Indian Government Releases FAQs on Union Budget 2026-27 Proposals

Following the Union Budget 2026-27 presentation on February 1, the finance ministry released a detailed set of FAQs through the Income Tax Department to clarify how several Budget proposals will work in practice. These clarifications are part of the Finance Bill, 2026 and assume special importance as India prepares to switch to the new Income-tax Act, 2025 from April 1, 2026. While some of these changes might not have attracted immediate public attention, they will have a significant impact on how taxpayers file returns, disclose income, deal with penalties and prosecution, comply with TDS rules, and respond to tax notices in the upcoming financial year. Taxpayers will now be able to file an updated return for up to 48 months, even if they did not file an original return earlier. However, the longer one waits, the more expensive it becomes, with additional tax rising from 25% to 70%. This makes late voluntary disclosure possible—but costly. Earlier, taxpayers could not use an updated return to reduce losses claimed in the original return. Budget 2026 changes this, allowing taxpayers to reduce losses through an updated return, giving flexibility to correct over-reported losses. Even after receiving a reassessment notice, taxpayers will be allowed to file an updated return within the specified time. While reassessment proceedings will continue, penalties will not be levied on income disclosed through such updated returns. The ITR filing deadline for non-audit business cases and trusts has been extended from July 31 to August 31, easing compliance pressure. Salaried individuals will continue to follow the July 31 deadline. Interest awarded by the Motor Accident Claims Tribunal to individuals or legal heirs will now be fully exempt from tax, and no TDS will be deducted. This brings long-awaited relief to accident victims and families. Resident buyers purchasing property from non-resident sellers will no longer need to obtain a TAN to deduct TDS. PAN-based deduction and reporting will be sufficient, reducing paperwork and delays in property transactions. The definition of “work” has been expanded to include supply of manpower, removing confusion over whether contractor or professional TDS rates apply. This brings clarity for businesses engaging staffing and outsourcing services. Small taxpayers will be able to apply online for lower or nil TDS certificates through a prescribed authority, instead of dealing only with the Assessing Officer. This is aimed at faster processing and less physical interface. Investors can submit one declaration to the depository for non-deduction of tax on mutual fund income, interest on securities and dividends. This removes the need to submit separate forms to each payer. The tax rate on unexplained credits, investments and expenditure has been halved from 60% to 30%. Importantly, if such income is voluntarily disclosed in the return, no penalty will be levied. In cases involving penalties for under-reporting, the tax department can issue a single composite order covering both assessment and penalty. This aims to reduce prolonged litigation and multiple proceedings. Even cases involving misreporting of income can now qualify for immunity from penalty and prosecution, provided the taxpayer pays the prescribed additional tax and does not appeal the assessment order. Penalties for defaults like non-audit of accounts or delay in furnishing statements will be replaced with fixed statutory fees, which will be levied automatically. The “reasonable cause” defence will not apply. Budget 2026 significantly softens prosecution provisions. Jail terms are reduced, many offences will attract only fines, and lower-value defaults are removed from criminal liability, making the law less punitive. Employers will be allowed to claim deduction for employees’ PF and ESI contributions if deposited up to the ITR filing due date, aligning employee contribution rules with employer contribution norms. Taken together, these FAQ-based clarifications show that Budget 2026 is not just about tax rates, but about reshaping compliance, enforcement and taxpayer behaviour under the new income-tax law. For taxpayers, understanding these quieter changes will be just as important as knowing slab rates when the new regime takes effect from April 1, 2026.