Budget 2026-27: Revision in Penalty and Prosecution Framework under Income Tax Act, Ensuring Relief to Taxpayers

The Union Budget for the Financial Year 2026-27 was presented by Finance Minister Nirmala Sitharaman in the Lok Sabha today.

Among the key proposals, the budget introduced major changes to the penalty and prosecution framework under the Income Tax Act. The goal behind this is to make compliance easier by reducing harsh criminal consequences for minor offences. This will especially benefit small taxpayers, students, young professionals and NRIs.

For people who may have missed reporting overseas assets, a one-time six-month foreign asset disclosure window has been introduced. Under this scheme, undisclosed foreign assets up to ₹1 crore can be declared by paying tax and penalty totalling 60%. Cases with disclosed income but unreported assets (up to ₹5 crore) can be settled on payment of a ₹1 lakh fee. In both categories, taxpayers get full immunity from prosecution and related penalties.

Technical defaults such as non-production of books of account, documents and payments made in kind will no longer attract criminal prosecution. Such defaults will instead be replaced with monetary fines.

For the remaining offences with prosecution, the maximum term of imprisonment has been capped at two years. Further, the courts are empowered to convert jail terms into fines.

To ease litigation and further reduce hardships faced by taxpayers, the Budget proposes to integrate assessment and penalty proceedings into a single order, avoiding separate orders that prolong disputes. The pre-deposit requirement for appeals has also been reduced from 20% to 10% of the core tax demand.

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