Budget 2026 Proposes To Rationalise Prosecution Framework In Income Tax Act

Finance Minister Nirmala Sitharaman unveiled a clean‑up of India's direct tax framework, announcing a new foreign asset disclosure scheme, a decriminalised prosecution regime and staggered filing timelines as part of the Union Budget 2026. 

The moves aim to ease compliance for small taxpayers and reduce friction in India's decade‑old income tax architecture ahead of the rollout of the new Income Tax Act from April 1, 2026.

At the centre of the overhaul is a one‑time, six‑month foreign asset disclosure window targeted at small taxpayers, including students, NRIs and young professionals who may have inadvertently missed reporting overseas holdings. 

Category A will allow individuals to declare undisclosed foreign assets up to Rs 1 crore, subject to a 60 percent total tax and penalty. Category B will cover cases where income was disclosed but the corresponding foreign asset was not, with a flat Rs 1 lakh fee for assets up to Rs 5 crore. In both cases, taxpayers will receive full immunity from prosecution and related penalties, a first‑of‑its‑kind relief package.

Sitharaman also proposed a staggered filing calendar, keeping the 31 July deadline for ITR‑1 and ITR‑2 filers while extending the timeline for non‑audit business cases and trusts to 31 August. Time to revise returns will now run till 31 March with a nominal fee, while updated returns may be filed even after assessment opens by paying an additional 10 percent tax.

Sitharaman signalled a decisive shift away from criminal penalties for minor infractions. The Budget proposes to decriminalise non‑production of books of account and remove prosecution for select offences, replacing them with monetary fines. The minimum payment required to contest a tax demand will fall from 20 percent to 10 percent of the core amount, easing cash burden on litigants.

In operational reforms, TDS on sale of property by non‑residents will be streamlined, and Form 15G/15H will be accepted through CDSL and NSDL, preventing unnecessary TDS on small investors. Supply of manpower services will also be brought under TDS to plug leakages.

With these changes, the Minister said, the new tax regime will become “simpler, fairer and far more predictable” for everyday taxpayers.