Budget 2026 Relief for Taxpayers: Penalty on Tax Audit Delay Removed from April 2026

Budget 2026 introduces a major compliance relief by replacing penalties with fixed mandatory fees for select procedural and technical lapses under the Income-tax Act.

The Government has recognised that penalties imposed for procedural or technical delays often result in avoidable litigation, even in situations where there is no revenue loss or any mala fide intent. To address this concern and provide greater certainty to taxpayers, Budget 2026 proposes to replace penalties for certain compliance failures with fixed or graded mandatory fees.

These amendments will come into force from 1 April 2026 and will apply from Tax Year 2026-27 onwards.

1. Change in Late Fee for Tax Audit – Section 446

Earlier Provision (Before Budget 2026)

Under Section 446, failure to get accounts audited or to obtain the audit report (without reasonable cause) attracted a discretionary penalty, being the lower of:

• 0.5% of total sales / turnover / gross receipts, or

• ₹1,50,000

Since the penalty was discretionary and turnover-linked, it frequently led to litigation, especially in cases involving minor or unintentional delays.

Proposed Amendment – Penalty Converted into Fee

Budget 2026 proposes to:

• Omit the penalty provision under Section 446, and

• Introduce a mandatory fee under proposed Section 428(c).

New Graded Fee Structure for Tax Audit Delay

📌 The fee is mandatory, non-discretionary, and not linked to turnover or receipts, ensuring certainty in compliance.

Important Note:
While Section 446 has been removed for tax audit defaults, it has been re-purposed to deal with penalties related to failure to furnish or furnishing incorrect information on crypto asset transactions.

2. Change in Penalty for Transfer Pricing Audit Report – Section 447

Earlier Provision

Failure to furnish the accountant’s report under Section 172 (relating to international and specified domestic transactions) attracted a fixed penalty of ₹1,00,000 under Section 447.

Proposed Amendment

Budget 2026 proposes to:

• Convert the penalty into a fee, and

• Shift the provision to Section 428(4).

New Graded Fee Structure

This change introduces proportionality and fairness, particularly for procedural delays without deliberate non-compliance.

3. Change in Penalty for Statement of Financial Transactions – Section 454(1)

Earlier Provision

Failure to furnish a Statement of Financial Transactions (SFT) or reportable account attracted a penalty of:

• ₹500 per day for the period of default.

Proposed Amendment

Budget 2026 proposes to:

• Convert the penalty into a mandatory fee, and

• Shift the provision to Section 427(3).

This reflects the Government’s intent to treat technical reporting delays as compliance lapses rather than offences.

4. Capping of Penalty under Section 454(2)

Earlier Provision

If SFT was not furnished even after notice, a penalty of:

• ₹1,000 per day was leviable

• No maximum limit was prescribed

Proposed Relief

Budget 2026 introduces:

• An upper cap of ₹1,00,000 on the penalty under Section 454(2)

This ensures certainty and prevents excessive penalties for prolonged but technical defaults.

5. Rationale Behind the Amendments

The Government has clearly stated that:

• Penalties for technical defaults cause unnecessary litigation

• Conversion into mandatory fees ensures certainty

• Non-discretionary fees reduce arbitrary assessments

• The reforms align with a trust-based, taxpayer-friendly tax administration

6. Effective Date & Applicability

• Effective from: 1 April 2026

• Applicable for: Tax Year 2026-27 onwards

• Defaults relating to earlier tax years will continue under the old provisions

Penalties Converted into Fees – Summary Table

(Effective from 01.04.2026 | Tax Year 2026-27 onwards)