The changes, announced as part of her speech on direct taxes, aim to decriminalise certain procedural non-compliances, reduce the severity of punishments, make penalties more proportionate, and ease the compliance burden on taxpayers
Finance Minister Nirmala Sitharaman presents her ninth consecutive Budget on Sunday. PIC/PTI
Finance Minister Nirmala Sitharaman on Sunday proposed a significant rationalisation of prosecution provisions under the Income Tax Act as part of Union Budget 2026. The changes, announced as part of her speech on direct taxes, aim to decriminalise certain procedural non-compliances, reduce the severity of punishments, make penalties more proportionate, and ease the compliance burden on taxpayers.
Union Budget 2026: Key measures under rationalisation
The proposals, detailed under the heading “Rationalisation of the prosecution framework”, include:
Decriminalisation of specific actions: Production of books of account and documents, and ensuring payment of tax deducted source (TDS) from the deductee in cases where payment is made in kind will no longer attract criminal prosecution.
Rationalisation of imprisonment type: All prosecutions under the Act will now carry simple imprisonment instead of rigorous imprisonment.
Reduction in maximum punishment: For any offence (except repeated offences), the maximum term of imprisonment is proposed to be reduced from seven years to two years.
Leniency for lower-end offences: Cases where the current maximum punishment is two years will see it reduced to six months (with or without fine), with no minimum imprisonment required.
Proportionate punishment linked to tax evaded: Prosecution will be based on the amount of tax evaded, with fines made optional and maximum imprisonment removed entirely for such offences.
Minor offences: Only a fine will be prescribed, with no imprisonment.
Union Budget 2026: Focus on simplifying tax administration
The Finance Minister said these changes are part of a broader effort to simplify tax administration, reduce litigation, decriminalise technical or procedural defaults, and shift enforcement focus toward serious tax evasion rather than minor or inadvertent lapses.
The proposals form part of the amendments relating to direct taxes and will require corresponding changes in the Income Tax Act, 2025, which is set to come into force from April 1.
Finance Minister Nirmala Sitharaman on Sunday created history by presenting her ninth consecutive Union Budget 2026, further cementing her place in India’s parliamentary record books. The Union Budget 2026 speech, delivered in the Lok Sabha, lasted around 84 minutes, marking the first time a Union Budget has been presented on a Sunday.
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