Union Budget 2026 Unveils Comprehensive Tax Reforms and Regulatory Changes
Finance Minister Nirmala Sitharaman presented the Union Budget 2026 in Parliament on Sunday, 1 February, outlining a series of significant fiscal reforms and policy adjustments. While maintaining the existing Income Tax slabs unchanged, the budget introduces multiple amendments to the Income Tax Act 2025 and other financial regulations aimed at streamlining taxation, enhancing compliance, and providing relief in specific areas.
Securities Transaction Tax (STT) Revisions and Implementation Timeline
The budget proposes notable increases in Securities Transaction Tax (STT) rates affecting derivatives trading. Specifically, the STT rate on the sale of an option in securities where the option is exercised has been raised from 0.125% to 0.15%, with tax computation based on the intrinsic price of the option. Concurrently, the STT rate on the sale of a future in securities has been elevated from 0.02% to 0.05%, calculated on the traded price of the future.
These revised STT rates on futures and options (F&O) transactions are scheduled to take effect from 1 April 2026. According to the Income Tax Department, the new rates will apply to derivatives transactions in securities entered into on or after that date, marking a strategic shift in market taxation.
Taxation of Stock Buybacks as Capital Gains
In a significant departure from previous norms, the finance minister proposed treating the proceeds of share buybacks as capital gains for taxation purposes. This change replaces the existing rule, effective since 1 October 2024, which classified the entire proceeds of a company's share buyback as dividend, taxed at the investor's applicable slab rate.
To address potential misuse, the budget introduces a special capital-gains tax rate of 30% for non-corporate promoters, aimed at discouraging buybacks as a primary method for profit extraction. Corporate promoters will be subject to a 22% effective tax rate under this new framework, aligning with broader fiscal objectives.
Exemption on Interest from Motor Accident Compensation
Starting 1 April 2026, any interest accrued on compensation awarded by Motor Accidents Claims Tribunals (MACT) will be entirely exempt from income tax deductions. This exemption applies to individuals or their legal heirs receiving compensation due to death, permanent disability, or bodily injury. Previously, while the principal compensation amount was treated as a capital receipt, the interest earned on it remained taxable, a disparity now rectified by this provision.
Extended Deadline for Revised Income-Tax Returns
Announcing key compliance enhancements under the Income Tax Act 2025, the finance minister proposed extending the deadline for filing revised income-tax returns to 31 March, moving from the earlier cutoff of 31 December. This extension aims to provide taxpayers with additional time for accurate filings and adjustments, reducing last-minute pressures.
Implementation of New Income Tax Act and Simplified Procedures
Sitharaman confirmed that the New Income Tax Act would come into effect from 1 April 2026, following her proposal last year to overhaul the six-decade-old Income Tax Act of 1961. The minister added that simplified income tax rules and forms will be notified later, promising a more user-friendly and efficient tax administration system.
Reduced Punishment for Offences and Penalty Provisions
The Union Budget 2026 proposes reducing the maximum punishment for offences under the Income Tax Act 2025 from the current seven years to two years. For subsequent offences, the punishment has been lowered from seven years to three years, reflecting a balanced approach to enforcement.
Regarding crypto assets, Section 509 of the new I-T Act introduces penalty provisions for non-furnishing of statements or furnishing inaccurate information on crypto asset transactions. It stipulates a penalty of ₹200 per day for non-furnishing and ₹50,000 for inaccurate particulars or failure to correct such inaccuracies.
Immunity from Penalty and TDS/TCS Non-Payment Consequences
Section 440 of the Income-tax Act, 2025 allows assessees to seek immunity from penalty imposition under Section 439 and from prosecution proceedings under Sections 478/479 related to underreporting of income, provided specified conditions are met. According to the Budget FAQs document, taxpayers who have paid due tax and interest within the demand period and not filed an appeal may apply for such immunity.
For non-payment of Tax Deducted at Source (TDS) or Tax Collected at Source (TCS), the maximum punishment proposed after amendments is two years imprisonment, with a minimum punishment of a fine, ensuring accountability while maintaining proportionality.
Overall, the Union Budget 2026 focuses on modernizing tax laws, enhancing market regulations, and providing targeted reliefs, setting the stage for a reformed fiscal landscape from April 2026 onward.
