Budget 2026: Immunity from prosecution, fee for late ITR revision — key income tax rule changes you need to know

As an individual taxpayer, if you were looking forward to Budget 2026 with the expectation of changes in income tax slabs, rates, exemptions, deductions, etc., you will be disappointed. There were hardly any noteworthy changes announced in these. However, the Budget has proposed a slew of changes, including immunity from penalty or prosecution for under-reporting or misreporting of income, fees for late revision of ITR, and partial decriminalisation of certain prosecution provisions. Let us understand these proposals.

Immunity from penalty for misreporting of income

At times, some individuals may under-report income, unintentionally or intentionally. Currently, Section 440 grants a waiver of penalty and immunity from prosecution in the case of under-reporting of income.

Budget 2026 proposes extending the provision for waiving penalty and granting immunity from prosecution to cases of misreporting of income. However, to obtain immunity, the taxpayer must pay the tax, the penalty, and an additional income tax equal to 100% of the tax payable on the under-reported or misreported income, in lieu of the penalty.

There is a separate penalty for unexplained credits, unexplained investment, unexplained assets, etc. It is proposed that such cases be considered as instances of misreporting income. A taxpayer can claim immunity in such cases by paying tax, the penalty, and additional income tax equal to 120% of the tax payable on the misreported income, in lieu of penalty.

The immunity is being granted to provide taxpayers with an opportunity to settle disputes at an early stage by paying the additional tax, and to reduce the burden of litigation and compliance. The taxpayer must file an application for immunity within one month from the end of the month in which they have received the assessment order. Immunity can be granted only if no appeal has been filed against the assessment order.

The amendment for granting immunity will come into effect from 1 April 2026.

Fee for late revision of ITR

Presently, an individual can file a revised return up to 31 December. Budget 2026 proposes extending the time for filing the revised return up to 31 March. The revised return can be an original return or a belated return. An individual filing a revised return after 31 December will have to pay a nominal fee as follows:

1. ₹1,000 fees if the total income is up to ₹5 lakh
2. ₹5,000 fees if the total income is more than ₹5 lakh

Conversion of penalty into fees for failure to furnish SFT

Section 454 of the Income Tax Act imposes a penalty on a person who fails to furnish a statement of financial transaction (SFT) or reportable account. Budget 2026 proposes to levy a fee instead of the existing penalty. The fee will be ₹200 per day for each day the failure continues. The fee will be capped at ₹1,00,000.

Increase in penalty for non-cooperation

Section 254 of the Income Tax Act provides the power to the Income Tax authorities to collect information from the premises where the business or profession is being carried out. The authorities can direct the proprietor, an employee or any other person attending, to furnish certain information as authorised.

If the attending person fails to furnish the required information to the income-tax authorities, a penalty can be imposed. The Income Tax Joint Commissioner, Deputy Director, Assistant Director, or the Assessing Officer has the power to impose a penalty of a maximum of ₹1,000.

Budget 2026 proposes increasing the maximum amount of penalty to ₹25,000 from the existing ₹1,000. The rationale is that the maximum penalty amount should be proportionate to create adequate deterrence and voluntary compliance.

Partial decriminalisation of specific prosecution provisions

Budget 2026 proposes amending Sections 475 to 478 and Section 494 of the Income Tax Act, 2025. The amendments involve partial decriminalisation of certain offences, full decriminalisation of certain offences, and changes to the nature and duration of the prescribed punishments.

The principles followed in the decriminalisation exercise are as follows:

1. Changing the nature of punishment from rigorous imprisonment to simple imprisonment.
2. Limiting the maximum punishment for any offences from the existing 7 years to 2 years. The punishment for subsequent offences will be reduced from the existing 7 years to 3 years.
3. New grading of offences and their corresponding new punishment, wherever the punishment is based on the grading of the amount of tax evaded.
4. If the amount of the tax involved is less than or equal to ₹10 lakh, the punishment for offences will be only a fine, with no imprisonment. If the amount of tax involved exceeds ₹10 lakh but is less than ₹50 lakh, the maximum imprisonment for offences will be 6 months. If the amount of the tax involved exceeds ₹50 lakh, the maximum imprisonment for offences will be 2 years.
5. The imposition of fine is being introduced in lieu of or in addition to imprisonment.
6. Certain offences will be fully decriminalised.

The new grading system is progressive and inclusive in nature. It is being adopted keeping in view the global practice and the spirit of Jan Viswas.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.