HIGHLIGHTS Of Proposals In UNION BUDGET 2026-27 DATED 1ST FEB 2026

HIGHLIGHTS

Of Proposals In

UNION BUDGET 2026-27 DATED 1^STFEB 2026

Proposed Key Direct Tax Changes, Income Tax Rates & Reliefs Explained!

A.    Introduction

With the Income-tax Act, 2025 set to come into force from 1 April 2026, replacing the six-decade-old Income-tax Act, 1961, the Finance Bill, 2026 assumes special significance as it introduces the first round of amendments to the new law even before its operational rollout.

Under the Income-tax Act, 2025, the earlier concepts of Previous Year and Assessment Year have been replaced by a single concept called “Tax Year”, and all amendments proposed in the Finance Bill, 2026 are to be read with reference to the relevant Tax Year;

“Tax Year” means the Financial Year in which the income is earned; for example, income earned during the Financial Year 1 April 2026 to 31 March 2027 shall relate to Tax Year 2026-27.

B.    Key Amendments for Individual Taxpayers

1)    No Major Increase in Income Tax Rates

The Government keptincome tax slabs and core rates unchanged, focusing instead on digital compliance improvements and taxpayer support, rather than immediate rate revisions.

2)    Tax Relief on Interest from Motor Accident Compensation

The Finance Bill 2026 proposes to makeinterest received on motor accident compensation fully tax-freefor victims or their legal heirs. At present, while compensation may be awarded by a tribunal under theMotor Vehicles Act, 1988, the interest portion was taxable. To reduce hardship for accident victims and their families, the law will now clearly exempt such interest income from tax. This relief will apply fromFY 2026-27 onwards.

·      No TDS is also applicable for such cases.

3)    Online Automated Rule-based Facility for Lower or Nil TDS Certificates

From FY 2026-27, taxpayers can apply online for a lower or nil TDS certificate instead of submitting physical applications. The tax authority will issue or reject the certificate electronically, making the process faster and simpler.

4)    No TAN Needed for Property Purchase from NRIs

To reduce compliance burden, resident individuals and HUFs buying property from anon-resident sellerwill no longer need to obtain aTANjust to deduct TDS on that transaction. They can complete the tax deduction process without applying for a separate TAN(e.g. Form 26QB which the buyer files in case of TDS on Purchase of Immovable property,etc), making property transactions simpler. This change will apply from1 October 2026.

5)    One-Time No-TDS Declaration Through Depository (Form 15G / 15H)

Investors can submit asingle no-TDS declaration to their depositoryinstead of giving forms to multiple companies or funds. The depository will share it with all payers. Companies will report these declarationsquarterly instead of monthly. Applicable tolisted demat securitiesfrom1 April 2027.

6)    Tax Exemption on Disability Pension for Armed & Paramilitary Forces

The Finance Bill 2026 proposes to clearly exemptdisability pensionreceived by Armed Forces and paramilitary personnel from income tax. This exemption will applyonly when the person is invalided out of service due to a disability linked to service, and it will cover both theservice element and disability elementof the pension. It will not apply to normal retirement cases. This change will be effective fromFY 2026-27 onwards.

7)    Relief in Prosecution for Small Foreign Asset Cases

Prosecution under theBlack Money Actwillnot applyif the total value of undisclosed foreign assets (other than immovable property) isup to ₹20 lakh. This protects small or accidental non-disclosures from harsh criminal action.(Retrospective from 1 Oct 2024)

8)    Higher Securities Transaction Tax (STT) on F&O Trades

The government has proposed anincrease in STT on derivatives (Futures & Options)to curb excessive speculation:

This will increase trading costs for frequent F&O traders, especially high-volume participants.

C.    Useful Insights for MSMEs & Startups

1)    Relief on PF/ESI Deduction: Extended Time Limit for Employers

The Finance Bill 2026 proposes to relax the time limit for employers to claim a tax deduction on employees’ PF/ESI contributions. Instead of losing the deduction for missing the due date under PF/ESI laws, employers will now be allowed the deduction if the amount is deposited before the income tax return filing due date. This will apply from FY 2026-27 onwards.

2)    Clear TDS Rule for Manpower Supply Payments

To remove confusion, the Finance Bill 2026 clarifies thatpayments for supply of manpowerwill be treated ascontract workfor TDS purposes, not as professional or technical services. This means TDS will apply under thecontractor payment rules(generally 1%/2%, depending on the payer) instead of the higher 10% rate used for professional services. This clarification will apply fromFY 2026-27 onwards.

3)    Rationalisation of Tax Exemption on Compensation for Compulsory Land Acquisition

The Finance Bill 2026 clarifies and expands the tax exemption on compensation received for compulsory land acquisition under the RFCTLARR Act, 2013, ensuring thatsuch compensation (including related income) is fully exempt from income tax, irrespective of the type of land, from1 April 2026onwards.

4)    Filing Due Dates & Revised/Belated Returns

a) Changes in ITR Filing Due Dates

These replaced earlier generic deadlines and are aimed at aligning compliance timelines across taxpayer categories.

b) Revised Returns

·       A taxpayer may now file arevised return up to 31 Marchof the assessment year (in effectFY 2026-27for AY 2027-28), subject to payment of anominal fee(rules to be notified).

·       This replaces the earlier deadline of 31 December of the assessment year.

5)    Updated Return Now Allowed to Reduce Reported Loss

The Finance Bill 2026 proposes a helpful relaxation in theupdated returnrules. Earlier, taxpayers could not file an updated return if it still showed aloss, even if they only wanted toreduce the amount of lossreported earlier. Now, taxpayers will be allowed to file an updated return toreduce previously claimed losses, even though the return continues to be a loss return. This gives taxpayers a chance to correct excess loss claims and avoid future disputes. The change will apply from1 April 2026under the new law and from1 March 2026under the existing Income-tax Act, 1961.

6)    Updated Return Allowed Even After Reassessment Notice

The Finance Bill 2026 proposes to allow taxpayers to file anupdated return even after receiving a reassessment notice. Earlier, once reassessment proceedings started, filing an updated return was not permitted. Now, taxpayers can voluntarily declare additional income through an updated return within the time mentioned in the notice. However, this will attract10% extra additional taxover and above the existing additional tax payable for updated returns. In return, the income declared through this route willnot be subject to penalty. This change will apply fromFY 2026-27 onwards, with a similar amendment being made retrospectively under the old Income-tax Act, 1961.

7)    FAST-DS 2026 – One-Time Disclosure Scheme for Foreign Assets

The government is proposing aspecial compliance scheme (FAST-DS 2026)for small taxpayers who may have unintentionally failed to reportforeign assets or foreign incomein the past. This includes cases like ESOPs from overseas jobs, small foreign bank accounts, insurance policies abroad, or assets held during foreign postings.

Under this scheme, taxpayers will be able tovoluntarily declare such foreign assets/incomeby paying prescribed tax or fees. In return, they will getlimited relief from heavy penalties and prosecutionunder the Black Money law. However, cases involving serious offences or criminal proceeds will not be covered. The scheme will be available for alimited period, with the start date to be notified separately.

8)    Major Decriminalisation of Tax Offences

Many tax offences that earlier attractedrigorous imprisonment up to 7 yearsare now being softened:

i)      Jail terms reduced tosimple imprisonment

ii)    Maximum imprisonment reduced mostly to2 years

iii)   Small cases (tax impact ≤ ₹10 lakh)→Only fine, no jail

iv)   Several technical offences (like minor compliance failures)fully decriminalised

Punishment now linked to theamount of tax involved

Focus shifts from criminal prosecution to monetary penalties.

9)    Technical Defaults Converted into Fees (Not Penalties)

Certain procedural failures will now attract afixed fee instead of penalty, reducing litigation:

This helps genuine businesses avoid harsh punishment for technical delays.

10)Lower Tax Rate on Unexplained Income

Tax on unexplained cash credits, investments, expenses etc. is proposed to be reduced from60% → 30%.

Separate penalty for this is removed and merged with generalmisreporting penalty rules.

11)Wider Immunity from Penalty & Prosecution

Immunity schemes are being expanded:

·      Now coversmisreporting casesalso (earlier only under-reporting)

·      Taxpayer can avoid penalty & prosecution by payingadditional tax

·      Helps settle disputes early and reduce litigation

12)Easier Treatment for Third Parties in Search Cases

If a search on one person reveals income of another person, theassessment period for that “other person” will be limited, reducing unnecessary long investigations.

13)More Time for Search Assessments

Time limit for completing search (block) assessments increased from12 months to 18 months, counted from thestart of search, ensuring uniform timelines in group cases.

14)Penalty to Be Decided Along With Assessment Order

Instead of separate penalty proceedings later, penalties for under-reporting/misreporting will now bedecided within the assessment order itself, reducing prolonged uncertainty.

15)Higher Penalty for Non-Furnishing Info During Survey

Maximum penalty for not providing information during tax survey increased from₹1,000 to ₹25,000to ensure cooperation.

16) Support to IT & Tech Sector -APA Benefit Extended to Associated Enterprises

(For MNCs, IT/Tech Companies, Transfer Pricing Cases)

Now, not only the company signing anAdvance Pricing Agreement (APA)but also itsAssociated Enterprise (AE)can file a modified return and claim arefund or tax adjustmentarising from the APA.

·      Applies to APAs entered on or after1 April 2026

17)Boost to Global Investment in India - Tax Exemption for Foreign Companies Using Indian Data Centres

(For Global Tech Firms, Cloud & AI Companies)

Foreign companies earning income from procuringdata centre services from notified Indian data centreswill get atax exemption up to FY 2046-47.
Condition: Services to Indian users must be routed through anIndian reseller.

18)Tax Exemption on Supplying Capital Equipment to Electronics Manufacturers

(For Foreign Electronics & Semiconductor Firms)

Foreign companies supplyingcapital goods/equipmentto Indian contract manufacturers incustom bonded warehouseswill get tax exemption on such income up toFY 2030-31.

19)More Non-Residents Exempt from MAT

(For Foreign Businesses Under Presumptive Taxation)

Two more categories of foreign businesses —

·      Cruise ship operators

·      Technology providers for electronics manufacturing setups

o  will now beexempt from Minimum Alternate Tax (MAT)if they opt for presumptive taxation.

20)Tax Relief for Visiting Foreign Experts

(For Non-Resident Professionals under Govt Schemes)

Foreign individuals visiting India undernotified government schemeswill get exemption on theirforeign incomefor5 years, provided conditions are met.

21)Strengthening IFSC (Gift City) - Longer Tax Holiday for IFSC Units

(For Financial Services, FinTech, Funds in IFSC)

·      Tax deduction extended from10 years → 20 years

·      After holiday period, tax rate capped at15%

22)Clarity for IFSC Treasury Centres

Certain intra-group loans/advances involving IFSC finance units willnot be treated as dividend, provided group structure and jurisdiction conditions are satisfied.

23)Support for Critical Minerals Sector

(For Mining, Energy & Strategic Resource Companies)

Morecritical mineralsadded to the eligible list so companies can claimtax deduction on prospecting & exploration expenses.

24)Corporate Tax & MAT Rationalisation - MAT Changes

Aim: Help companiestransition smoothly to the new tax regime.

25)TCS Rate Rationalisation

26)No Interest Deduction Against Dividend & Mutual Fund Income

FromFY 2025-26 onwards, taxpayers willnot be allowed to claim any deduction for interest expensesagainstdividend income or income from mutual funds. Earlier, such interest was allowed as a deduction up to20% of the dividend or mutual fund income. This benefit is now being completely withdrawn, meaning dividend and mutual fund income will be taxedwithout reducing any related interest cost.

27)Buyback of Shares to Be Taxed as Capital Gains

Currently, money received by shareholders onshare buybackis taxed likedividend income. This is proposed to change.

FromFY 2026-27 onwards:

·       Buyback proceeds will be taxed under“Capital Gains”

·       Promoterswill face ahigher effective tax rate (around 30%)

·       Promoter companieswill face an effective tax of22%

This brings buyback taxation closer to share sale taxation and increases tax impact for promoters.