3 min readNew DelhiFeb 2, 2026 05:59 AM IST
Providing additional room for disclosures, and some relief to individual taxpayers from penalties and prosecution, the Union Budget 2026-27 has introduced a comprehensive rationalisation of the tax penalty and prosecution framework, with measures including integration of assessment and penalty proceedings, decriminalisation of technical defaults, and expansion of immunity schemes. The Budget announcements by Finance Minister Nirmala Sitharaman also included a one-time foreign asset disclosure scheme for small taxpayers.
“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 the appeal process. Further, the quantum of pre-payment (to appeal a tax demand) is being reduced from 20% to 10% and will continue to be calculated only on core tax demand,” Sitharaman said in her Budget speech.
“As an additional measure for reducing litigation, I propose to allow taxpayers to update their returns even after reassessment proceedings have been initiated, at an additional 10% tax rate over and above the rate applicable for the relevant year,” the Finance Minister added.
Additionally, the existing framework for immunity from penalty and prosecution in cases of under-reporting is proposed to be applied to cases of misreporting as well. However, in such cases, the taxpayer will need to pay 100% of the tax amount as additional income tax, over and above the tax and due interest.
“Penalties for certain technical defaults such as failure to get accounts audited, non-furnishing of transfer pricing audit report and default in furnishing statement for financial transactions, are proposed to be converted into fee,” Sitharaman said.
Non-production of books of account and documents, and payment of TDS in kind, will also be decriminalised, and minor offences will only attract fines and not prosecution.
The remaining prosecutions will be graded as per the quantum of the offence, entailing simple imprisonment of up to two years, down from seven years, with courts having the power to convert even those into fine. Also, all prosecutions shall be rationalised to simple imprisonment instead of rigorous imprisonment. In cases where the maximum punishment is presently two years, it will be reduced to six months with or without fine.
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In a bid to address practical issues of small taxpayers like students, young professionals, IT employees, relocated NRIs, among others, the government will introduce a one-time six-month foreign asset disclosure scheme, under which such taxpayers can disclose income or assets below a certain size. “The scheme covers low-value foreign assets such as ESOPs and RSUs received during overseas employment, dormant foreign bank accounts, and savings held by individuals who have returned to India after living abroad,” said Amit Maheshwari, Managing Partner, AKM Global.
Furthermore, simplified Income Tax rules and forms as per the Income Tax Act, 2025 will be “notified shortly”. While the deadline for filing tax returns for those who fall under ITR 1 and ITR 2 categories will continue to be July 31 those that fall under the non-audit business categories will have an extra month, till August 31.
The time available for filing revised ITR is proposed to be extended by three months — to March 31 from December 31 — with the payment of a nominal fee by the taxpayer.
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