

Introduction

Finance Minister Nirmala Sitharaman presented the Union Budget 2026 on February 1, 2026, marking her ninth consecutive budget presentation. This budget continues the government’s ongoing efforts to reform India’s tax system, with several amendments proposed to the Income-tax Act, 1961 through the Finance Bill, 2026.

The Finance Act, 2026 makes changes to tax rates, compliance procedures, and assessment mechanisms across various provisions. These changes aim to reduce litigation, simplify compliance for taxpayers, and bring domestic tax laws in line with global standards. Several sections have been amended, new provisions inserted, and certain obsolete clauses omitted.

This article discusses the main amendments in the Finance Act, 2026, covering provisions relevant to salaried persons, professionals, businesses, and investors. The analysis is based on the provisions as enacted and does not cover rules or notifications that may follow subsequently. Each section discussed below highlights the legal change, its effective date, and its implications for taxpayers and practitioners.

(The analysis is based on the Finance Bill, 2026 as presented on February 1, 2026. These proposals will become law only upon enactment and may undergo changes during the legislative process.)

1. Reduction in TCS Rate on Overseas Tour Programme Packages

The Finance Act, 2026 has amended Section 206C(1G) relating to Tax Collected at Source on overseas tour packages under the Liberalised Remittance Scheme.

Amendment:

The TCS rate has been reduced from 5%/20% to a uniform 2%, and without any threshold or stipulation of amount.

Implications:

• Reduces cash outflow at the time of foreign travel payment
• TCS applies from the first rupee at 2%
• Credit available in ITR upon filing, subject to matching with Form 26AS

2. Revised Due Dates for Filing Income-tax Returns

The Finance Act, 2026 has amended Section 139(1) of the Income-tax Act, 1961, to extend the due dates for filing income-tax returns for certain categories of taxpayers.

Amendment:

Implications:

• Non-audit business taxpayers and trusts get an additional one month for filing
• Aligns deadlines with availability of TDS/TCS data and Form 16/16A issuance
• Reduces rush during peak filing season

Effective from: AY 2027-28 onwards.

This creates separate deadlines for different taxpayer categories based on their compliance requirements.

3. Extension of Time Limit for Filing Revised Returns

The Finance Act, 2026 has amended Section 139(5) of the Income-tax Act, 1961, which deals with filing of revised income-tax returns.

Amendment:

The time limit for filing a revised return has been extended from 31st December of the relevant assessment year to 31st March of the assessment year. A revised return can now be filed on payment of an additional fee as prescribed.

Implications:

• Taxpayers now have until March 31 (instead of December 31) to correct mistakes in their original returns
• This may reduce applications filed under Section 154 for rectifying mistakes
• Additional fee of ₹1,000 (for income up to ₹5 lakh) or ₹5,000 (for income above ₹5 lakh) applies if revision is made after 31st December

Effective from: AY 2027-28 onwards.

4. Tax Exemption on Interest from Motor Accident Claims Tribunal Awards

The Finance Act, 2026 has inserted a new clause under Section 10 to exempt interest awarded by Motor Accident Claims Tribunal (MACT) from income tax.

Amendment:

Interest awarded by MACT to a natural person on compensation received is now exempt from tax under Section 10. Consequently, TDS under Section 194A is not applicable on such interest.

Implications:

• Interest component of MACT awards is no longer taxable in the hands of recipients
• No TDS deduction required by insurance companies or tribunals on such payments
• Recognizes that such interest is compensatory in nature and should not be taxed

Effective from: AY 2027-28 onwards

5. Taxation of Share Buyback Proceeds as Capital Gains

The Finance Act, 2026 has amended the tax treatment of proceeds received by shareholders on buyback of shares.

Amendment:

Proceeds from buyback of shares are now taxable as capital gains in the hands of shareholders. This applies uniformly to all categories of shareholders; individuals, firms, companies, etc.

Previously, buyback of shares (other than listed equity shares) was subject to tax under Section 115QA in the hands of the company, and shareholders received the proceeds tax-free.

Implications:

– Minority shareholders will be paying capital gains tax on buyback proceeds (LTCG at 12.5% for listed shares held over 12 months)

– Promoters will be paying an additional buyback tax: effective rate of 22% for corporate promoters and 30% for non-corporate promoters

– Holding period and type of shares will determine whether LTCG or STCG applies

– This treats buyback similar to a sale transaction for tax purposes

– Addresses tax arbitrage concerns while providing relief to minority shareholders

6. Interest on Penalty Not Chargeable During Pendency of Appeal Before Commissioner (Appeals)

The Finance Act, 2026 has amended the provisions relating to levy of interest on penalty amounts during appeal proceedings.

Amendment:

Interest under Section 220(2) shall not be charged on penalty amounts for the period during which the first appeal is pending before the Commissioner (Appeals). This applies irrespective of whether the appeal is decided in favor of the taxpayer or the revenue.

Implications:

• Provides relief to taxpayers by not charging interest during the appeal period
• Interest starts running only after disposal of the first appeal, if penalty is upheld
• Applicable to all penalties levied under the Income-tax Act, 1961

7. Introduction of Foreign Asset Disclosure Scheme

The Finance Bill, 2026 proposes to insert a new Chapter introducing the “Foreign Assets of Small Taxpayers Disclosure Scheme, 2026.”

Scheme Particulars:

• Window period of 6 months from the date of notification
• Primarily intended for students, technology professionals, and non-resident Indians who have returned to India
• Covers undisclosed foreign assets and foreign income

Benefits under the Scheme:

• Assets or income declared under the scheme shall be exempt from inclusion in total income
• No penalties are proposed to be levied under the Income-tax Act, 1961
• Immunity from prosecution under the Income-tax Act and the Black Money Act, 2015

Complementary Amendment:

The scheme operates alongside proposed changes to the Black Money Act, 2015, providing a framework for voluntary compliance.

Effective from: Date to be notified by the Central Government

8. Enhanced Investment Limit for Persons of Indian Origin in Equity Markets

The Finance Bill, 2026 proposes amendments to liberalise investment norms for Persons Resident Outside India (PROI) in Indian equity markets.

Amendment:

Persons of Indian Origin are now permitted to invest in equity shares of listed Indian companies under the Portfolio Investment Scheme. The individual investment ceiling has been raised from 5% to 10% of the paid-up capital of the company.

Implications:

• Increases accessibility of Indian equity markets to non-resident investors
• Allows PIOs to build larger stakes in Indian companies
• Requires compliance with FEMA regulations and RBI guidelines

9. Decriminalisation of Select Offences under the Income-tax Act

The Finance Bill, 2026 proposes amendments to decriminalise certain minor offences and rationalise penalties under the Income-tax Act, 1961.

Offences Converted to Fine-Only:

The following offences will no longer attract imprisonment and will be punishable only by fine:

• Non-production of accounts and documents when required under Section 142(1)
• TDS defaults on certain payments made in kind

Rationalisation of Serious Offences:

For serious offences, maximum imprisonment is now 2 years (simple imprisonment). Courts can now impose fines instead of imprisonment.

Retrospective Relief under Black Money Act:

With effect from October 1, 2024, non-disclosure of non-immovable foreign assets with aggregate value below ₹20 lakh will be exempt from prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

10. Amendments to Minimum Alternate Tax (MAT) Provisions

The Finance Bill, 2026 proposes significant changes to the computation and credit mechanism under Section 115JB relating to Minimum Alternate Tax.

Key Amendments:

• MAT Credit Carry Forward: From April 1, 2026, brought-forward MAT credit can be set off only if the company opts for the new tax regime. The set-off is limited to one-fourth (25%) of the tax liability computed under the new regime.
• MAT as Final Tax: From April 1, 2026, MAT is proposed to be treated as final tax liability at the rate of 14% (plus applicable surcharge and cess), reduced from the current 15%. This eliminates the credit mechanism for MAT paid going forward.

Implications:

– Companies will no longer accumulate MAT credit from April 1, 2026 onwards

– Brought-forward MAT credit accumulated till March 31, 2026 will continue to be available for set-off

– Such brought-forward credit can be utilized only in the new tax regime and is restricted to 25% of tax liability

– Companies paying MAT will have clarity on their final tax liability without future credit entitlement

– Companies need to evaluate their tax regime choice considering the restricted MAT credit utilization

Effective from: April 1, 2026 (AY 2027-28)

Key Takeaways

Individual Taxpayers:

• TCS on foreign tour packages reduced to 2%
• Filing deadline extended to August 31 for non-audit cases
• Revised returns permitted till March 31 (additional fee applies post December 31)
• MACT interest awards exempt from tax

Investors:

• Buyback proceeds taxable as capital gains
• LTCG at 12.5% on listed shares (holding period exceeds 12 months)
• PIOs permitted 10% investment limit (increased from 5%)

Companies:

• MAT at 14% becomes final tax from April 1, 2026
• MAT credit mechanism discontinued prospectively
• Existing MAT credit (till March 31, 2026) restricted to 25% set-off only

General:

• Foreign Assets Disclosure Scheme notified with prosecution immunity
• Interest on penalty waived during first appeal pendency
• Minor offences under Income-tax Act decriminalized

Conclusion

The Finance Bill, 2026 proposes multiple amendments to the Income-tax Act, 1961 across various areas including TCS rates, return filing timelines, penalty provisions, disclosure schemes, and corporate taxation. These amendments seek to reduce compliance burden, rationalize penalties, and promote voluntary disclosure. Taxpayers, tax professionals, and businesses should review their practices in light of these changes. The government will issue detailed rules and notifications to clarify how these provisions will work. Taxpayers should watch for CBDT circulars and notifications that will provide implementation details.