Presenting the Union Budget 2026, the Finance Minister Nirmala Sitharaman proposed the replacement of the Income Tax Act, 1961 with a new Income Tax Act, 2025, to come into force from April 1, 2026, alongside a series of reforms to the direct-tax regime.
The Finance Minister said a comprehensive review of the six-decade-old law, announced in July 2024, had been completed in record time. Simplified Income Tax Rules and new return forms will be notified shortly, with the stated objective that “ordinary citizens can comply without difficulty”.
Relief and Ease of Living Measures
Among key taxpayer reliefs, the Budget proposes to exempt from income tax any interest awarded by the Motor Accident Claims Tribunal to a natural person, while also removing tax deduction at source on such interest.
The Finance Minister proposed a sharp reduction in tax collected at source (TCS) rates. TCS on overseas tour packages will be cut to 2 per cent, replacing the current rates of 5 per cent and 20 per cent, without any minimum amount condition. TCS for remittances under the Liberalised Remittance Scheme (LRS) for education and medical purposes is also proposed to be reduced from 5 per cent to 2 per cent.
To address ambiguity, supply of manpower services is proposed to be explicitly treated as payment to contractors for TDS purposes, attracting deduction at either 1 per cent or 2 per cent.
A rule-based automated scheme is proposed to allow small taxpayers to obtain lower or nil deduction certificates without approaching an assessing officer. Depositories will be enabled to collect Form 15G or 15H from investors holding securities across multiple companies and transmit them directly to the relevant companies.
The time limit for revising income tax returns is proposed to be extended from December 31 to March 31 on payment of a nominal fee. Filing timelines will also be staggered, with individuals filing simpler returns continuing with a July 31 deadline, while non-audit business cases and trusts will have time until August 31.
Foreign Asset Disclosure and Small Taxpayer Measures
To address practical difficulties faced by students, young professionals, relocated non-residents and similar taxpayers, the Finance Minister proposed a one-time six-month foreign asset disclosure scheme.
Under the proposal, taxpayers who failed to disclose overseas income or assets up to ₹1 crore will be required to pay tax and additional tax at 30 per cent each on the undisclosed amount, in return for immunity from prosecution. A second category, covering taxpayers who paid tax but failed to declare assets up to ₹5 crore, will be eligible for immunity from penalty and prosecution on payment of a ₹1 lakh fee.
Direct Tax Penalty, Prosecution and Litigation Reforms
The Budget proposes integration of assessment and penalty proceedings through a common order, with no interest liability on penalty amounts during the first appellate stage. The mandatory pre-deposit for filing appeals is proposed to be reduced from 20 per cent to 10 per cent of core tax demand.
Taxpayers will be allowed to update returns even after reassessment proceedings begin, on payment of an additional 10 per cent tax, with the assessing officer required to rely on the updated return.
The existing immunity framework for under-reporting is proposed to be extended to cases of misreporting, subject to payment of an additional tax equal to 100 per cent of the tax due. Certain technical defaults are proposed to be converted from penalties into fees, while non-production of books of account and TDS defaults where payment is made in kind are proposed to be decriminalized.
The Finance Minister also proposed graded prosecution provisions, reducing maximum imprisonment to two years, with courts empowered to convert imprisonment into fines. Immunity from prosecution with retrospective effect from October 1, 2024 is proposed for non-disclosure of small foreign assets below ₹20 lakh.
Co-Op Sector Specific Announcements
For cooperative societies, deductions are proposed to be extended to include supply of cattle feed and cotton seed by members. Inter-cooperative dividend income redistributed to members will be deductible under the new tax regime, and a three-year exemption is proposed for certain national cooperative federations on dividends distributed to member cooperatives.
IT Sector Specific Proposals
In support of the IT sector, multiple technology-related services are proposed to be clubbed under a single “Information Technology Services” category with a common safe harbour margin of 15.5 per cent. The eligibility threshold for safe harbour is proposed to be raised from ₹300 crore to ₹2,000 crore, with automated approvals and continuity for up to five years.
Tax Holiday For Specific Foreign Companies Till 2047
The Budget proposes a tax holiday until 2047 for foreign companies providing global cloud services using data centres located in India, subject to conditions. Additional safe harbour and exemption measures are proposed for data centres, component warehousing, toll manufacturing, and non-resident experts working in India.
On tax administration, a joint committee is proposed to align income computation standards with Indian accounting standards, removing the need for separate tax accounting from the 2027-28 tax year.
Other Direct Tax Regime Changes
Buybacks are proposed to be taxed as capital gains for all shareholders, with an additional tax for promoters. TCS rates on specified goods are proposed to be rationalised to 2 per cent. Securities Transaction Tax on futures and options is proposed to be increased.
The Budget also proposed making Minimum Alternate Tax a final tax from April 1, 2026, with the rate reduced to 14 per cent and limited carry-forward set-off of accumulated credits under the new regime.