The Income Tax Department has issued a comprehensive compilation of Frequently Asked Questions (FAQs) on the direct tax proposals presented in the Union Budget 2026–27 on Feb 01, 2026, offering clarity and ease of understanding for taxpayers, professionals, and institutions. The release underscores the Government’s commitment toward creating a modern, simplified, and transparent tax ecosystem aligned with the vision of improving ease of living and strengthening voluntary compliance.
The set of FAQs, based entirely on the legislative proposals in the Finance Bill, 2026, aims to demystify provisions across multiple domains ranging from TDS reforms and rationalised penalty structures to updated return mechanisms, cooperative taxation, decriminalisation initiatives, and the newly introduced Foreign Assets of Small Taxpayers – Disclosure Scheme (FAST-DS) 2026.
The Ministry emphasises that the Budget proposals reflect an ongoing evolution of India’s tax architecture, keeping pace with expanding digitalisation, enhanced taxpayer services, and the broader goal of a trust-based tax administration.
Ease of Living: Making Compliance Simpler and Fairer
A key objective of Budget 2026 is to improve taxpayer convenience. The FAQs provide detailed explanations of several measures aimed at reducing litigation and procedural complexity.
Tax Exemption on Interest Awarded under the Motor Vehicles Act
A new provision exempts interest awarded to individuals or their legal heirs by the Motor Vehicle Claims Tribunal. The exemption aims to ensure that compensation designed for relief is not eroded by tax burdens. Correspondingly, TDS shall not apply to such payments, thereby eliminating procedural hassles.
Relief in TDS on MACT Compensation Payments
The FAQs clarify that interest awarded by the Tribunal to individuals will no longer be taxable nor subject to TDS from 1 April 2026, while existing provisions continue for non-individual recipients.
These simplifications reflect the Government’s commitment to ensure that compensation meant for victims is not delayed or complicated by tax administration processes.
Streamlined TDS and Compliance Systems
Budget 2026 proposes multiple improvements to TDS-related processes. The FAQs explain these in user-friendly language.
Electronic Process for Lower/Nil Deduction Certificates
Smaller taxpayers can now apply electronically to a designated income-tax authority for lower or nil deduction certificates. This reduces physical interface and allows faster disposal.
Centralised Declarations for No-TDS on Certain Income
Taxpayers receiving dividends, interest on securities, or income from mutual fund units can submit declarations directly to depositories, instead of filing multiple forms with various deductors. Effective 1 April 2027, this significantly reduces repetitive compliance.
Including Supply of Manpower within “Work” for TDS
To bring uniformity and clarity, “supply of manpower” is explicitly included within the definition of “work” under TDS provisions, effective 1 April 2026.
Ease in Return Filing: Extended Timelines and Flexible Revision
Extended Due Date for Non-Audit Taxpayers and Trusts
The due date for filing returns for individuals running small businesses (non-audit cases) and trusts has been extended to 31 August, beginning tax year 2026-27. This measure acknowledges seasonal workloads and supports greater compliance accuracy.
Revised Return Filing Window Extended to 12 Months
Taxpayers now have a full year from the end of a tax year to rectify omissions and errors. A nominal fee applies for revision beyond nine months, depending on income thresholds.
Greater Flexibility in Filing Updated Returns
Important reforms include:
- Allowing updated returns for reducing previously claimed losses, enabling better compliance when corrections are needed.
- Allowing updated returns in response to reassessment notices under section 280, with additional tax applicable.
- Ensuring such updated returns safeguard taxpayers from penalties for under-reporting or misreporting of income disclosed therein.
These measures strengthen voluntary compliance and reduce adversarial proceedings.
Significant Rationalisation of Penalties, Prosecution, and Tax Rates
Composite Assessment-cum-Penalty Orders
To reduce extended legal processes, assessments and penalty decisions may now be issued through a consolidated order, applicable from 1 April 2027. This removes duplication and helps taxpayers receive faster resolution.
Expanded Immunity Provision
Section 440 is amended to allow immunity even in cases involving misreporting, provided the taxpayer pays prescribed additional tax. This reform is crucial to encourage prompt settlement.
Penalties Converted to Automatic Fees
Penalties for delays in filing audit reports, statements of financial transactions, or reportable accounts are replaced with auto-levied fixed fees, enhancing transparency and reducing subjectivity.
Partial Decriminalisation of the Income-tax Act
Major changes include:
- Reducing maximum imprisonment from 7 years to 2 years.
- Introducing graded punishment based on tax amounts involved.
- Fully decriminalising certain offences, especially procedural in nature.
These changes align the law with global best practices and the principles of Jan Vishwas.
Reduced Tax Rate on Unexplained Income
Tax rate on incomes under sections 102–106 (unexplained credits/investments) is reduced from 60% to 30%, aligning with rationalised penalty provisions and promoting honest reporting.
FAST-DS 2026: One-Time Window for Small Taxpayers with Foreign Assets
The Budget introduces the Foreign Assets of Small Taxpayers – Disclosure Scheme (FAST-DS 2026), offering a one-time opportunity to disclose undisclosed foreign income or assets (up to ₹1 crore), or certain unreported but explained assets (up to ₹5 crore), with immunity from penalty, tax, and prosecution under the Black Money Act.
The FAQs provide clarity on:
- Eligibility, including students, returning NRIs, employees with ESOPs, etc.
- Tax rate (60% of value) on undisclosed assets and fixed fee on reportable assets.
- Valuation norms, timelines, payment mechanisms, and consequences of misrepresentation.
This scheme strengthens compliance while providing a fair and proportionate remedy for small taxpayers who unintentionally failed to report foreign assets.
Strong Support for Cooperatives
The FAQs elaborate on major support measures for cooperative societies:
Expanded Definition of Cooperatives
Societies registered under the Multi-State Cooperative Societies Act, 2002 are now formally included, ensuring consistent treatment.
Extended Deductions for Primary Cooperatives
Primary cooperatives supplying milk, oilseeds, fruits, vegetables—and now cotton seed and cattle feed—to federal cooperatives or government entities can claim 100% deduction on profits from such activities.
Dividend Deductions under New Regime
Inter-cooperative dividends continue to receive deduction even under the new tax regime, provided they are redistributed to members.
These measures empower the cooperative system, reinforcing rural income pathways and community-based economic structures.
Other Key Clarifications
Crypto-Asset Transaction Reporting
A new penalty structure (₹200 per day for delay; ₹50,000 for inaccurate reporting) enhances enforcement of reporting obligations for crypto-asset transactions.
No TAN Needed for Purchasing Property from Non-Residents
Resident individuals/HUFs purchasing immovable property from non-residents will not require TAN, simplifying compliance through PAN-based challan-cum-statement filing.
Government Advisory
The Income Tax Department urges taxpayers, professionals, and institutions to rely only on official sources—notifications, circulars, and statutory documents—when interpreting Budget proposals. The FAQs serve as an explanatory guide but should be read in conjunction with the Finance Bill, 2026.
The complete FAQ document is available here: https://incometaxindia.gov.in/Documents/Budget2026/FAQs-Budget-2026.pdf
