Budget 2026 Focuses on Taxpayer Trust and Simplified Compliance
Finance Minister Nirmala Sitharaman has consistently emphasized trust as a cornerstone for taxpayers, and in Budget 2026-27, she has taken significant strides to enhance the ease of filing and updating returns while encouraging voluntary compliance to minimize litigation. The new Income Tax Act, 2025, set to be effective from April 1, is designed to be revenue-neutral, with no alterations to income tax rates or slabs. However, it aims to simplify the tax framework by reducing the number of sections by nearly half and eliminating layers of interpretational ambiguity.
Key Changes in the Income Tax Act 2025
One of the most notable reforms is the introduction of a single 'tax year,' which replaces the previously confusing distinction between assessment year and previous year. This change is expected to streamline the tax filing process and reduce confusion among taxpayers. Additionally, the government has promised to notify redesigned income tax return forms shortly, featuring simpler language and user-friendly layouts. These improvements are intended to enable ordinary taxpayers to comply with tax obligations without the need for professional assistance, fostering greater accessibility and understanding.
Extended Time Limits and Updated Return Provisions
To further support taxpayers, the time limit for filing a revised tax return has been extended from nine months to twelve months after the end of the tax year. This extension provides ample room for individuals to correct mistakes without facing penalties. Moreover, taxpayers can now update their returns after reassessment proceedings have been initiated, albeit at an additional cost. An extra 10% tax rate will apply over and above the rate for the relevant year, and such returns can also be filed to reduce earlier claimed losses.
CA Ketan Vajani commented, "The taxpayer can now take shelter under updated return and avoid penalties with 10% extra cost. An amendment is proposed with effect from assessment year 2026-27, and the benefit can be availed of even in the current financial year."
Gautam Nayak, tax partner at CNK & Associates, added, "Instead of paying 25%, the taxpayer would have to pay 35%. However, this would enable closure of the matter without resorting to a drawn-out and time-consuming reassessment and consequential penalty process."
It is important to note that updated returns cannot be filed in prohibited cases, such as those involving information under the Black Money Act or Prevention of Money-Laundering Act.
Measures to Reduce Disputes and Enhance Efficiency
In another move aimed at cutting down on disputes, the Finance Minister has proposed the integration of assessment and penalty proceedings into a single, common order. This consolidation is expected to streamline the resolution process and reduce administrative burdens. Additionally, to minimize paperwork and physical interactions with tax officials, applications for lower or nil TDS certificates can now be filed electronically, promoting a more efficient and contactless system.
The tax payable for filing an updated return varies, starting at 25% and going up to 70% of the differential tax and interest, depending on the delay. This provision, along with the ability to reduce earlier claimed losses through updated returns, offers taxpayers flexibility in managing their tax liabilities. For instance, if an original return showed a loss of Rs 10 lakh, a taxpayer can now file an updated return with a reduced loss of Rs 8 lakh.
Overall, these reforms in Budget 2026-27 reflect a concerted effort to simplify tax compliance, reduce litigation, and build a more trustworthy and efficient tax system for all stakeholders.
