Summary of this article
Budget 2026 cuts tax on unexplained income from 60 to 30
New Income-tax Act encourages voluntary disclosure over punitive enforcement
Lower tax may reduce disputes, defaults, prolonged tax litigation
Safeguards likely exclude cases under scrutiny or reassessment
Under the new Income-tax Act, 2025, amended by the Finance Bill 2026, the tax rate on unexplained or undisclosed income has been reduced from 60 per cent to 30 per cent.
New Law Rewards Honest Reporting
“While it has not been categorically brought in as a Voluntary Disclosure of Income Scheme (VDIS) or termed as such, the impact of the budget 2026 proposal to reduce the base rate of income tax on unexplained incomes to 30 per cent, does seem to act like it, the difference, however, being a VDIS would have been time-bound or short-lived, but this benefit of lowering the base tax rate on such incomes has been embedded within the new Act itself and hopefully it is here to stay,” says Ritika Nayyar, partner, Singhania & Co.
The government, with the entire new law enactment and such changes, intends to move from a "penalizing when caught” mindset to encouraging a “voluntary disclosure and come clean” mindset, such that taxpayers feel safe to disclose any such income rather than fear steep and harsh base taxes.
Safeguards Needed For Voluntary Disclosures
If this framework is to work effectively, safeguards will be essential. Typically, the benefit of lower tax would not extend to cases where scrutiny, reassessment, or search proceedings have already commenced. “The law may continue to impose penalties and prosecution where concealment is detected by the department. Clear eligibility conditions and cut-off points will be necessary to ensure that only genuine, voluntary disclosures are incentivized,” says B. Shravanth Shanker, managing partner, B. Shanker Advocates.
A Win-Win For Taxpayers
With these changes, the government intends to modify its perception from a policing mechanism to a relatively trusting mechanism. By bringing down the tax rate, the taxpayers will feel safer to disclose and pay regular tax instead of concealing and living in the constant stress of getting caught and eventually paying significantly huge penalties.
It’s a step forward to encourage taxpayers to be more honest in paying taxes, bringing in a sense of trust between each other, which will, in turn, ease the whole tax system to reduce defaults, disputes, and litigations. “So, eventually this step should be a win-win situation for both the government and taxpayers, wherein the taxpayers will not only feel trusted but also sense that honesty is actually rewarded and not being punished as in the erstwhile draconian provisions,” says Nayyar.
