Rationalizing Penalty and Prosecution under Income Tax: Key Reforms in Budget 2026

Budget 2026 marks a decisive shift in India’s tax administration, moving from “fear-based” enforcement to trust-based governance. As the new Income-tax Act, 2025 prepares to roll out on April 1, 2026, the Finance Minister has proposed several measures to decriminalize minor infractions and integrate legal proceedings to reduce litigation.

Here is a detailed look at the changes aimed at rationalizing penalty and prosecution.

1. Integration of Assessment and Penalty Proceedings

To reduce the “multiplicity of proceedings,” the Budget proposes a common order for both assessment and penalty.

• Unified Process: Taxpayers will no longer have to undergo separate, sequential processes for tax determination and penalty imposition.
• Relief on Interest: There will be no interest liability on the penalty amount during the period an appeal is pending before the first appellate authority (CIT Appeals), regardless of the appeal’s outcome.

2. Decriminalisation of Minor Offenses

In a move to ease the compliance burden on small taxpayers and professionals, the government has signaled a shift away from criminal penalties for procedural lapses.

• Conversion to Fees: Penalties for technical defaults—such as failure to get accounts audited, non-furnishing of transfer pricing reports, or delays in filing financial transaction statements—are proposed to be converted into a simple fee rather than a punitive penalty.
• decriminalized Acts: Actions such as the non-production of books of account or technical defaults in TDS payments made in kind are being decriminalized.
• Immunity for Foreign Assets: Small taxpayers (students, NRIs, and professionals) who inadvertently missed reporting non-immovable foreign assets with an aggregate value less than ₹20 lakh are granted immunity from prosecution, effective retrospectively from October 1, 2024.

3. Expansion of Immunity Framework

The current framework for immunity from penalty and prosecution, which was previously restricted to “under-reporting,” is now being extended to cases of misreporting.

• The “100% Rule”: To qualify for this immunity in misreporting cases, the taxpayer must pay an additional income tax equal to 100% of the tax amount due, over and above the standard tax and interest.
• Reduced Pre-payment: To make the justice system more accessible, the quantum of pre-payment required to file an appeal is being reduced from 20% to 10%, and it will be calculated only on the core tax demand.

4. Opportunities for Voluntary Compliance

Budget 2026 introduces a “compliance-first” culture by allowing taxpayers to correct their records even after legal proceedings have started.

• Update During Reassessment: For the first time, taxpayers can file an updated return even after reassessment proceedings have been initiated.
• Cost of Regularization: This is permitted at an additional tax rate of 10% above the applicable rate for that year. Once filed, the Assessing Officer is required to use only this updated return for the remainder of the proceedings.

Summary of Key Changes

CA Ankit Gulgulia (Jain)

FCA, CWM (AAFM-US), CBV, CIFRS, R-ID, B.COM (H), RV* (IBBI)

Practising Chartered Accountant in Delhi NCR Since 2011. He can be contacted at ankitgulgulia@gmail.com or +91-9811653975.