Union Budget 2026 delivers one of the most comprehensive overhauls of India’s income tax ecosystem in recent years. The focus clearly shifts from enforcement-heavy administration to simplicity, automation, global competitiveness, and trust-based compliance.
Below is a structured breakdown of the key income tax proposals and reforms announced.
1. New Income Tax Act, 2025
A landmark reform, the New Income Tax Act, 2025, is proposed to replace the existing Income Tax Act and will come into effect from 1 April 2026.
Key highlights:
- A simplified legislative framework with clearer definitions and reduced interpretational ambiguity
- Simplified Income Tax Rules and redesigned Forms to be notified shortly
- Forms will be citizen-friendly, aimed at easy compliance for ordinary taxpayers
Impact:
This reform addresses long-standing complexity caused by decades of amendments, explanations, and exceptions, significantly improving predictability and reducing litigation.
2. Ease of Living for Individual Taxpayers
Several proposals directly target relief and convenience for individuals:
- Interest awarded by Motor Accident Claims Tribunal (MACT) to natural persons will be fully exempt from Income Tax
- Corresponding TDS provisions to be removed, eliminating procedural hardship for accident victims
3. TCS & TDS Rationalisation
To ease cash flow pressures and reduce over-collection of taxes:
TCS Rationalisation
- TCS on overseas tour program packages reduced to 2% (from the existing 2–20%)
- TCS on LRS remittances for education and medical purposes reduced to 2% (from 5%)
TDS Simplification
- Simplified TDS provisions for manpower supply, benefiting labour-intensive industries
- Rule-based automated scheme for small taxpayers to obtain lower or nil TDS certificates, replacing manual applications to Assessing Officers
4. Return Filing, Compliance & Procedural Simplification
Key procedural changes aimed at reducing friction:
- Single-window filing of Form 15G / 15H through depositories for TDS on dividends and interest
- Extended timeline for revising returns:
- Revision permitted up to 31 March (earlier 31 December)
- Subject to payment of a nominal fee
- Staggered timelines for filing tax returns to ease system load
- PAN-based challan to replace TAN for property transactions involving NRIs
- One-time 6-month foreign asset disclosure scheme for small taxpayers to disclose overseas income or assets
5. Rationalisation of Penalty & Prosecution Regime
The Budget introduces a significant softening of the penalty and prosecution framework:
- Integrated assessment and penalty proceedings through a common order
- Taxpayers allowed to update returns even after reassessment proceedings, on payment of:
- Applicable tax + additional 10%
- Penalty for misreporting eligible for immunity upon payment of additional tax
- Decriminalisation of:
- Non-production of books of account
- Failure to deduct TDS where payment is made in kind
- Immunity from prosecution (retrospective from 1 Oct 2024) for:
- Non-disclosure of non-immovable foreign assets with aggregate value below ₹20 lakh
6. Cooperative Sector – Targeted Tax Relief
Measures to strengthen the cooperative ecosystem include:
- Extension of deductions for primary cooperative societies supplying:
- Milk, oilseeds, fruits, vegetables
- Now extended to cattle feed and cotton seed
- Deduction for inter-cooperative dividend income under the new tax regime, to the extent distributed to members
- 3-year dividend income exemption for notified national cooperative federations on investments made up to 31 January 2026
7. Supporting the IT Sector as India’s Growth Engine
Major transfer pricing and safe harbour reforms:
- Clubbing of:
- Software development
- IT-enabled services
- KPO
- Contract R&D (software-related)
into a single category of Information Technology Services - Uniform safe harbour margin of 15.5%
- Safe harbour threshold increased from ₹300 crore to ₹2,000 crore
- Safe harbour approval to be automated and rule-driven, valid for 5 continuous years
- Fast-track Unilateral APA process:
- Target completion within 2 years (extendable by 6 months)
- Modified return facility for APA entities extended to associated enterprises
8. Attracting Global Business & Investment
Strong incentives to position India as a global services and manufacturing hub:
- Tax holiday till 2047 for foreign companies providing global cloud services using Indian data centres
- 15% cost-based safe harbour for related-party data centre service providers
- Safe harbour for non-residents for component warehousing in bonded warehouses at 2% of invoice value
- 5-year income tax exemption for non-residents supplying capital goods or tooling to toll manufacturers in bonded zones
- Exemption of global income of non-resident experts for 5 years under notified schemes
- MAT exemption for non-residents taxed on a presumptive basis
9. Tax Administration & Accounting Alignment
- Joint Committee of MCA and CBDT to integrate ICDS requirements into IndAS
- Separate ICDS-based accounting to be eliminated from FY 2027–28
- Rationalisation of the definition of “accountant” under Safe Harbour Rules
10. Other Significant Tax Proposals
- Buyback taxation:
- Buyback proceeds for all shareholders to be taxed as Capital Gains
- Additional buyback tax for promoters:
- 22% for corporate promoters
- 30% for non-corporate promoters
- TCS rationalisation:
- Alcoholic liquor, scrap, minerals: 2%
- Tendu leaves: reduced from 5% to 2%
- STT increase:
- Futures: 0.05% (from 0.02%)
- Options premium: 0.15%
- Options exercise: 0.15%
- MAT reforms:
- MAT to become final tax
- MAT rate reduced to 14% (from 15%)
- No new MAT credit accumulation from 1 April 2026
- Existing MAT credit (as of 31 March 2026) usable only under the new regime, capped at 25% of tax liability
Conclusion
Union Budget 2026 marks a structural transformation of India’s income tax system—simpler laws, automated processes, reduced criminalisation, and global competitiveness at the core. For individuals, businesses, and global investors alike, the reforms signal certainty, compliance ease, and long-term policy stability.