Budget 2026-27 Proposes Penalty Relief, Decriminalisation And Litigation Reduction In Income Tax Law

The Union Budget 2026–27 on Sunday proposed wide-ranging changes to the income tax penalty and prosecution framework, including immunity schemes, decriminalisation of certain offences and procedural measures to reduce litigation.

Presenting her direct tax proposals, Finance Minister Nirmala Sitharaman said, “Multiplicity of proceedings are a hindrance to the ease of doing business.” She proposed to “integrate assessment and penalty proceedings by way of a common order for both.”

The Finance Minister announced that taxpayers would not face interest liability on penalties during appeals. “There will be no interest liability on the taxpayer on the penalty amount for the period of appeal before the first appellate authority irrespective of the outcome of appeal process,” she said.

She also proposed reducing the pre-deposit requirement. “The quantum of pre-deposit is being reduced from 20 per cent to 10 per cent and will continue to be calculated only on core tax demand.”

To further reduce disputes, Sitharaman proposed allowing updated returns even after reassessment proceedings begin. “I propose to allow taxpayers to update their returns even after reassessment proceedings have been initiated,” she said, subject to payment of “an additional 10 per cent tax over and above the rate applicable for the relevant year.”

The Finance Minister also proposed extending immunity provisions. “I propose to apply the existing framework for immunity from penalty and prosecution in cases of under-reporting to misreporting too,” she said, adding that such taxpayers would be required to pay “100 per cent of the tax amount as additional income tax over and above the tax and interest due.”

Announcing a one-time foreign asset disclosure scheme, the Finance Minister said it would apply to two categories of taxpayers. “The first category comprises taxpayers who did not disclose their overseas income or assets,” she said, adding that “the limit of undisclosed income or asset is proposed to be up to ₹1 crore.” Such taxpayers would be required to pay “30 per cent of the undisclosed income or fair market value of the asset as tax and 30 per cent as additional income tax in lieu of penalty,” and would “thereby get immunity from prosecution.”

Referring to the second category, Sitharaman said it would cover taxpayers “who disclosed their overseas income and/or paid due tax but could not declare the asset acquired.” In such cases, “asset value is proposed to be up to ₹5 crore,” and “immunity from both penalty and prosecution will be available with payment of a fee of ₹1,00,000.”

The Budget also proposed converting penalties for certain procedural defaults into fees. “Penalties for certain technical defaults such as failure to get accounts audited, non-furnishing of transfer pricing audit report and default in furnishing statement of financial transactions are proposed to be converted into fee,” she said.

On criminal provisions, Sitharaman announced, “I propose to rationalise the prosecution framework under the Income Tax Act.” She said that “non-production of books of account and documents and offences relating to TDS where payment is made in kind are being decriminalised,” and that “minor offences will attract fine only.”

Remaining prosecutions, she said, would be “graded commensurate with the quantum of offence,” entail “only simple imprisonment,” with “maximum imprisonment reduced to two years,” and include “power to compound even those offences.”