Income Tax Changes Announced in Union Budget 2026

Direct Tax Proposals in Budget 2026 – Key Highlights

In Union Budget 2026, the Government has announced a wide-ranging and future-oriented set of Direct Tax reforms aimed at simplifying tax laws, reducing disputes, improving compliance, and enhancing India’s appeal as a global investment destination. These measures signal a decisive shift from a complex, enforcement-driven regime to a trust-based, technology-enabled, and taxpayer-friendly tax system, aligned with the vision of Viksit Bharat.

1. New Income-tax Act, 2025 – A Structural Overhaul

One of the most significant announcements in Budget 2026 is the replacement of the Income-tax Act, 1961 with the Income-tax Act, 2025, effective from 1 April 2026.

The new legislation is designed to:

• Be substantially shorter and simpler, with fewer sections and chapters

• Use clear and unambiguous language to minimise interpretational disputes

• Be easier for taxpayers and tax authorities to understand and implement

Simplified Income-tax Rules and redesigned return forms will be notified shortly, enabling individuals to comply without professional assistance.

2. Taxpayer Relief & Ease of Living Measures

The Budget introduces multiple measures to address long-standing taxpayer concerns:

MACT Interest Exemption

• Interest awarded by the Motor Accident Claims Tribunal (MACT) to individuals will be fully exempt from tax.

• No TDS will apply, irrespective of the amount received.

Rationalisation of TCS under LRS

• TCS on overseas tour packages reduced to 2% (from 5% / 20%), without any threshold.

• TCS on education and medical remittances under LRS reduced from 5% to 2%.

Clarity on TDS for Manpower Supply

• Manpower supply services classified as contractor payments.

• TDS rate capped at 1% / 2%, eliminating ambiguity and litigation.

Automated Lower / Nil TDS Certificates

• Eligible small taxpayers can obtain lower or nil TDS certificates through an automated, rule-based system without Assessing Officer interaction.

Simplification of Form 15G / 15H

• Depositories authorised to accept declarations centrally and share them with multiple companies, reducing repetitive filings.

3. Rationalised Return Filing Timelines

To ease compliance pressure:

• Belated and revised returns can now be filed up to 31 March (earlier 31 December) on payment of a nominal fee.

• Staggered ITR due dates introduced:

  • ITR-1 & ITR-2 (Individuals): 31 July

  • Non-audit cases and trusts: 31 August

4. Relief for Property Transactions Involving NRIs

For purchase of immovable property from a non-resident:

• Resident buyers are no longer required to obtain a TAN.

• TDS can be deposited using a PAN-based challan, similar to resident transactions.

5. One-Time Foreign Asset Disclosure Scheme (FAST-DS, 2026)

A special 6-month disclosure window has been introduced for genuine hardship cases involving small taxpayers.

Category A

• Undisclosed foreign income / assets up to ₹1 crore

• Payment of:

  • 30% tax

  • 30% additional tax (in lieu of penalty)

• Immunity from prosecution granted

Category B

• Foreign assets up to ₹5 crore

• One-time fee of ₹1 lakh

• Full immunity from penalty and prosecution

Immunity from prosecution is also retrospectively extended for non-immovable foreign assets up to ₹20 lakh.

6. Rationalisation of Penalty & Prosecution Regime

Key reforms include:

• Assessment and penalty proceedings to be concluded through a single consolidated order

• No interest on penalty amounts during pendency of first appeal

• Pre-deposit for appeal reduced from 20% to 10%, limited to core tax demand

Updated Returns Post Reassessment

• Taxpayers can file updated returns even after reassessment initiation by paying an additional 10% tax.

Penalty to Fee Conversion

• Certain technical defaults (audit, TP report, SFT) converted into fee-based non-criminal defaults.

Decriminalisation Measures

• Minor offences punishable only with fines

• Maximum imprisonment reduced to two years

• Penalties graded based on tax evasion quantum

7. Targeted Tax Relief for Cooperatives

• Deduction extended to supply of cattle feed and cotton seed by primary cooperatives

• Inter-cooperative dividend income allowed as deduction under the new tax regime

• Three-year dividend exemption for notified national cooperative federations, subject to redistribution

8. IT Sector Boost & Transfer Pricing Certainty

• IT and IT-enabled services consolidated under “Information Technology Services”

• Uniform safe harbour margin of 15.5%

• Threshold enhanced from ₹300 crore to ₹2,000 crore

• Automated safe harbour approvals valid for 5 years

• Fast-track unilateral APA with targeted 2-year resolution

9. Measures to Attract Global Business & Talent

• Tax holiday till 2047 for foreign cloud service providers using Indian data centres

• 15% safe harbour margin for data-centre support entities

• 5-year tax exemption for non-residents supplying capital goods to bonded zone manufacturers

• Exemption of global income for foreign experts residing in India up to 5 years

• MAT exemption for non-residents taxed on presumptive basis

10. Tax Administration Reforms

• ICDS to be merged with Ind-AS from FY 2027-28

• Definition of “accountant” rationalised to support global expansion of Indian advisory firms

11. Other Key Direct Tax Measures

• Buyback taxation shifted to capital gains for all shareholders

• Additional tax for promoters to prevent arbitrage

• TCS on liquor, scrap and minerals reduced to 2%; tendu leaves from 5% to 2%

• STT increased on futures and options

• MAT to become final tax from 1 April 2026, rate reduced to 14%, with limited MAT credit set-off

Conclusion

The Direct Tax proposals in Budget 2026 mark a bold move towards simplicity, certainty, and trust-based taxation. With a new Income-tax Act, substantial compliance relief, rationalised penalties, and strong incentives for investment and global integration, the reforms aim to strike a balance between revenue mobilisation and taxpayer confidence, supporting long-term economic growth.