DIRECT TAXES IN UNION BUDGET 2026-27

In the Budget 2026 session of Parliament of India which begun on 29th January, 2026 with the address of President of India and tabling of Economic Survey 2025-26, the Union Finance Minister presented her 9th consecutive Union Budget for the year FY 2026-27 on 1st February, 2026 and also introduced Finance Bill, 2026 in the Lok Sabha.

A range of proposals on Direct Taxes ensure ‘Ease of living’ for taxpayers have been announced. It proposes that any interest awarded by the Motor Accident Claims Tribunal to a natural person will be exempt from Income Tax, and any TDS on this account will be done away with. A scheme for small taxpayers is also proposed wherein a rule-based automated process will enable obtaining a lower or nil deduction certificate instead of filing an application with the assessing officer.

In the Financial Bill, 2026, changes in Income Tax have been proposed to curb pendency, reduce litigation and facilitate dispute resolution. The proceedings relating to assessment and penalties shall be clubbed into one to save on time. Further, an additional window has been provided to close the dispute by paying some additional tax and such opportunity could be availed by taxpayers. Proceedings could also be closed by paying additional tax even after the assessment is completed.

The proposed changes inter alia, include taxation of buy back of securities, securities transaction tax (STT) on futures, minimum alternate tax (MAT). There is also a scheme for disclosure of foreign assets. The direct tax proposals aim at ease of living, ease doing business, rationalization of penalties and prosecution, support to information technology sector, tax administration and to attract global business and investments.

Highlights of Direct Taxation Reforms & Proposals

• New Income Tax Act, 2025 to replace the six decade old 1961 Act from 1st April 2026.
• It aims to simplify the law, reduces ambiguity, and cuts the number of provisions significantly, helping reduce litigation and compliance burden.
• No changes proposed in the basic income tax slabs or marginal rates of tax for the assessment year 2026-27.
• Extended timelines to file revised returns from 31 December to 31 March for a nominal fee giving more flexibility to tax payers.
• Proposes to stagger the timeline for filing tax returns – individuals to continue filing till 31st July and Trust/Non-audit business cases till 31st August.
• Taxpayers can now update returns even after reassessment starts at an additional 10% tax rate, improving procedural fairness.
• TAN for property transactions involving non-resident Indians to be replaced with resident buyers PAN based challan.
• TCS rate for sellers of specific goods i.e., alcoholic liquor, scrap and members to be rationalized to 2%
• TDS on sale of immovable property by Non-residents now to be deducted and deposited through resident buyer’s PAN based challan instead of TAN.
• TCS rationalized for overseas education & medical remittances under LRS to 2% from earlier 5%.
• TCS on foreign tour packages lowered to 2% flat with no threshold from earlier 5%/20%
• Supply of manpower services is proposed to be specifically brought within the ambit of payment to contractors for the purpose to TDS ending ambiguity leading to TDS on these services at the rate of 1%/2% only.
• Proposal to integrate assessment and penalty proceedings by way of a common order for both to avoid multiplicity of proceedings with no interest liability on the taxpayer on the penalty amount for the period of appeal before the first appellate authority. Moreover, pre-payment to be reduced to 10% from 20% earlier.
• A special one-time Amnesty Scheme giving a six-month disclosure window to students, young professionals, tech employees, relocated NRIs and other small taxpayers to declare undisclosed foreign assets or income.
• Immunity from penalty and prosecution for declaring non-immovable foreign assets with aggregate value of less than Rs. 20 lakh w.e.f. 1st October, 2024.
• Decriminalization of non-production of books of account / documents and requirement of TDS payment where payment is made in kind.
• Rationalization of prosecution provisions.
• Single window filing of forms by investors such as Form 15G or Form 15H for TDS on dividends, interest etc instead of filing with respective companies.
• Software development / IT enabled / knowledge process outsourcing / contract R & D services relating to software development to be clubbed under a common category of ‘IT services’ with common safe harbor margin of 15.5%. Threshold for availing safe harbor to increased from Rs. 300 crore to Rs. 2000 crore.
• Foreign companies providing cloud services to customers globally by using data centre services from India to be given tax holiday till 2047.
• Exemption from Minimum Alternate Tax (MAT) to non-residents paying tax on presumptive basis.
• MAT shall be made final tax with no further credit accumulation from April, 2026.
• Any interest awarded by Motor Accident Claims Tribunal (MACT) to be exempt helping the victims / beneficiaries.
• Committee to be set up for incorporating the requirements of Income Computation and Disclosure Standards (ICDS) in the Indian Accounting Standards (IndAS) so that separate accounting need may be dispensed with from tax year 2027-28.
• Securities Transaction Tax (STT) on futures to be enhanced from 0.02% to 0.05% and STT on options premium or exercise of options to be raised to 0.5% or 0.125%.

The tax proposals aim to build up taxpayers trust, and use simpler forms, rationalized provisions, lenient penalties, structural reforms and more rationalized procedures which would in turn improve compliances and tax efficiencies.

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