The Union Budget for FY27 is unlikely to deliver major changes to income tax law. Instead, the most consequential shifts for taxpayers are expected to come through a new set of income tax rules that will determine how the revamped Income Tax Act, 2025, operates in practice, according to two people aware of the development.
The Finance Bill, 2026, to be tabled in Parliament as part of the FY27 Budget, may carry only essential income-tax proposals such as notifying tax rates for the year and outlining the transition to the new income tax regime from 1 April, the people said.
The contours of the new regime will be defined by rules to be issued shortly by the Central Board of Direct Taxes (CBDT), they added.
These rules assume significance as they will shape taxpayer rights, fairness in the system, compliance burden, and the differentiation between procedural breaches and tax evasion.
The regulatory framework will hinge on these rules, as they are expected to cover sensitive procedures under faceless assessment, provide safeguards against excessive official discretion, lay down processes for initiating prosecution and offer guidance on the transition to the new regime.
The rules under the Income Tax Act, 2025, have taken on added importance because the new law has been pared down sharply—nearly halving the number of chapters and words compared with the 1961 Act it replaces—in an effort to make it simpler and more reader-friendly. In the process, several operational and procedural aspects, including those relating to faceless assessment, have been shifted from the law itself to subordinate rules.
The parliamentary panel that cleared the Income Tax Bill approved several such provisions after accepting the government’s explanations on how safeguards would be addressed in the rules.
Experts say that while the Act has undergone structural simplification, many monetary limits and classifications embedded in the tax system—some dating back to 1961—have never been rationalized for inflation, economic growth or changing urban realities.
Experts expect the Union Budget to include announcements on the transition to the new regime and measures to support its implementation. However, they note that several rules and forms are yet to be notified, raising concerns about uncertainty and the risk of inadvertent non-compliance for taxpayers.
“Industry and other stakeholders are therefore keenly awaiting timely notification of the rules, filing mechanisms, and explanatory FAQs,” an tax expert said.
“Much will depend on how these rules are ultimately framed. They will play a decisive role in shaping taxpayer rights, ensuring fairness and proportionality in enforcement and reducing the compliance burden,” he said.
“Following global best practices and allowing meaningful stakeholder consultation before finalising the rules will be key to ensuring that the new law delivers on its promise of a simpler, fairer, and more taxpayer-friendly tax system,” he added.
The Income Tax Act, 1961, is slated for repeal, with the new Income Tax Act, 2025, set to take effect from 1 April.
Queries emailed to the finance ministry on Tuesday seeking comments for the story remained unanswered till press time.
Frozen thresholds
Experts also flagged that several thresholds in the tax framework have remained frozen for decades.
“For instance, tax-free meal allowance continues to be capped at ₹50 per meal. ₹50 per meal no longer reflects urban food costs and has effectively become obsolete. Similarly, for calculating house rent allowance exemption, metro cities mean four cities that is, Delhi, Mumbai, Kolkata and Chennai, as were introduced in 1961, and never updated thereafter,” another tax expert said.
Cities such as Bengaluru, Hyderabad, and Pune, despite comparable cost of living, continue to be treated as non-metros, he said. The tax-free gift limit of ₹50,000 has also remained unchanged since its introduction, despite shifts in income levels and social practices.
“While rules under the Income Tax Act, 2025 are yet to be notified, businesses and professionals are keenly awaiting if any recalibration is done to these existing monetary limits, as a part of a broader tax policy realignment,” he said.
He also cautioned that while income-tax rules cannot breach or override the Act, they can significantly shape how the law functions in practice.
“For instance, rules prescribing reporting formats or faceless assessment mechanism can either simplify compliance for taxpayers or increase procedural burden. Similarly, rules governing valuation methods, documentation, etc, can influence fairness and due process, and, if loosely drafted, may expand executive discretion beyond what Parliament intended,” he said.
“Thus, while the Act sets the legal framework, the rules can decisively affect whether the system is taxpayer-friendly and balanced or compliance-heavy,” he added.
Experts said the Union Budget can still play a meaningful role by fine-tuning income tax slabs, rebates, standard deductions and compliance-related provisions that will operate alongside the new Act. While major structural reforms are embedded in the law itself, the Budget remains a powerful instrument in shaping taxpayers’ actual tax burden, they said.
Source from: https://www.livemint.com/economy/income-tax-rules-due-soon-fy27-budget-minimal-changes-tax-lawas-11768448643091.html
