Budget 2026: ITR Proceedings Clubbed, Penalties And Prosecution Rules Simplified

The Union Budget 2026 signals a deliberate cooling-off in the way the income tax law deals with non-compliance. Presenting the Budget in Parliament, Finance Minister Nirmala Sitharaman said that the sheer number of parallel proceedings under the Income Tax Act has become a hurdle for taxpayers and businesses alike. The changes announced this year seek to simplify enforcement, narrow the scope for prolonged disputes, and redraw the line between serious tax evasion and routine defaults.

A key proposal is the integration of assessment and penalty proceedings. Instead of separate orders issued at different stages, tax officers will now pass a common order covering both. For taxpayers, this matters because penalties often outlive the assessment itself, leading to years of follow-up litigation even after the main tax demand is resolved.

The appeal process has also been eased. Sitharaman said that no interest will be levied on the penalty component for the period an appeal remains pending before the first appellate authority. This applies regardless of whether the taxpayer eventually succeeds or fails. In addition, the mandatory pre-deposit required to file an appeal has been cut to 10 per cent from 20 per cent, and will be computed only on the core tax demand, not on penalties. The change reduces the upfront financial burden of challenging an assessment.

Updating Returns After Reassessment

In a move aimed squarely at cutting litigation, Budget 2026 allows taxpayers to update their returns even after reassessment proceedings have begun. Such updates will attract an additional 10 per cent tax over the applicable rate for that year. Once the revised return is filed, the assessing officer will rely only on this version during proceedings, closing the door on parallel calculations and disputes.

The immunity framework has also been widened. Until now, immunity from penalty and prosecution was largely available in cases of underreporting. The Budget extends this to misreporting as well, subject to the taxpayer paying an additional 100 per cent of the tax amount, apart from tax and interest already due. The intent is clear: settle first, prosecute later, if at all.

Fewer Crimes, More Proportion

Several technical lapses, including failure to get accounts audited, delays in transfer pricing audit reports, and defaults in furnishing financial transaction statements, are proposed to be treated as fees instead of penalties. Non-production of books of account and certain TDS-related defaults where payment is made in kind are being decriminalised. Minor offences will now attract only monetary fines.

For cases that still warrant prosecution, the framework has been softened. Prosecutions will be graded according to the amount involved. Maximum imprisonment has been reduced to two years, and courts will have the discretion to convert jail terms into fines.

The Budget also grants retrospective immunity from prosecution for non-disclosure of non-immovable foreign assets with an aggregate value below Rs 20 lakh. This relief will apply from October 1, 2024. Until now, such cases were outside the immunity framework under the Income Tax Act. The change is expected to limit prosecution in smaller, low-value disclosure lapses.

Says Rohit Jain, Managing Partner, Singhania & Co: “The decriminalization of technical defaults by converting them into fees and reducing maximum sentences to simple imprisonment aligns with the Jan Vishwas philosophy of decriminalizing minor civil wrongs. Furthermore, allowing updated returns post-reassessment and extending immunity to "misreporting" (albeit at a 100 per cent premium) offers a pragmatic "exit ramp" from protracted litigation. While the fiscal costs may be high, the reduction in judicial backlog and the retrospective immunity for small foreign assets provide much-needed legal certainty.”