A simpler income tax law will come into force from 1 April, along with other changes announced in this year’s Budget including higher benefit of deductions for salaried tax payers and a new buyback taxation scheme.
The new tax regime modifies the return filing timeline in certain cases and rationalises penalties while looking to reduce complexity and encourage voluntary compliance.
Mint takes a closer look at the changes that will kick in on Wednesday.
What’s the nature of the changes that will take effect on 1 April?
The changes proposed through Finance Act of 2026, signed off by President Droupadi Murmu on Monday, include the rationalisation of certain penalties, greater leeway to update tax returns and disclose previously unreported foreign assets and income below a limit, changes to the taxes deducted or collected at source (TDS and TCS) including on overseas tour packages and education, and a new tax regime for share buybacks. From 2026-27, businesses not subjected to a tax audit will be able to file their returns up to the end of August.
What are the changes related to filing tax returns?
Starting in 2026-27, taxpayers can revise their returns even after the department initiates a tax case. To do this, they must pay an extra 10% tax on top of the usual rates required for updating a return after the relevant tax year ends. These rates range from 25-70% from the first to the fourth year. The goal is to reduce litigation and encourage voluntary compliance.
Under the new scheme, small taxpayers such as students, young professionals, tech employees or relocated non-resident Indians can now report previously undisclosed income or assets to avoid prosecution. For an asset or income worth up to ₹1 crore, a 60% tax that includes a penalty component must be paid. For undisclosed foreign income or an asset worth up to ₹5 crore, a flat fee of ₹100,000 must be paid for immunity from prosecution.
What are the key features of the new income tax law?
The Income Tax Act 2025 introduces a clear ‘tax year’ concept spanning 12 months from 1 April to eliminate confusion between financial and assessment years. It significantly enhances salaried taxpayer benefits, raising children’s education allowance from ₹100 to ₹3,000 per month per child (two children max) and children’s hostel allowance from ₹300 to ₹9,000 per month per child, aligning exemptions with inflation and real costs, according to Sandeep Sehgal, partner – tax, AKM Global, a tax and consulting firm.
The new law cuts the number of rules from 511 to 333, reducing complexity and chances of misinterpretation for easier compliance and fewer disputes. The transition, however, may pose challenges, notably in utilizing excess TDS challans due to section renumbering and new payment codes, Sehgal added.
On the other hand, Budget 2026 proposals indicate a legislative intent to reduce procedural hardship and compliance friction. “Overall, these changes should be viewed as a calibrated legislative package that combines simplification with selective tightening, resolves certain legacy ambiguities and requires taxpayers and advisors to re-evaluate compliance positions, documentation, and transaction planning with greater precision from the outset of tax year 2026-27,” he said.
How does the new buyback tax regime work?
Under the new framework, any consideration received from share buybacks by companies will be taxed as capital gains in the hands of the shareholder, instead of dividend income. For promoters, there will be an additional tax that will take the effective rate on such gains to 30%. The effective rate applicable for promoter companies, including the additional tax, will be 22%.
The income tax department clarified last week that this additional tax levied on promoters under a special provision will attract a flat 12% surcharge. For other taxpayers, the standard surcharge rates will apply if their capital gains exceed the thresholds required under regular tax laws. Under normal provisions, there is no surcharge if the total income is below ₹50 lakh.
What are the main challenges in making the transition?
The main hurdle for the income tax department is ensuring a seamless shift, which requires a highly resilient IT system. Historically, new reporting regimes for income tax, GST, and the Companies Act have faced significant technical disruptions when platforms became overwhelmed by a sudden surge in filings.
For instance, the June 2021 launch of the revamped income tax e-filing portal and the July 2017 rollout of the network saw disruptions as a large number of tax payers attempted to file their returns simultaneously.