Union Finance Minister Nirmala Sitharaman, while presenting the Union Budget 2026, announced a landmark overhaul of India’s direct tax framework with the introduction of the Income Tax Act, 2025, which will replace the six-decade-old Income Tax Act, 1961. The new law will come into force from April 1, 2026, marking one of the most significant reforms in India’s tax administration history.
Comprehensive Rewrite of Income Tax Law Completed in Record Time
The Finance Minister recalled that a comprehensive review of the Income Tax Act, 1961 was announced in July 2024, and stated that the exercise has now been completed “in record time.” The rewritten legislation aims to simplify compliance, reduce litigation, and make the tax system more citizen-friendly.
Alongside the new Act, simplified Income Tax Rules and Forms will be notified shortly, giving taxpayers adequate time to familiarise themselves with the new requirements. Sitharaman emphasized that the forms have been redesigned to ensure that ordinary citizens can comply without difficulty, reinforcing the government’s broader “Ease of Living” agenda.
Key Direct Tax Proposals Announced in Budget 2026
Tax Exemption on Motor Accident Compensation Interest
In a major relief to accident victims, the Finance Minister proposed that any interest awarded by the Motor Accident Claims Tribunal (MACT) to a natural person will be fully exempt from Income Tax. Additionally, Tax Deducted at Source (TDS) on such interest payments will be completely done away with.
Sharp Reduction in TCS on Foreign Remittances and Travel
To ease the burden on individuals spending overseas, Sitharaman announced substantial reductions in Tax Collected at Source (TCS) rates:
- Overseas tour program packages:
TCS reduced from 5% and 20% to a flat 2%, with no minimum amount threshold. - Education and medical expenses under Liberalised Remittance Scheme (LRS):
TCS rate reduced from 5% to 2%.
These measures are expected to significantly reduce cash-flow pressures on students, families, and medical travellers.
Clarity on TDS for Manpower Services
To address long-standing ambiguity, the government proposed to explicitly include supply of manpower services within the definition of payments to contractors for TDS purposes. As a result, TDS on manpower services will be capped at 1% or 2%, bringing certainty and reducing disputes.
Automated Lower/Nil TDS Certificates for Small Taxpayers
In a move aimed at procedural simplification, the Finance Minister proposed a rule-based automated scheme for small taxpayers to obtain lower or nil TDS deduction certificates, eliminating the need to approach the assessing officer.
Single Form 15G/15H for Multiple Securities
For taxpayers holding securities across multiple companies, Sitharaman announced that depositories will be enabled to accept Form 15G or Form 15H from investors and directly share it with all relevant companies. This will eliminate repetitive submissions and ease compliance.
Extended Time for Revising Returns and Staggered ITR Deadlines
The Budget proposes to:
- Extend the deadline for revising income tax returns from 31 December to 31 March, subject to payment of a nominal fee.
- Stagger return filing deadlines:
- ITR-1 and ITR-2 (individuals): 31 July (unchanged)
- Non-audit business cases and trusts: Extended till 31 August
Simplified TDS Procedure for Non-Resident Property Sales
For the sale of immovable property by non-residents, the Finance Minister proposed that TDS will be deducted and deposited using the resident buyer’s PAN-based challan, eliminating the requirement to obtain a Tax Deduction Account Number (TAN).
One-Time Foreign Asset Disclosure Scheme for Individuals
Addressing genuine hardships faced by students, young professionals, tech employees, relocated NRIs and similar taxpayers, the Budget proposes a one-time six-month foreign asset disclosure scheme.
The scheme will cover two categories:
Category A: Non-Disclosure of Overseas Income or Asset
- Applicable where undisclosed income or asset value is up to ₹1 crore
- Taxpayer must pay:
- 30% of fair market value or undisclosed income as tax, and
- 30% as additional income tax in lieu of penalty
- Immunity from prosecution will be granted
Category B: Income Disclosed, Asset Not Declared
- Asset value limit: up to ₹5 crore
- Immunity from both penalty and prosecution
- Payable amount: ₹1 lakh fee
The Finance Minister stated that the scheme is intended to resolve genuine compliance gaps without criminalising honest mistakes.
A Shift Towards Trust-Based Tax Administration
With the new Income Tax Act, simplified compliance processes, automated systems, and targeted reliefs for individuals, Budget 2026 signals a clear shift towards a trust-based, technology-driven tax administration, balancing enforcement with fairness.
The reforms are expected to significantly reduce litigation, improve voluntary compliance, and make India’s tax system more accessible for citizens and global professionals alike.
