The Union Budget 2026–27 did not introduce any major changes to income tax rates, but rationalised penal provisions, eased the compliance burden, and simplified return filing through redesigned forms, following the enactment of the Income Tax Act, 2025.
“The simplified Income Tax Rules and Forms will be notified shortly, giving adequate time to taxpayers to acquaint themselves with its requirements. The forms have been redesigned such that ordinary citizens can comply without difficulty,” finance minister Nirmala Sitharaman said in her budget speech on Sunday.
Extending return filing timelines
Additionally, tax filing timelines have been extended. “Presently, the revised return can be filed up to 31st December following the tax year. Return filing period extends up to October 31st for persons engaged in international transactions under section 92E. In this regard, it is proposed to allow extending the time of filing revised return upto 31st March following the tax year. This revised return can be of original return or belated return. A nominal fee of ₹1,000 or ₹5,000 is also proposed where the revision of original or belated return is made after 31st December depending upon whether the income is up to or more than ₹5 lakh,” Sitharaman clarified in her speech.
Further, income tax (IT) filing due date was extended for certain category of taxpayers. Taxpayers with business income filing ITR 3 and ITR 4 forms can file their tax returns by 31 August for non-audit business cases and trusts, instead of 31 July.
It is proposed to ease the compliance burden of small taxpayers by providing an online option to the payee, to apply for issuance of certificate for lower or nil deduction of income-tax, which is proposed to be issued online after electronic verification.
Rationalizing penalties
There are broadly two type of penalties—for underreporting of income due to mistakes or oversight where the penalty is 50% on tax amount. In the case of misreporting of income for giving wrong or faulty information, the penalty is 200% of tax amount.
There is already a framework for immunity from penalty and prosecution if the penalty is initiated for underreporting of income. Budget 2026-2027 extends that to misreporting of income, where 100% of tax amount is paid as additional income tax. However, the misreporting of income in respect of unexplained cash credit is proposed to be settled with a payment of 120% of the tax. In such a scenario if prosecution is initiated, immunity will not be granted.
“For underreporting, taxpayers had an option to pay the tax and interest within 30 days, not file an appeal and get immunity from penalty. But misreporting cases had no such immunity option and penalty proceedings would continue after appeals were decided. The government has extended the immunity option even to misreporting cases with the conditions that the taxpayer must pay the tax due, interest on it and an additional amount equal to 100% of the tax,” said Prakash Hegde, a Bengaluru-based chartered accountant (CA).
In yet another change, the budget proposed to waive interest levied on penalty till the first appeal is underway. Currently, once a penalty is imposed, interest starts accumulating on that penalty amount if it is not paid immediately. This can significantly increase the total liability if the case drags on through appeals. Hegde said the budget has proposed to waive the interest until the first level of appeal is completed, or until the time limit for filing the first appeal expires.
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, were proposed to be converted into fees instead of penalties.
In the current framework, first an assessment order is passed and based on the findings or additions made, penalty is initiated in the assessment order by the assessing officer. Subsequently, separate penalty proceedings are initiated by giving a show cause notice and a separate penalty order is passed after giving due opportunity to the assessee.
“In this regard, it is considered that the above scheme leads to multiplicity of proceedings, as eventually penalty has to be imposed based on the findings of the assessment order and additions made in it and subject to the status of appellate proceedings. Further, taxpayer remains in uncertainty regarding the status of imposition of penalty as the appellate proceedings may stretch to multiple years. In this context, a common order for both assessment and penalty for under-reporting and misreporting of income will ensure avoiding multiplicity of proceedings which in turn would reduce the compliance of the tax payers apart from providing consistency in levying of penalty,” the budget memorandum read.
Updated returns
Taxpayers can file updated tax returns to show additional income even after filing their returns. The facility is available for up to a period of four years from the tax year in which the return was filed for the first time. Updated returns can be filed with additional tax liability of 25%, 50%, 60%, 70% from the first into fourth year, from the year in which the tax return is originally filed. The budget proposed allowing updated returns to be filed even after reassessment proceeding are initiated by the income tax (IT) department. The updation is proposed to be enabled at an additional 10% tax rate over and above the rate applicable for the relevant year.
If the taxpayer files updated return and reports additional income, the penalty shall not be levied on such additional income.
