The Finance Bill, 2026 proposes a major rationalisation of taxation and penalties applicable to unexplained incomes covered under sections 102 to 106 of the Income-tax Act, 2025. Currently, such incomes—relating to unexplained credits, investments, assets, expenditure, or certain borrowings—are taxed at a steep rate of 60% under section 195, along with a separate penalty of 10% of tax under section 443. To align tax treatment with principles of proportionality, the Bill proposes to reduce the tax rate on such incomes from 60% to 30%. Simultaneously, the standalone penalty under section 443 is proposed to be omitted, with these cases being brought within the general misreporting penalty framework under section 439. This ensures consistency with penalties applicable to other misreported incomes and avoids duplicative penal provisions. The amendments aim to rationalise enforcement, reduce excessive tax burden, and simplify compliance. These changes will take effect from 1 April 2026 and apply from tax year 2026–27 onwards.
Rationalisation of tax rate under section 195 and penalty under section 443 in respect of certain Income:
Section 195 of the Income-Tax Act, 2025 (hereinafter referred as ‘the Act’) provides for tax on income referred to in section 102 to 106. Section 102 to 106 provides for income on account of, unexplained credits, unexplained investment, unexplained asset, unexplained expenditure and amount borrowed or repaid through negotiable instrument, hundi, etc.
2. Section 195(1) further provides that where total income of an assesse includes any income referred to in section 102 or 103 or 104 or 105 or 106, the income-tax calculated on such income will be charged at the rate of 60%.
3. Further, section 443 provides that, penalty amounting to 10% of the tax payable under section 195(1)(i), on an assessee if the income determined in his case for any tax year includes any income referred to in section 102,103,104,105 or 106.
4. With regard to the section 195 of the Act on the tax on income referred to in section 102 to 106, it is considered that the tax rate of 60% which is currently charged on income referred to in section 102 to 106 as per section 195, is not proportionate and need rationalisation. Therefore, to rationalise the same, the tax rate of 30% is proposed under section 195 of the Act.
5. Further, it is also proposed to bring the penalty rate on income determined by Assessing Officer which is in nature of income referred to in section 102 to 106 at par with the rate charged for misreporting of income under section 439. Accordingly, penalty provision under section 443 (penalty for income referred to in section 102 to 106) is proposed to be omitted and, in respect of such income, penalty is proposed to be included in the cases of under-reporting of income in consequence of misreporting under section 439(11) of the Act.
6. Therefore, it is proposed to amend section 195 to reduce the tax rate from 60% to 30%. Further, it is also proposed to omit penalty under section 443 and subsume this penalty under section 439(11) of the Act.
7. This amendment will take effect from the 1st day of April, 2026 and shall apply for tax year 2026-27 and subsequent tax years.
[Clause 46, 84, 86]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 46 of the Bill seeks to amend section 195 of the Income-tax Act, 2025 relating to tax on income referred to in sections 102 to 106.
It is to proposed to amend the said section so as to reduce the rate of income-tax calculated on income referred to in sections 102 to 106 from 60% to 30%.
This amendment will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Clause 84 of the Bill seeks to amend section 439 of the Income-tax Act, 2025 relating to penalty for under-reporting and misreporting of income.
Sub-section (11) of the said section provides the categories of cases of misreporting of income referred to in sub-section (10).
It is proposed to amend the said sub-section (11) so as to include the income referred to in section 195(1)(b) within the ambit of income referred to in sub-section (10).
It is further proposed to insert a new sub-section (13A) so as to provide that where additional income-tax is paid in accordance with section 267(5)(ii), the income on which such additional income-tax is paid shall not form the basis of imposition of penalty.
These amendments will take effect from 1st April, 2026 and will, accordingly, apply in relation to the tax year 2026-2027 and subsequent years.
Clause 86 of the Bill seeks to omit section 443 of the Income-tax Act, 2025 relating to penalty in respect of certain income.
It is proposed to omit the said as a consequential amendment made in section 439 of the said Act.
This amendment 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
46. Amendment of section 195.
In section 195 of the Income-tax Act, in sub-section (1), in the longline, in clause (i), for the figures and symbol “60%”, the figures and symbol “30%” shall be substituted.
84. Amendment of section 439.
In section 439 of the Income-tax Act,––
(a) in sub-section (11),––
(i) in clause (e), the word “and” occurring at the end shall be omitted;
(ii) in clause (f), for the word “apply.”, the words “apply; and” shall be substituted;
(iii) after clause (f), the following clause shall be inserted, namely:–– “(g) income referred to in section 195(1)(b).”.
(b) after sub-section (13), the following sub-section shall be inserted, namely:––
“(13A) Where additional income-tax is paid in accordance with section 267(5)(ii), the income on which such additional income-tax is paid shall not form the basis of imposition of penalty under this section.”.
86. Omission of section 443.
Section 443 of the Income-tax Act shall be omitted.
