Budget 2026 – Key Legislative Amendments
The Finance Bill, 2026 has proposed several significant amendments to the Income-tax Act, 1961 aimed at rationalising compliance, simplifying tax administration, and providing relief to taxpayers.
Draft Income Tax Rules, 2026 Released for Public Consultation
The CBDT released Draft Income-tax Rules, 2026 for public consultation on 7 February 2026, with comments invited until 22 February 2026. The draft proposes to replace the existing 511 rules and 399 forms with a streamlined set of 333 rules and approximately 190 forms, in simpler language with tables, formulae, and “smart forms” with pre-fill capabilities. This is part of the broader exercise to enact a new, simplified Income-tax Act.
Extended Due Dates for Filing Returns
The due date for non-audit assessees with PGBP income and partners of non-audit firms is proposed to be extended from 31 July to 31 August, effective from AY 2026-27. The time limit for revised returns under Section 139(5) is also proposed to be extended from nine months to twelve months from the end of the relevant tax year.
Updated Return – Reduction of Loss Now Permitted
Under Section 139(8A), taxpayers will now be permitted to reduce the loss originally claimed in a return filed within the due date, subject to payment of additional tax. This amendment addresses a practical hardship and is effective from March/April 2026.
MAT Rationalisation
Under the old tax regime, the MAT rate is proposed to be reduced from 15% to 14% of book profit, with MAT paid treated as final tax and no MAT credit carry forward, effective from 1 April 2026. Under the new regime, foreign companies may claim credit for excess of normal tax over MAT, while domestic companies may claim credit up to 25% of tax liability.
Decriminalisation of Tax Offences
Certain defaults under TDS, TCS and other minor provisions are proposed to be decriminalised by replacing criminal prosecution with a mandatory fee-based mechanism. Section 428 proposes replacing specified penalties with mandatory fees, effective from 1 April 2026 (Tax Year 2026-27 onwards).
Exemption for Interest on Compensation under Motor Vehicles Act
Interest on compensation awarded under the Motor Vehicles Act, 1988 for bodily injury, disability, or death will be exempt from tax for individuals or their legal heirs, effective 1 April 2026. Disability pension of Armed Forces and Paramilitary personnel invalided out due to service-related bodily disability is also proposed to be exempt from tax.
Revised Taxation of Share Buybacks
The Finance Bill, 2026 proposes a significant restructuring of the taxation of share buybacks. Under the framework introduced in Budget 2024, buyback proceeds received by shareholders were taxed as dividend income at applicable slab rates, with the company required to deduct TDS. The new proposal reverts to treating buyback proceeds as capital gains in the hands of shareholders, based on actual gains computed as the difference between consideration received and cost of acquisition, taxed as short-term or long-term capital gains depending on the holding period.
To prevent promoters from misusing buybacks as a tool for tax arbitrage, the Finance Bill introduces an additional buyback tax specifically on promoters. This results in an effective tax rate of 22% for corporate promoters and 30% for non-corporate promoters. This targeted measure is intended to close the tax advantage that promoters enjoyed by preferring buybacks over dividends and to ensure more equitable treatment of shareholder payouts across investor categories.
Transfer Pricing Safe Harbour Regime – Significant Expansion
The Finance Bill, 2026 proposes a comprehensive overhaul of India’s Transfer Pricing Safe Harbour regime, the most significant restructuring since its introduction. The eligibility threshold for international transactions has been substantially increased from Rs. 300 crore to Rs. 2,000 crore, bringing a significantly larger cohort of mid-to-large entities, including Global Capability Centres (GCCs) and IT service exporters, within the ambit of the Safe Harbour mechanism.
The categories of eligible services have been rationalised by consolidating software development, IT-enabled services, knowledge process outsourcing, and contract R&D into a unified “Information Technology Services” category with a common Safe Harbour margin of 15.5%. The Safe Harbour approval period has been extended from the current period to five consecutive years, eliminating the need for annual revalidation and providing long-term certainty. Further, a new Safe Harbour category for data center services has been introduced.
Other Budget 2026 Amendments
- TCS rationalisation on transactions involving alcoholic liquor, tendu leaves, scrap, minerals and LRS remittances.
- STT on derivatives increased – Options to 0.15% and Futures to 0.05%, effective 1 April 2026.
- Due date for employee contribution deduction aligned with ITR filing.
- Non-requirement of TAN to resident buyers for purchase of immovable property from non-resident.
FAST-DS 2026 – Foreign Assets of Small Taxpayers Disclosure Scheme
The Finance Bill, 2026 introduces the Foreign Assets of Small Taxpayers – Disclosure Scheme, 2026 (FAST-DS 2026), a one-time statutory scheme allowing eligible taxpayers to voluntarily disclose undisclosed foreign income or assets within a six-month window (to be notified), with full immunity from penalty and prosecution, including under the Black Money Act.
Under Category 1, where foreign income was never offered to tax in India or a foreign asset was never disclosed in Schedule FA, taxpayers with aggregate undisclosed value not exceeding Rs. 1 crore may avail the scheme by paying 30% tax plus 30% additional levy, amounting to 60% of the total value, after which full immunity is granted. Under Category 2, where tax on foreign income was duly paid in India but the corresponding foreign asset was not reported in Schedule FA, taxpayers with aggregate asset value not exceeding Rs. 5 crore may obtain full immunity upon payment of a flat fee of Rs. 1,00,000, with no reassessment consequences.
Additionally, the Finance Bill provides that no prosecution shall be initiated for non-disclosure of foreign assets (other than immovable property) where the aggregate value does not exceed Rs. 20 lakh, with this relief applicable retrospectively from 1 October 2024.
India – France DTAA – Amending Protocol Signed
On 23 February 2026, India and France signed an Amending Protocol to the India-France Double Taxation Avoidance Convention originally signed on 29 September 1992. The Protocol grants full capital gains taxing rights to India as the source country, removing the earlier exemption enjoyed by French investors on gains from sale of Indian company shares. The Most-Favoured-Nation (MFN) clause has been deleted entirely from the Protocol, bringing finality to the long-running litigation and disputes arising from India’s position on MFN-based treaty claims.
On dividends, the existing single rate of 10% is replaced with a split rate – 5% for shareholders holding at least 10% of the capital of the paying company and 15% for all other shareholders. The definition of Fees for Technical Services (FTS) has been aligned with the India-US DTAA, thereby narrowing the scope of FTS taxable in India which reduces disputes that previously arose due to the broader FTS definition in the original France treaty. The Protocol also introduces a Service Permanent Establishment clause, updates the Exchange of Information provisions to current international standards, introduces a new article on Assistance in Collection of Taxes, and incorporates applicable BEPS MLI provisions into the treaty. The amendments will take effect after completion of domestic ratification procedures in both countries.
Income Tax Case Laws
1. ITAT Mumbai Limits Section 263 Powers in Bogus LTCG Case
Case: Mrs. Suneeta Sekhri v. Deputy Commissioner of Income Tax
Court: Income Tax Appellate Tribunal, Mumbai
Verdict Date: 2 February 2026
In this case for Assessment Year 2018-19, the assessee declared income of Rs. 2.48 crore including long-term capital gains (LTCG) from the sale of shares. The case was selected for scrutiny regarding alleged bogus penny stock transactions.
During reassessment proceedings, the Assessing Officer examined documents such as demat statements, bank statements, and contract notes, and denied exemption under Section 10(38), adding Rs. 24.39 lakh to the assessee’s income.
Subsequently, the Principal Commissioner invoked Section 263, stating that the amount should have been treated as unexplained cash credit under Section 68 and taxed under Section 115BBE at a higher rate.
The ITAT held that the Assessing Officer had already conducted a detailed enquiry and applied his mind while passing the assessment order. Since the necessary enquiry was made and the issue was already under appeal, invoking Section 263 amounted to a change of opinion, which is not permissible under law.
Accordingly, the revision order under Section 263 was quashed and the appeal of the assessee was allowed.
2. Registration under Section 12AB Cannot be Rejected on Mere Suspicion of Financial Transactions
Case: Seth PannaLal Charitable Trust v. Commissioner of Income-tax
Court: Income Tax Appellate Tribunal, Delhi
Verdict Date: 4 February 2026
The assessee trust’s application for registration under Sections 12A/12AB was rejected by the Commissioner (Exemptions) on the grounds that donations were mainly made in March in fixed denominations, some donations were given to unregistered trusts, there were related-party transactions and temporary loans, and surplus funds were invested in FDRs, allegedly casting doubt on the genuineness of activities.
The ITAT held that at the stage of registration, the scope of enquiry is limited to examining the objects of the trust and the overall genuineness of its activities, and not to conduct a detailed scrutiny of financial transactions unless there is evidence of illegality or personal benefit.
Since no misuse of funds or personal gain was established, the rejection was held unsustainable, and the Tribunal directed that registration be granted.
3. Notional Rent Addition Quashed – DVO Valuation Cannot Override Actual Lease Terms
Case: DCIT (Exemption)-1(1) v. Aditya Birla Foundation
Court: Income Tax Appellate Tribunal, Mumbai
Verdict Date: 5 February 2026
The Income Tax Appellate Tribunal held that exemption under Section 11 could not be denied to the assessee-trust for Assessment Years 2016-17 and 2017-18. The Assessing Officer had invoked Section 13, alleging that the trust leased its hospital property to a related concern (ABHSL) at inadequate rent and substituted actual rent with higher notional rent based on a District Valuation Officer (DVO) report.
However, it was found that the trustees held only 30 out of 50,000 shares in the lessee company, which was below the threshold under Section 13(3). Therefore, Section 13 was not attracted and denial of exemption was unjustified.
The Tribunal also held that interest income of Rs. 29.33 lakhs, already offered to tax on receipt basis in an earlier year, must be excluded when taxed on accrual basis to avoid double taxation.
Accordingly, the Revenue’s appeals were dismissed.
4. Calcutta High Court – Section 68 Addition on Share Capital Deleted
Case: Principal Commissioner of Income-tax v. Express Tradelink (P.) Ltd.
Court: Calcutta High Court
Verdict Date: 4 February 2026
The issue was whether addition under Section 68 could be made on account of share capital and share premium received from nine corporate subscribers.
The Assessing Officer had treated the share capital as unexplained cash credit, alleging that the assessee failed to prove identity, creditworthiness and genuineness of transactions. However, the assessee had furnished detailed documentary evidence including PAN, share application forms, bank statements, ITR acknowledgments and audited financial statements of the subscriber companies.
The High Court held that once the assessee provides proper documentary evidence establishing identity and banking trail, the initial burden under Section 68 stands discharged and the onus shifts to the Revenue. The Assessing Officer cannot dismiss audited financials and PAN details as mere “paper compliance” without bringing contrary evidence on record.
Further, non-appearance of directors is not sufficient ground for addition, especially when the Assessing Officer failed to fully exercise powers under Section 131 for verification.
The Court also clarified that for Assessment Year 2009-10, the “source of source” requirement was not applicable, as the relevant proviso to Section 68 is prospective.
Held: No perversity in the Tribunal’s order deleting the addition. Revenue’s appeal dismissed. Decision in favour of the assessee.
5. ITAT Raipur – 80GGC deduction allowed despite allegation of bogus political donation
Case: Assistant Commissioner of Income-tax, Circle-1(1) v. Anuj Prakash Gupta
Court: Income Tax Appellate Tribunal, Raipur
Verdict Date: 5 February 2026
The issue was whether deduction under Section 80GGC for donation to a political party could be disallowed merely because the party was allegedly involved in providing accommodation entries.
The Assessing Officer reopened the case based on Investigation Wing information that the political party was engaged in bogus donation activities and disallowed the deduction of Rs. 2 lakh. However, the assessee had made the donation through banking channels and obtained proper receipt.
The Tribunal held that the Assessing Officer failed to bring any evidence showing that the donation amount was returned to the assessee or that the assessee derived any benefit from the alleged arrangement. No direct nexus or bank trail was established linking the assessee to any refund or accommodation entry.
Held: In absence of specific evidence against the assessee, disallowance under Section 80GGC was unjustified. Revenue’s appeal dismissed. Decision in favour of the assessee.
6. ITAT Indore – Penalty under Section 270A Upheld for Wrong Claim of Interest Deduction
Case: Kamal Shadija v. Assessment Unit, Income-tax Department
Court: Income Tax Appellate Tribunal, Indore
Verdict Date: 6 February 2026
The issue was whether penalty under Section 270A for under-reporting of income was justified where the assessee claimed deduction of interest expenditure under Section 57 against interest income but failed to prove nexus between borrowed funds and loans advanced.
The assessee had earned interest income of Rs. 5.84 lakh and claimed equal deduction under Section 57, resulting in nil income under the head “Income from other sources.” During scrutiny, the Assessing Officer asked the assessee to establish a direct link between borrowed funds (on which interest was paid) and loans given (from which interest was earned). The assessee failed to prove such nexus, and the deduction was disallowed. The assessee accepted the disallowance and did not file appeal.
Penalty proceedings were initiated under Section 270A for under-reporting of income. The Tribunal held that since the assessee failed to satisfy the mandatory condition of establishing nexus under Section 57(iii), the deduction was not allowable in law. As the assessed income was higher than the returned income, it clearly amounted to under-reporting under Section 270A(2)(a). The plea of consistency and protection under Section 270A(6) was rejected.
Held: Penalty under Section 270A was rightly levied and upheld. Appeal dismissed. Decision in favour of the Revenue.
7. ITAT Mumbai – Ad-hoc Disallowance of Business Expenses Not Sustainable
Case: DCIT v. NDX P2P (P.) Ltd.
Court: Income Tax Appellate Tribunal, Mumbai
Verdict Date: 10 February 2026
The issue was whether the Assessing Officer could disallow 20% of “other expenses” (Rs. 44.14 crore) on an ad-hoc basis under Section 37(1).
The assessee, a technology-driven P2P lending platform, had furnished audited books of account, detailed ledger accounts (running into hundreds of pages), party-wise break-up, invoices, and TDS details. However, the Assessing Officer disallowed 20% of the expenses alleging failure to establish that the expenditure was wholly and exclusively for business purposes.
The Commissioner (Appeals), after calling for a remand report, found that the assessee had submitted complete details and that the Assessing Officer had neither rejected the books nor pointed out any specific defect or unverifiable expense. The disallowance was purely ad-hoc and based on estimation.
The Tribunal held that where audited books and supporting documents are produced, an ad-hoc disallowance without identifying specific defects or discrepancies cannot be sustained. Since no particular expense was found to be non-genuine or personal in nature, the estimated disallowance was unjustified.
Held: Deletion of 20% ad-hoc disallowance upheld. Revenue’s appeal dismissed. Decision in favour of the assessee.
8. Delhi High Court – Reopening Based on Audit Objection Held Invalid and Time-Barred
Case: Sapphire Foods India Ltd. v. Assistant Commissioner of Income-tax (OSD)
Court: Delhi High Court
Verdict Date: 16 February 2026
The issue was whether the Assessing Officer could reopen a completed scrutiny assessment (Assessment Year 2016-17) based solely on audit objections regarding expenses paid to the Managing Director and a shareholder.
During the original assessment under Section 143(3), the Assessing Officer had specifically sought details of remuneration and professional fees, and the assessee had furnished employment and consultancy agreements along with all supporting documents. Despite this, reassessment proceedings were initiated in 2023 on the basis of audit objections alleging that Rs. 9.80 crore of expenses were wrongly allowed.
The High Court held that since all material facts and documents were already disclosed and examined during the original assessment, reopening on the same material amounts to a change of opinion, which is not permissible in law. An audit objection cannot convert the power of reassessment into a power of review.
Further, the Court held that the notice issued on 31 March 2023 was beyond the four-year limitation period, as there was no failure on the part of the assessee to disclose material facts. Hence, the extended limitation period was not available.
Held: The notice under Section 148 and the order under Section 148A(d) were quashed as being based on change of opinion and barred by limitation. Decision in favour of the assessee.
9. Capital Gains Addition Unsustainable Without Proper Evidence of On-Money
Case: S. Rajendran v. Deputy Commissioner of Income-tax
Court: Supreme Court of India
Verdict Date: 24 February 2026
The Assessing Officer made an addition towards alleged unaccounted consideration (on-money) received on sale of property, based on certain materials gathered during search proceedings. The addition was made by treating the alleged excess amount as undisclosed income.
On appeal, it was contended that no direct incriminating material or concrete evidence was found to establish that the assessee had actually received any amount over and above the documented sale consideration. The addition was primarily based on presumptions and third-party statements without corroborative proof.
The Tribunal observed that mere suspicion or unverified documents, without cogent evidence linking the assessee to actual receipt of unaccounted money, cannot justify addition under the Act. In the absence of reliable and substantive material, the addition was held to be unsustainable.
Held: Addition towards alleged on-money in property transaction cannot be sustained without concrete incriminating evidence. Relief granted in favour of the assessee.
10. Unexplained LIC Investment of Rs. 50 Lakhs Taxable under Section 69 – Protective Assessment Not Permissible
Case: Pratibha Singh v. ACIT
Court: Income Tax Appellate Tribunal, Chandigarh
Verdict Date: 25 February 2026
The assessee made an investment of Rs. 50 lakhs in an LIC policy, which was disproportionate to her returned income. She contended that the investment was made by the HUF out of agricultural income under an alleged MOU through an LIC agent.
The Tribunal observed that no documentary evidence was produced to establish availability of Rs. 50 lakhs with the HUF. No books of account, sale records of agricultural produce, cash book, or cash flow statement were furnished. Further, the alleged MOU was not produced and transactions in the LIC agent’s bank account predated the supposed agreement. The policy stood in the name of the assessee, who was the life assured and beneficiary.
The Tribunal held that mere assertion that funds belonged to the HUF cannot discharge the burden under Section 69. In absence of proof of source, the investment was rightly treated as unexplained in the hands of the assessee.
On the plea for protective addition, the Tribunal relied on Lalji Haridas v. ITO and held that protective assessment arises only where the Assessing Officer himself entertains doubt about the person liable to tax. Since the Assessing Officer had reached a clear finding that the investment belonged to the assessee, addition was rightly made on a substantive basis.
Held: Rs. 50 lakh LIC investment treated as unexplained under Section 69 in assessee’s hands, plea for protective assessment rejected. Appeal dismissed in favour of Revenue.
