Budget 2026 Aims to Cut Litigation by Rationalising Tax Prosecution

Finance Minister Nirmala Sitharaman on Sunday announced a major clean-up of India’s direct tax system, unveiling a series of changes aimed at making income tax rules simpler and less intimidating for ordinary taxpayers.

Presenting the Union Budget 2026, Sitharaman said the government wants to reduce friction in the existing income tax framework and make compliance easier, especially for small taxpayers, ahead of the rollout of the new Income Tax Act from April 1, 2026.

At the heart of the reforms is a one-time foreign asset disclosure window, which will remain open for six months. The scheme is meant for individuals such as students, non-resident Indians and young professionals who may have unintentionally failed to report overseas assets.

Under the proposal, individuals with undisclosed foreign assets worth up to Rs 1 crore will be able to declare them by paying tax and penalty together amounting to 60 per cent, after which they will receive complete protection from prosecution. In cases where income was declared but the related foreign asset was missed, a flat fee of Rs 1 lakh will apply for assets up to Rs 5 crore. The government described this as a relief measure designed to encourage honest disclosure without fear of legal action.

The finance minister also announced changes to income tax return (ITR) filing timelines. While the July 31 deadline will remain unchanged for salaried individuals and small taxpayers, others will get more time. The window to revise returns will now stay open till March 31, with a small fee, and taxpayers will be allowed to file updated returns later by paying additional tax.

In a significant shift, Sitharaman said the government is moving away from criminal penalties for minor mistakes. Several procedural lapses will be decriminalised, with monetary fines replacing prosecution. She also announced that taxpayers contesting a tax demand will now have to pay only 10 per cent of the disputed amount upfront, down from 20 per cent, easing financial pressure during litigation.

The Budget also includes measures to simplify tax procedures. The process of tax deduction at source (TDS) on property sales involving non-residents will be streamlined. Small investors will be able to submit Form 15G and 15H digitally through depositories, helping them avoid unnecessary tax deductions. The government also proposed bringing manpower supply services under TDS to reduce tax leakages.

Also Read: From MSMEs to Semiconductors: Sitharaman Lays Out Big Budget Vision