Budget 2026 Proposes 30% Tax Rate on Unexplained Income, Including Cash Credits and Investments [Read Finance Bill 2026]
The proposal is in line with the intent of the Finance Ministry to rationalise special income charged under Section 195 of the Income Tax Act.
The Union Budget for the financial year 2026-27 was presented by Finance Minister Nirmala Sitharaman in the Lok Sabha on Sunday, February 1, 2026. Among the reforms proposed for the direct tax regime are the rationalisation of unexplained income including unexplained cash credits and unexplained investments.
Under the present Income Tax regime, certain categories of income such as unexplained cash credits, unexplained investments, unexplained assets, unexplained expenditure, and amounts borrowed or repaid through specified negotiable instruments are treated as unexplained income.
If an assessee’s total income includes such unexplained income, it is taxed at a rate of 60%, along with applicable surcharge and cess. Further, a penalty of 10% is also payable if the Assessing Officer determines that the income includes unexplained income as well.
Considering the significantly high tax burden levied on taxpayers, the government has proposed to reduce the tax rate applicable to unexplained income to 30%.
The proposed change is aimed at bringing the tax treatment of such income more in line with broader principles of proportionality, while continuing to discourage non-compliance.
Alongside the reduction in the tax rate, the Budget also proposes to simplify the penalty framework applicable to unexplained income.
The standalone penalty provision in section 443 (penalty for income referred to in section 102 to 106) is proposed to be omitted.
Instead, income of this nature is proposed to be included under the cases of under-reporting of income in consequence of misreporting under section 439(11) of the Act, thus removing overlapping penalty sections.
The omission of this penalty section is also consistent with the government’s broader objective of rationalising penalties and reducing complexity in tax law.
The proposed amendments are set to take effect from April 1, 2026, and shall be applicable from the tax year 2026-27 onwards.
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