Budget 2026-27 introduces the Income Tax Act 2025, which will replace the existing Income Tax Act 1961 from April 1, 2026. As announced by Finance Minister Nirmala Sitharaman, this represents a comprehensive reform completed in record time, with simplified rules and forms to be notified shortly to give adequate time for taxpayers to prepare. The new legislation introduces citizen-friendly return forms designed to reduce compliance friction and enable easier filing with fewer errors. The transition will be supported by staggered filing deadlines and extended revision windows, with the Government providing adequate time for taxpayers to familiarize themselves with the new requirements.
Budget 2026-27 has significantly revamped the framework for dealing with misreported tax income, with an emphasis on quicker case resolution, lower litigation, and a more taxpayer-friendly compliance regime. According to reports from ET Now, the changes seek to reduce punitive treatment for taxpayers who voluntarily resolve disputes, while continuing strict action against intentional concealment. Central to this reform is the widening of the immunity framework, which earlier applied only to underreporting cases and will now extend to misreporting as well -- a notable policy shift, as misreporting has historically attracted stringent penalties. The Government has proposed to integrate assessment and penalty proceedings by way of a common order after providing reasonable opportunity to the taxpayer to explain the issue, with the aim of providing fast-track settlement of disputes.
Under the current system, tax violations are divided into two broad categories. As reported by ET Now, underreporting, which is usually caused by mistakes or oversight, attracts a penalty of 50% of the tax payable. Misreporting, which involves providing incorrect information or misrepresenting income, attracts a hefty penalty of 200% of the tax amount. The new framework provides exemptions from penalties and legal action in cases of misreporting, provided taxpayers meet the prescribed payment conditions. For cases involving undisclosed cash credits, undisclosed investments, or similar income, the settlement threshold is higher, requiring payment of 120% of the tax amount. However, if litigation has already begun, the exemption will not be available.
While maintaining the existing crypto tax framework unchanged, Budget 2026 introduces stricter compliance measures for crypto transactions. Entities that fail to file crypto transaction statements will face a ₹200 per day penalty, while furnishing incorrect or misleading information — or failing to correct it — will attract a ₹50,000 fine. These provisions will take effect from April 1, 2026 as part of the Finance Bill amendments under Section 509 of the Income-tax Act, 2025. Union Finance Minister Nirmala Sitharaman stated the aim is to deter non-compliance in crypto-asset reporting, though industry leaders say the Budget missed a key opportunity to support long-term growth in crypto and Web3.
In standard misreporting cases, taxpayers must pay 100% of the tax amount, in addition to the base tax and interest, to receive the exemption. According to the Ministry of Finance statement reported by ET Now, for cases involving undisclosed cash credits, undisclosed investments, or similar income, the settlement threshold is higher, requiring payment of 120% of the tax amount. The new framework introduces additional flexibility with penalty not leviable on additional income declared in updated returns, which encourages voluntary disclosure and reduces litigation burden. The Government has also proposed that interest on penalty would be kept in abeyance during the pendency of appeal before first appellate authority to provide relief to taxpayers on account of increased quantum of demand.
As an additional measure for reducing litigation, the Finance Minister proposed 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. As reported by ET Now, the assessing officer will then use only this updated return in his proceedings. The Government has also introduced integrated assessment-penalty orders to provide fast-track settlement of disputes, with the aim of reducing multiplicity of proceedings and increasing compliance. The new framework allows filing of updated returns even after reassessment proceedings have been initiated, with the Government stating that there is already a framework for immunity from penalty and prosecution in the cases of underreporting, which will now be applied to misreporting as well.
According to the Government as reported by ET Now, the Finance Minister proposed to rationalise prosecution framework under the Income Tax Act while maintaining a careful balance for deterrence in some serious offences. The new framework introduces simple imprisonment only instead of rigorous imprisonment, with the maximum punishment for any offence reduced to 2 years instead of 7 years. In cases where presently the maximum punishment is two years, the punishment has been reduced to 6 months with or without fine and with no minimum imprisonment. The Government has also proposed that prosecution for the offences under Income-tax Act 2025 shall be based on the amount of tax evaded and the punishment shall be proportionate to the gravity of crime. For minor offences, only fine shall be provided as punishment, while the remaining prosecutions will be graded commensurate with the quantum of offence, with courts having power to convert even those into fine.