Budget 2026 softens penalty, prosecution norms for individual taxpayers

Budget 2026 signals a shift towards trust-based taxation by easing penalties, limiting prosecution for small and technical lapses

The Union Budget 2026-27 has significantly softened India’s penalty and prosecution regime for individual taxpayers, signalling a nod to trustbased taxation and decriminalisation of minor and technical lapses. The changes aim to reduce litigation, ease compliance anxiety, and encourage honest disclosures. 

The Budget has proposed a one-time, six-month window for small taxpayers, such as students, young professionals and relocated NRIs, to disclose foreign income and assets within specified limits and get immunity. This scheme will apply to two

categories of taxpayers: First, those who did not disclose their overseas income or assets; and second, those who disclosed their overseas income and/or paid due tax but did not declare the asset acquired. 

 

For the first category, undisclosed income or assets can be up to ₹1 crore. The taxpayer must pay tax at 30 per cent of the undisclosed income or the asset’s fair market value, along with an additional 30 per cent as extra tax in lieu of a penalty. For the second category, the undisclosed asset value can be up to ₹5 crore. Immunity from both penalty and prosecution will be available on payment of a fee of ₹1 lakh.  Earlier, foreign asset reporting lapses were treated harshly. “The Budget offers a limited-time regularisation window with clear thresholds, defined payments, and immunity from penalty or prosecution,” said Vishwas Panjiar, founder, SVAS Business Advisors. “The six-month window underscores that this relief is exceptional, and post-window enforcement is likely to be stricter,” said Jidesh Kumar, managing partner, King Stubb & Kasiva, Advocates and Attorneys. 

For non-immovable foreign assets below ₹20 lakh, the government will provide prosecution immunity with retrospective effect from October 1, 2024 (penalty relief already exists). Earlier, even small-value overseas assets triggered prosecution anxiety.  The Budget has proposed allowing taxpayers to file an updated return even after reassessment proceedings have begun, by paying an additional 10 per cent tax over the applicable rate. Earlier, reassessment effectively closed the door on voluntary correction. “The change creates a clear exit route during reassessment, with the assessing officer proceeding only on the basis of the updated return,” said Panjiar. Taxpayers with genuine omissions should use this option early. 

Under existing provisions, assessment and penalty proceedings run independently. After finalising the assessment and tax demand, authorities initiated a separate penalty proceeding. Even when taxpayers appealed the assessment, penalties did not automatically get stayed. “Integrating assessment and penalty proceedings through a common order will eliminate duplication, bring greater procedural clarity, and significantly reduce the administrative burden for taxpayers,” said Neeraj Agarwala, partner, Nangia & Co.  The immunity framework will now extend to misreporting cases, provided the taxpayer pays an additional 100 per cent tax over and above tax and interest. Misreporting cases earlier offered very limited closure options. This route may suit taxpayers who prioritise certainty and have a weak factual position; otherwise, a well-prepared contest may still be preferable. 

The government has decriminalised certain defaults, such as non-production of books and documents and issues linked to tax deducted at source (TDS) where payment is made in kind. Earlier, these could carry prosecution risk. “This reduces fear and overreach, but it does not dilute the need for discipline — records and reconciliations must still be maintained,” said Panjiar. 

Certain technical defaults have been shifted from a “penalty” to a “fee” regime, where applicable. Earlier, penalties involved discretion, prolonged arguments, and years of avoidable litigation. A fee model brings predictability. 

Window for revised returns to be extended

 

• A revised return can currently be filed within nine months from the end of the relevant tax year, or before completion of assessment, whichever is earlier
• The Finance Bill, 2026 proposes to extend this window to 12 months from the end of the relevant tax year, or before completion of assessment, whichever is earlier
• A fee is proposed for revised returns filed after nine months from the end of the relevant tax year
• The fee will depend on the total income reported in the revised return: ₹5,000 if it exceeds ₹5 lakh, and ₹1,000 if it is below ₹5 lakh

 

Obtaining lower/nil TDS certificate to become easier

 

• Under the existing process, the payee must apply to the assessing officer (AO) for a lower or nil TDS certificate
• The AO may issue the certificate if satisfied
• This procedure applies to both small and large cases
• Finance Bill, 2026, proposes that small taxpayers may submit the application for a lower or nil TDS certificate electronically to a prescribed income-tax authority
• Authority will examine the application, issue certificate, or reject it if conditions are not met or application is incomplete

 

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The writer is a Delhi-based independent journalist