The Union Budget 2026 has introduced a significant clarification and expansion in the scope of Section 536(2)(h) under the Income-tax Act, 2025, addressing a long-standing legislative gap arising from the repeal of the Income-tax Act, 1961.
The amendment ensures that deductions or income exclusions earlier claimed under the repealed 1961 Act do not permanently escape taxation merely because there is no violation of conditions attached to such deductions. The change will come into force from 1 April 2026, applying from Assessment Year (AY) 2026–27 onwards.
Background: What Section 536(2)(h) Originally Provided
Under the existing framework of Section 536(2)(h) of the Income-tax Act, 2025:
- If a deduction was allowed or an amount was not included in total income under the repealed Income-tax Act, 1961,
- And such allowance or exclusion was subject to fulfillment of certain conditions,
- Then on violation of those conditions, the amount would be deemed as income in the tax year in which the violation occurred.
In essence, the provision was a recapture mechanism, ensuring that tax benefits granted conditionally under the old Act could be withdrawn if those conditions were breached.
The Legislative Gap Identified
The Government noted an important omission in the existing provision.
There were several situations under the Income-tax Act, 1961 where:
- A deduction had been allowed, or
- An amount had not been included in total income,
without being subject to any ongoing conditions.
Under the new Income-tax Act, 2025, these amounts may still be required to be included as income, even though:
- There is no violation of any condition, and
- The original benefit was lawfully claimed under the 1961 Act.
However, Section 536(2)(h), as it stood, did not cover such cases, since it only operated when there was a violation of conditions.
This created a potential tax leakage, allowing certain past deductions or exclusions to remain permanently untaxed due to the repeal of the earlier law.
What the Amendment Seeks to Achieve?
To plug this gap, the amendment proposes that:
Any sum which was allowed as a deduction or not included in total income under the repealed Income-tax Act, 1961, shall be deemed to be income under the Income-tax Act, 2025, even without violation of any conditions, if such sum would have been includible in total income under the 1961 Act had it not been repealed.
In simple terms:
- The focus shifts from “violation of conditions” to “taxability in substance”.
- If an amount was never meant to remain permanently exempt and would have been taxed under the old law in due course, it can now be brought to tax under the new law.
Key Features of the Amendment
1. No Requirement of Condition Violation
The most important change is that taxability no longer depends on breach of conditions. Even in the absence of any violation, the amount can be deemed as income.
2. Continuity of Taxation Across Repeal
The amendment ensures seamless tax continuity despite the repeal of the Income-tax Act, 1961, preventing unintended exemptions.
3. Deeming Fiction Expanded
The deeming provision now applies where:
- Deduction/exclusion was allowed earlier, and
- The amount would have been taxable under the 1961 Act had it continued.
4. Prospective Application
The amendment will:
- Take effect from 1 April 2026, and
- Apply to Tax Year / AY 2026–27 and subsequent years.
Practical Implications for Taxpayers
For Businesses and Corporates
- Past deductions or income deferrals claimed under transitional provisions must be re-examined.
- Accounting and tax teams should identify items that were excluded earlier but may now become taxable under the new law.
For Professionals and Advisors
- The amendment increases the importance of legacy tax position reviews.
- Advisory work will need to factor in recapture risks, even where no non-compliance exists.
For Litigation and Assessments
- The provision may lead to fresh disputes on whether an amount “would have been included” under the 1961 Act.
- Interpretation of historical provisions will play a key role in assessments.
Legislative Intent
The amendment reflects a clear intent:
- To prevent permanent tax avoidance due to legislative transition, and
- To ensure that tax benefits granted under the repealed law do not outlive their intended life.
It reinforces the principle that repeal of a taxing statute should not result in unintended tax immunity.
Conclusion
The amendment to Section 536(2)(h) is a technically precise but far-reaching change introduced in Budget 2026. By expanding the deeming provision beyond cases of conditional violations, the legislature has ensured substantive tax neutrality during the shift from the Income-tax Act, 1961 to the Income-tax Act, 2025.
Taxpayers would be well advised to review historical deductions and exclusions to assess exposure under the amended provision before AY 2026–27.
Read More: JurisHour | Tax Law Daily Bulletin : February 6, 2026
