Union Budget 2026 marks a landmark transition in India’s tax framework with the replacement of the Income Tax Act, 1961 by the new Income Tax Act, 2025, effective from 1 April 2026. The reforms aim to simplify language, rationalise procedures, and promote trust-based compliance. Key proposals carried forward or introduced include rationalised return filing deadlines, extended timelines for revised and updated returns, permission to file updated returns even after reassessment notices, and the merger of penalty proceedings with assessment orders. Relief-oriented measures include decriminalisation of minor offences, reduced imprisonment terms, lower pre-deposit for appeals, immunity for small foreign assets, and the FAST-DS 2026 disclosure scheme. Structural changes under the new Act include electronic issuance of lower TDS certificates, PAN-based TDS compliance for property purchases, exemption of MACT interest from TDS, simplified Form 15G/15H filing, MAT as a final tax, capital gains taxation of buybacks, and withdrawal of interest deduction against dividend income. Overall, the proposals reflect a decisive shift towards simplification, voluntary compliance, and procedural fairness.
Arjuna (Fictional Character): Krishna, the Union Budget 2026 has been presented. This time, there is a historic shift — after 63 years, the Income Tax Act, 1961 is being replaced by the new Income Tax Act 2025. What does this transition mean for taxpayers and what are the key changes in this Budget?
Krishna (Fictional Character): Arjuna, you are absolutely right. The Income Tax Act, 1961 served the nation for over six decades, but with countless amendments, it had become increasingly complex with layers of provisos and explanations. The new Income Tax Act, 2025, effective from 1st April 2026 shall replace the previous Act.
Arjuna (Fictional Character): Krishna, what are the important 26 proposals brought through Budget 2026?
Krishna (Fictional Character): Arjuna, just like a relay race a runner passes the relay to another runner there are some changes in Budget which are made in Income Tax Act 1961 which shall be passed to Income Tax Act, 2025 and there are some changes which shall be directly introduced in Income Tax Act, 2025.
Changes Brought in Income Tax Act 1961 are as below:
1. Rationalization of Return Filing Due Dates – Due dates for filing returns are rationalized. Salaried taxpayers and people without business income: 31st July; business/professional assessee not liable to audit, including partners of non-audit firms: 31st August.
2. Extended Time for Revised Return – Earlier, revised returns could be filed only up to 31st December. Now, revised return can be furnished up to 31st March, with a nominal fee if filed after 31st December.
3. Updated Return after Reassessment Notice – Now taxpayers can file an updated return even after issue of reassessment notice, subject to payment of additional tax. AO must use only the updated return in proceedings, and no penalty will be levied on additional income reported.
4. Updated Return for Reducing Losses – Updated returns can now be filed to reduce previously reported losses.
5. Penalty within Assessment Order – Penalty proceedings will now be included within the assessment order itself. Separate penalty proceedings are no longer required.
6. Interest on Penalty – Interest on penalty will be kept in abeyance during pendency of appeal before first appellate authority.
7. Immunity from Misreporting Penalty – Immunity extended to misreporting cases. By paying 100% of the additional tax (120% for unexplained cash credits), taxpayers can avoid penalty.
8. Decriminalization of Offences – Non-production of books of account and failure to pay TDS in kind are decriminalized. Minor offences attract only a fine; rigorous imprisonment replaced by simple imprisonment.
9. Reduced Maximum Imprisonment – Maximum imprisonment for serious tax offences reduced from 7 years to 2 years of simple imprisonment. Earlier 2-year maximum reduced to 6 months.
10. Validity of DIN-based Assessments – Assessments will not be invalid due to technical DIN defects. Reference to computer-generated DIN will suffice.
11. Prosecution Immunity — Small Foreign Assets – Taxpayers holding non-immovable foreign assets below ₹20 lakh are granted immunity from prosecution. Effective retrospectively from 1st October 2024.
12. FAST-DS 2026 (Foreign Asset Disclosure Scheme) Undisclosed foreign assets can be disclosed by paying tax and extra charges, without risk of prosecution.
Changes Brought in Income Tax Act 2025 are as below:
13. New Income Tax Act, 2025 —Now, a brand-new Income Tax Act, 2025 will come into effect from 1st April 2026 with simplified language, logical arrangement of provisions, rationalized rules, and new simplified return forms.
14. Employee Contribution Deduction – Earlier, deduction for employee contribution to PF was disallowed if employees’ contribution was deposited after the statutory due date; now it is proposed to allow deduction if deposited up to the income tax return filing due date.
15. Lower / Nil TDS Certificates – Earlier, applications for lower or nil TDS required manual processing and physical certificates. The proposal introduces electronic verification and digital issuance of such certificates. Hence, the entire process will be completed online.
16. TAN Relaxation for Property Purchase – Earlier, a resident buyer had to obtain TAN when purchasing property from a non-resident. Now the proposal removes the requirement of TAN for resident individuals and HUFs, and the TDS compliance will now be possible using PAN alone.
17. MACT Interest – Earlier, interest awarded by the Motor Accident Claims Tribunal (MACT) to individuals was subject to applicable TDS rates, creating hardship for accident victims. Now, a complete TDS exemption is proposed for interest awarded by MACT to individuals.
18. Form 15G/15H – Single Filing to Depository – Earlier, taxpayers were required to submit Form 15G or Form 15H separately to each company, mutual fund, or deductor to claim TDS exemption. Now, a single filing of Form 15G/15H to the depository will suffice, covering dividends, mutual fund income, and securities interest across all holdings.
19. Manpower Supply —Now, manpower supply services are specifically included under the definition of ‘work’ for TDS purposes, meaning TDS will be deducted at 1% (for individuals/HUFs) or 2% (for others) as applicable to contractors.
20. Tax Audit Default — Penalty Converted to Fee – Earlier, failure to get accounts audited attracted a penalty now this penalty is proposed to be converted to a ‘fee’ on a per-day-of-default basis subject to a maximum ceiling.
21. Transfer Pricing Report Default — Penalty Converted to Fee – attracted a fixed penalty now, similar to the Tax Audit default, this penalty is also proposed to be converted to a ‘fee’ on a per-day-of-default basis subject to a maximum ceiling.
22. Pre-payment for Filing Appeal – Earlier, a taxpayer was required to pay 20% of the core tax demand before filing an appeal. Now, the pre-payment requirement is reduced from 20% to 10% of the core tax demand.
23. Tax on Unexplained Income- Earlier, unexplained income such as cash credits and unexplained investments was taxed at 60% plus 10% penalty. Now, the tax rate on unexplained income is reduced to 30%. The separate 10% penalty is removed and merged with the penalty for misreporting at 200% of the tax amount.
24. MAT as Final Tax – Earlier, Minimum Alternate Tax (MAT) was computed at 15% of book profit and operated as a minimum tax with credit carry-forward. Now, MAT is a final tax at a reduced rate of 14%.
25. Buyback Taxed as Capital Gains – Earlier, income received by shareholders from buyback of shares was treated as dividend. Now, buyback proceeds will be taxed as Capital Gains in the hands of all shareholders.
26. Deduction of Interest against Dividend Income – Earlier, interest expenditure was allowed as deduction against dividend income. The proposal disallows deduction of interest expenditure against such income. Dividend income will now be taxed without such deduction.
Arjuna (Fictional Character): Krishna, what does the taxpayer learn from this?
Krishna (Fictional Character): Arjuna, the proposed changes in this budget focuses a clear intention to simplify procedures and timelines, especially for return filing and compliance. Taxpayers are given more opportunities to correct mistakes and make voluntary disclosures within the legal framework. It must be noted that all these changes are only proposals under the Finance Bill, 2026 and we should wait for the final amendments and notified provisions.
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