Budget 2026: Tax rules kicking in from April 1 under new compliance framework; what taxpayers should note

New tax rules: Following the presentation of the Union Budget 2026–27 on February 1, the Finance Ministry, through the Income Tax Department, released a detailed set of FAQs clarifying how several proposals will work in practice. These clarifications, part of the Finance Bill, 2026, assume added importance as India prepares to shift to the new Income-tax Act, 2025 from April 1, 2026.

While many of these measures did not grab headlines, tax experts say they will significantly influence how taxpayers file returns, disclose income, manage penalties and prosecutions, comply with TDS provisions and respond to tax notices in the coming financial year.

Longer window for updated ITR

One of the most impactful changes is the extension of the updated return window to 48 months. An updated return allows individuals to correct omissions after the deadline for filing a revised ITR has lapsed. Under the Budget 2026 proposal, Section 263(6) will be amended to permit filing of an updated return even when the taxpayer seeks to reduce the loss amount compared with the loss claimed in the originally filed return.

Taxpayers can now file an updated return even if no original return was filed earlier. However, the cost rises sharply with time, with additional tax increasing from 25% to as much as 70%, making delayed voluntary disclosure possible but expensive.

Loss correction now permitted

For the first time, taxpayers will be allowed to reduce losses through an updated return. Earlier rules only permitted upward revisions of income, limiting the ability to correct overstated losses.

Updated return allowed post reassessment notice

Even after receiving a reassessment notice, taxpayers can file an updated return within the permitted period. While reassessment proceedings will continue, income disclosed through such updated returns will not attract penalties.

As per the Budget documents, filing of an updated return may also be permitted in cases where reassessment proceedings have been initiated and a notice has been issued under Section 280 of the Act, as this is expected to help reduce litigation.

ITR deadline eased for non-audit cases

The return filing deadline for non-audit business cases and trusts has been extended from July 31 to August 31, easing compliance pressure. The July 31 deadline remains unchanged for salaried individuals.

Accident compensation interest exempt

Interest awarded by the Motor Accident Claims Tribunal to accident victims or their legal heirs will now be fully exempt from tax, with no TDS deduction, offering long-awaited relief.

NRI property deals

Resident buyers purchasing property from non-residents will no longer need to obtain a TAN for TDS deduction. PAN-based reporting will suffice, simplifying property transactions.

Manpower supply brought under contract TDS

The definition of “work” has been expanded to explicitly include manpower supply, removing ambiguity over applicable TDS rates for staffing and outsourcing contracts.

Simpler route for lower or nil TDS

Small taxpayers can now apply online for lower or nil TDS certificates through a prescribed authority, rather than dealing solely with the Assessing Officer, reducing processing time and physical interface.

One declaration for investment income

Investors can submit a single declaration to depositories for non-deduction of tax on mutual fund income, dividends and interest on securities, replacing multiple submissions to different payers.

Lower tax on unexplained income

The tax rate on unexplained credits, investments and expenditure has been cut to 30% from 60%. Importantly, voluntary disclosure of such income will not attract penalties.

Assessment and penalty orders combined

In under-reporting cases, the tax department can now issue a single composite order covering both assessment and penalty, aiming to reduce litigation and procedural delays.

Expanded immunity from penalties

Immunity from penalty and prosecution has been widened, even to certain misreporting cases, provided the taxpayer pays the prescribed additional tax and does not appeal the assessment order.

Penalties shift to fixed fees

Several penalties for procedural defaults will be replaced with fixed, automatic fees. The “reasonable cause” defence will no longer apply in such cases.

Decriminalisation of tax offences

Budget 2026 significantly softens prosecution provisions, reducing jail terms, converting many offences into fine-only defaults and removing lower-value cases from criminal liability.

PF, ESI timelines aligned

Employers can now claim deductions for employees’ PF and ESI contributions if deposited up to the ITR filing due date, aligning employee contribution rules with employer norms.

Taken together, these changes signal that Budget 2026 is not just about tax rates, but about reshaping compliance, enforcement and taxpayer behaviour under the new income-tax regime.