The Finance Bill, 2026 proposes to significantly expand the scope of immunity from penalty and prosecution under section 440 of the Income-Tax Act, 2025. Currently, immunity is available only for cases of under-reporting of income, subject to payment of tax and interest and non-filing of appeal. The amendment extends this relief to cases where under-reporting arises due to misreporting, provided the taxpayer pays additional income-tax equal to 100% of the tax payable on such income in lieu of penalty. Further, for incomes falling under sections 102 to 106—such as unexplained credits, investments, assets, or expenditure—where penalty is now subsumed under misreporting, immunity can be claimed on payment of additional income-tax at 120% of the tax payable. The proposal enables early dispute resolution, reduces litigation, and offers taxpayers a structured settlement route while preserving deterrence through higher additional tax. These changes will apply from 1 April 2026 for tax year 2026–27 onwards.
Expanding the scope of immunity from penalty or prosecution under section 440 of the Act-
Section 440 of the Act, provides, inter-alia, procedure of granting immunity by the Assessing Officer from imposition of penalty or prosecution, if assessee fulfils the following conditions, namely: –
a. the tax and interest payable as per Assessment order, has been paid within the period specified in notice of demand;
b. no appeal against the such assessment order has been filed.
2. Further, sub-section (2) provides that assessee shall file an application within one month from the end of the month in which said assessment order has been received by him. Furthermore, sub-section (3) provides that assessing officer shall, subject to the fulfilment of the aforementioned conditions, and after the expiry of the period of filing the appeal, grant the immunity from imposition of penalty under section 439 and initiation of prosecution proceedings under section 478 or section 479. Further, sub-section (4) provides that Assessing Officer shall pass an order accepting or rejecting the application, within a period of three months from the end of the month in which the application for requesting immunity is received.
3. Presently, immunity under section 440 can only be granted in the cases of underreporting of income and not in the case of under-reporting of income in consequence of misreporting.
4. In this regard, it has been considered that provision of immunity should also be extended to such cases where under-reporting of income is in consequence of misreporting. However, the taxpayer is required to pay an additional income-tax to the extent of 100% of the amount of tax payable on such income in lieu of the penalty.
5. Additionally, as the separate penalty (existing penalty under section 443 of the Act) for income determined by AO, which is in the nature of income referred to in section 102 to 106 (unexplained credits, unexplained investment, unexplained asset etc ) of the IT Act, 2025 is proposed to be omitted and subsumed in cases of misreporting of income under section 439(11), therefore immunity provision for the same is also proposed in section 440, to provide opportunity to the taxpayers to settle the disputes at an early stage on payment of additional-tax and reduce the burden of litigation and compliance. However, the taxpayer is required to pay an additional income-tax to the extent of 120% of the amount of tax payable on such income in lieu of penalty.
6. In view of the same, it is proposed to amend the section 440 of the Act so as to extend the scope of immunity to such cases where penalty is initiated for under-reporting of income in consequence of misreporting.
7. This amendment will take effect from the 1st day of April, 2026 for tax year 2026-27 and subsequent tax years.
[Clause 85]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 85 of the Bill seeks to amend section 440 of the Income-tax Act, 2025 relating to immunity from imposition of penalty, etc.
The said section, inter alia, provides the procedure for granting immunity by the Assessing Officer from imposition of penalty or initiation of prosecution, if assessee fulfils certain conditions specified therein.
Under the said section immunity is granted only in the cases of under-reporting of income and not in the case of misreporting of income.
It is proposed to amend the said section by substituting sub-sections (1) to (4) thereof so as to extend such immunity––
i. for misreporting of income [under section 439 (11) (a) to (f)], on payment of the tax and interest payable as per the order of assessment or reassessment under section 270(10) or section 279, along with additional income-tax amounting to 100% of the amount of tax payable on under-reported income, in lieu of penalty and no appeal has been filed;
ii. for income referred to in sections 102 to 106 [under section 439 (11) (g)], on payment of the tax and interest payable as per the order of assessment or reassessment under section 270(10) or section 279, along with additional income-tax amounting to 120% of the amount of tax payable on under-reported income, in lieu of penalty and no appeal has been filed.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
85. Amendment of section 440.
In section 440 of the Income-tax Act,––
(a) for the marginal heading, the following marginal heading shall be substituted, namely:––
“Waiver of penalty and immunity from prosecution.”;
(b) for sub-sections (1) to (4), the following sub-sections shall be substituted, namely:––
“(1) An assessee may make an application to the Assessing Officer to grant waiver of penalty levied under section 439 and immunity from initiation of proceedings under section 478 or 479 on fulfilment of the following conditions: ––
(a) the tax and interest payable as per the order of assessment under section 270(10) or reassessment under section 279, has been paid within the period specified in the notice of demand;
(b) where penalty has been levied under the circumstances referred to in section 439(11)(a) to (f), additional income-tax amounting to 100% of the amount of tax payable on under-reported income has been paid within the period specified in the notice of demand, in lieu of such penalty;
(c) where penalty has been levied under the circumstances referred to in section 439(11)(g), additional income-tax amounting to 120% of the amount of tax payable on under-reported income has been paid within the period specified in the notice of demand, in lieu of such penalty; and
(d) no appeal has been filed against the order of assessment or reassessment and levy of penalty referred to in clause (a), (b) and (c).
(2) An application referred in sub-section (1) shall be made within one month from the end of the month in which the order referred to in the said sub-section is received by the assessee, in such form and verified in such manner, as may be prescribed.
(3) The Assessing Officer shall, on fulfilment of the conditions as specified in sub-section (1), and after the expiry of the period of filing appeal as specified in section 358(3)(a), grant waiver of penalty under section 439 and immunity from initiation of proceedings under section 478 or 479.
(4) No waiver or immunity under sub-section (3) shall be granted if any proceeding has been initiated under Chapter XXII.”.
