Key Highlights of Union Budget 2026 covering major Direct Tax proposals

Key Highlights of the Union Budget 2026, covering major Direct Tax proposals announced on 1 February 2026.

This Budget is significant as the ninth consecutive Budget by the finance minister and the first prepared at Kartavya Bhawan. Shaped by the Viksit Bharat Young Leaders Dialogue 2026, it reflects a Yuva Shakti–driven vision focused on inclusive and sustainable growth.

The Government’s Sankalp aims to convert aspirations into achievements, ensuring growth reaches farmers, SC/ST communities, youth, women, and other vulnerable sections. Policy priorities centre on accelerating economic growth, empowering people, and ensuring inclusivity in line with Sabka Saath, Sabka Vikas.

Strong emphasis has been placed on technology-led development, with focus on AI, digital infrastructure, healthcare, education, energy security, and innovation. Fiscal discipline and continued public investment under Atmanirbhar Bharat remain key, with India’s economy showing resilience at around 7% growth, despite global challenges.

DIRECT TAX PROPOSALS

1. The Government has announced the completion of a comprehensive review of the Income-tax Act, 1961 and has proposed the introduction of a new Income-tax Act, 2025, to be implemented with effect from 1 April 2026.

2. New Income Tax Rules and Forms:

Income Tax Rules and return forms will be notified shortly. The revised forms are intended to allow individuals to meet their tax obligations with ease and without unnecessary procedural difficulty.

3. Relaxation of allow ability of Employee Contribution to specified funds– Section 29

Earlier position

• Deduction of employee contribution (such as PF, ESIC, etc.) was allowed only if the amount was deposited within the due date prescribed under the respective labour
• Any delay beyond the statutory due date, even if the amount was paid before filing the income-tax return, resulted in disallowance of deduction.

Proposed Position:

• The due date for depositing employee contribution, for the purpose of claiming deduction, has now been linked to the due date of filing the return of income under section 263(1).
• Employer will be allowed deduction if the employee contribution is deposited on or before the income-tax return filing due date, irrespective of the due date under the respective welfare laws.

4. Exemption on Interest on Compensation under the Motor Vehicles Act, 1988

• Earlier, Interest received on compensation awarded under the Motor Vehicles Act, 1988 was taxable, unless the recipient fell under specific exempt categories listed in Schedule III. For TDS purposes, tax was not deducted only if the interest amount did not exceed Rs.50,000 in a tax year.
• Now, with the amendment being proposed to include Interest received on compensation awarded under the Motor Vehicles Act, 1988 to an individual or his legal heir under exempt category to provide relief for genuine hardships caused to the victims and their family. Further, TDS is also not be deducted on such interest as per the Budget Proposal.

5. Relaxation for application of Lower TDS/TCS Certificate

As per the proposal of the present budget, for the purpose of ease of compliance to the small tax payers, Now the Tax payer will be able-

• To apply for a Lower or Nil TDS/TCS certificate online using Electronic Verification Code (EVC).
• The Income-tax Authority will examine the application after
• Where the prescribed conditions are satisfied, the Lower or Nil TDS/TCS certificate will be issued electronically.
• If the conditions are not fulfilled, the application shall be rejected by the Income-tax
• This measure is intended to simplify the process for taxpayers, particularly small taxpayers, by reducing procedural requirements and enabling a fully electronic application and approval mechanism.

6. No requirement to obtain TAN by resident Individual/HUF for non-resident immovable property seller:

• As per the Budget proposal, a resident individual purchasing immovable property from a non-resident will not be required to obtain a Tax Deduction and Collection Account Number (TAN) for deducting tax on such transaction.
• This change removes the requirement to apply for TAN and file TDS returns for a one- time property purchase transaction.
• The Government may introduce a PAN-based mechanism for deduction of TDS in such cases, similar to the system already applicable for purchase of property from resident
• The proposal is applicable where the seller is a non-resident individual or

7. Enabling filing of declaration for no TDS through Depository (Erstwhile Form 15G/H)

• Eligible investors can now file a single declaration (Erstwhile Form 15G/H) for no TDS with the depository instead of submitting separate declarations to each payer of dividend, interest on securities, or mutual fund income. The depository will share the declaration with the respective income-paying This facility is available only for listed securities or units held in demat form. Further, the reporting timeline for such declarations by payers to the Income-tax Department has been revised from monthly to quarterly, reducing compliance burden for all parties.

8. Clarification for TDS on Supply of “Manpower”

• Different TDS rates apply to payments made to contractors and to payments made for professional or technical services.
• At present, there has been uncertainty on the applicable TDS rate for supply of manpower, leading to inconsistent deductions.
• The Budget proposes to treat supply of manpower as “work” for TDS purposes hence it will be deducted at contractor rates, depending on the nature of the payer.
• This clarification removes ambiguity and ensures uniform application of TDS provisions in cases involving supply of manpower.

9. Alignment of Income-tax Provisions with RFCTLARR Act

• The RFCTLARR Act, 2013 provides that amount received on account of award or agreement due to compulsory acquisition of land is not subject to income tax. However, the Income-tax Act, 1961 did not contain an explicit exemption for such income, leading to uncertainty. This position was later on clarified by the CBDT through Circular No. 36/2016.
• To remove ambiguity and align the Income-tax Act with the RFCTLARR Act, the Budget now proposes to expressly exempt any income arising from an award or agreement made on account of compulsory acquisition of land, other than cases covered under section 46 of the RFCTLARR Act.

10. Exemption for Disability Pension to Armed Forces Personnel:

• Disability pension is paid to Armed Forces personnel who are invalided out of service due to a disability attributable to, or aggravated by, military service. Such pension consists of a service element and a disability element, and has historically been treated as exempt through earlier laws, notifications, and circulars.
• The Budget now proposes to formally provide exemption for both components of disability pension, but only where the individual is invalided out due to service-related disability. This exemption will not apply to cases of retirement on superannuation or otherwise. The proposed exemption will also be extended to eligible paramilitary

11. Rationalization of Due Dates for Filing of Return of Income

 12. Revised Return Time limit and fees

A revised return of income now can be filed up to 31st March subject to payment of the prescribed additional fee if filed after 31^st December, as proposed under the Act.

13. Proposals for Updated Return:

• As per the Budget 2026 proposal, an updated return can be filed even in cases where losses have been reported. However, such updated return shall be permitted only if it results in reduction of the losses originally claimed in the return of income.
• Where an updated return is filed in response to a notice issued by the Income-tax Department within the time specified in such notice, the taxpayer shall be liable to pay additional income-tax at an increased rate of 10% over and above the additional tax and interest payable. Once such additional income-tax is paid, the income disclosed in the updated return shall not be liable to penalty.

14. Foreign Assets of Small Taxpayers – Disclosure Scheme, 2026 (FAST-DS 2026)

• The Budget proposes a time-bound disclosure scheme (FAST-DS 2026) to allow small taxpayers to voluntarily declare undisclosed foreign assets or foreign income arising from past or inadvertent non-compliance. The scheme covers cases such as foreign ESOPs/RSUs, dormant overseas bank accounts, and foreign savings or insurance
• Eligible taxpayers may regularise such disclosures on payment of prescribed tax or fee and will receive limited immunity from penalty and prosecution under the Black Money Act, excluding cases involving prosecution or proceeds of crime.

15. Relaxation of conditions for prosecution under the Black Money Act

• The Budget proposes a relaxation in prosecution provisions under the Black Money Act to provide relief in cases of minor and inadvertent non-disclosure of foreign assets where the aggregate value of foreign assets (other than immovable property) does not exceed Rs.20 lakh. (Retrospective from 1.10.2024)

16. Changes With respect to Block Period Assessments

• Under the existing block assessment provisions, where undisclosed income relating to a third person is found during a search on another person, the same block period applies to both. This results in a full block assessment even where the undisclosed income of the third person relates only to one specific tax year, causing unnecessary compliance burden.
• To address this, the Budget proposes to limit the block period for such other persons only to the tax year(s) to which the undisclosed income relates, instead of applying the entire block period.
• The time limit for completing a block assessment is linked to the date of execution of the last search authorisation or requisition, which often results in different limitation periods within the same search group.
• The Budget proposes to compute the time limit for completing block assessment from the date of initiation of search or requisition, instead of the last authorisation date, and to extend the completion period from 12 months to 18 months.

17. Proposals for Changes in Various Penalties:

I. “Fees” instead of Penalties:

 II. Imposition of Penalty within the Assessment Order

• At present, assessment and penalty proceedings are separate, leading to multiple notices, prolonged litigation, and uncertainty for taxpayers.
• The Budget proposes that penalty for under-reporting or misreporting of income will be imposed directly in the assessment order itself, instead of initiating separate penalty proceedings later.
• The requirement of issuing a separate show-cause notice and passing an independent penalty order will be dispensed with for such cases.
• Interest for non-payment of demand will be charged only after disposal of appeal by CIT(A) or ITAT, as applicable.

III. Increase in Maximum Penalty for Non-compliance with Information Collection

• Earlier, where a person failed to furnish information called for by the income-tax authorities during collection of information from the business premises, a maximum penalty of Rs.1,000 could be imposed.
• The Budget proposes to increase the maximum penalty to Rs.25,000 for failure to comply with directions to furnish information.

IV. Expanding the scope of immunity from penalty or prosecution under section 440 of the Act

• At present, immunity from imposition of penalty and initiation of prosecution is available only in cases of under-reporting of income, subject to payment of tax and interest and non-filing of appeal against the assessment order. Where under-reporting arises due to misreporting of income, such immunity is not available, even though a higher tax is payable in lieu of penalty.
• The Budget now proposes to expand the scope of immunity from penalty or prosecution under section 440/270AA of the Act, where under-reporting of income is a consequence of misreporting, provided the prescribed conditions are fulfilled.
• In such cases, immunity will be available on payment of additional income-tax at 100% (Section 270AA) or 120% (Section 440) of the tax payable, as applicable.

V. Penalty for Non-furnishing or Furnishing Incorrect Information on Crypto-asset Transactions

• The Act requires prescribed reporting entities to furnish statements containing details of crypto-asset transactions. To ensure compliance and discourage defaults, the Budget proposes to introduce specific penalty provisions for failure to comply with these reporting requirements.
• Under the proposal,

(i) a penalty of 200 per day will be levied for non-furnishing of the statement

(ii) a fixed penalty of 50,000 will apply for furnishing inaccurate information or failure to rectify such inaccuracies.

18. Proposals For Co-Operatives

• A benefit of deduction to cooperative societies in respect of dividends received from other cooperative societies is now extended to the new regime to the extent such dividends are distributed to their members.
• Further, notified federal cooperative societies will be allowed a deduction for dividends received from companies for three years, up to Tax Year 2028-29 under both old and new regime, provided the investments were made on or before 31 January 2026 and such dividends are further distributed to members.
• The Budget proposes to expand the scope of deduction available to primary cooperative societies engaged in supplying produce of their members. In addition to milk, oilseeds, fruits, and vegetables, the deduction will now also cover profits from activities such as supply of cattle feed and cotton seeds, where such supplies are made by a primary cooperative society to a federal cooperative society, the Government, or specified public entities.
• The Budget proposes to expand the definition of “co-operative society” to include societies registered under the Multi-State Cooperative Societies Act, 2002, in addition to those registered under State and Union Territory cooperative laws.
• It is proposed that no tax shall be deducted at source on interest income (other than interest on securities) credited or paid to any co-operative society engaged in the business of banking, including co-operative land mortgage banks, thereby aligning the provisions with the Income-tax Act, 1961.

19. Changes in TCS Rates

20. Tax Exemptions for certain Foreign Entities/NR:

1) Data Centre Activity : The Budget proposes to exempt income earned by foreign companies/Non-Resident etc. from procuring data centre services in India from specified Indian data centres, in order to promote investment in data centres and support India’s artificial intelligence and digital infrastructure ecosystem. This exemption will apply to income accruing or arising in India for a period up to the tax year ending 31st March 2047.

Conditions: The exemption will be available only:

• Where the services are procured from a specified data centre, which is approved and notified by the Central Government
• Owned and operated by an Indian
• Services are provided to Indian users, the foreign company must route such services through an Indian reseller entity

2) Capital Equipment: Income earned by a foreign company from supplying capital goods, equipment, or tooling to an Indian contract manufacturer engaged in the production of electronic goods not to be included in the total income earned by such entity with certain conditions. This benefit will be available up to Tax Year 2030–31.

Conditions: The exemption will apply where the Indian contract manufacturer is

• Located in a customs bonded area
• Produces electronic goods on behalf of the foreign company for

21. Disallowance of Interest Deduction against Dividend Income

Under the existing provisions, interest expenditure incurred for earning dividend income or income from mutual fund units is allowed as a deduction, subject to a cap of 20% of such income. The Budget now proposes to withdraw this benefit entirely, providing that no deduction for interest expenditure shall be allowed against dividend income or income from units of mutual funds.

22. Proposals for IFSCs:

Earlier provisions

• Units in IFSC were allowed a 100% deduction for 10 consecutive years out of 15
• Offshore Banking Units (OBUs) were allowed a 100% deduction for 10 consecutive

Proposed provisions

• Units in IFSC will now be eligible for a 100% deduction for 20 consecutive years out of 25 years.
• Offshore Banking Units (OBUs) will be eligible for a 100% deduction for 20 consecutive
• Business income earned after the deduction period will be taxed at a concessional rate of 15%.

23. Changes In Minimum Alternative Tax (MAT)

• Following two businesses have been added in the EXCLUSION category of MAT for Non-Resident Entity opting for Presumptive Taxation:
  • Business of operation of cruise ships
  • Provision of services or technology for setting up electronics manufacturing facilities in India for resident companies
• With effect from 04.2026 under old regime No new mat credit to be allowed
• Rate of MAT Reduced from 15% to 14%
• Setoff of MAT credit under new regime to be allows to domestic companies only to the extent of 25% of Tax Liabilities.
• For the foreign company, setoff of MAT Credit to be allowed to the extent of difference of Tax on total income and MAT for the year in which normal tax is higher that the

24. Exemption for Sovereign Gold Bonds – Clarification

• Under the existing provisions, capital gains arising on redemption of Sovereign Gold Bonds (SGBs) are exempt from tax, the Budget proposes to clarify that such exemption will be available only where the bond is subscribed at the time of original issue and held continuously until maturity.

25. Taxation of buyback of shares:

• Earlier, under the existing provisions, the amount received by a shareholder on buy- back of shares was treated as dividend income and taxed accordingly. Separately, the cost of acquisition of shares extinguished on buy-back was allowed as a capital loss.
• It is now proposed that the entire consideration received on buy-back shall be taxed under the head “Capital Gains”, replacing dividend taxation. Further, to address the special position of promoters in buy-back decisions, an effective tax rate of 30% is proposed for promoter individuals, while promoter companies will be taxed at an effective rate of 22% on gains arising from buy-back.

26. Increase in Securities Transaction Tax (STT) on options and futures:

The Bill proposes to increase the Securities Transaction Tax (STT) applicable on trading in the stock market, specifically on derivative instruments like options and futures:

• Option sales: STT increased from 10% to 0.15% on the option premium
• Options on exercise: STT increased from 125% to 0.15% on the intrinsic value
• Futures trading: STT increased from 02% to 0.05% on the traded value