Key amendments proposed under Direct and Indirect tax laws in the Finance Bill, 2026

Finance Bill, 2026 has been introduced in the Lok Sabha on 1st February 2026 and various amendments have been proposed under Direct and Indirect Taxes.

A. Key changes proposed under the Income Tax Act, 2025 (“Act”) –

The following amendments are proposed to be applicable from 1^st April 2026 unless specified otherwise.

Tax rates and Income-tax returns

• Section 206 of the Act covers the existing provisions relating to Minimum Alternate Tax (MAT). It provides for levy of MAT at the rate of 15% on book profits and allow companies to carry forward MAT credit for 15 years to set-off against future income-tax liability. The Bill proposes to reduce the MAT rate to 14% and treat MAT as the final rate of tax for companies opting for the old tax regime under section 115JAA of the Income-tax Act, 1961 with no entitlement to MAT credit in any subsequent tax year ending on or before 31st March, 2026. Moreover, the Bill proposes that utilisation of already accumulated MAT credit will be allowed under the new tax regime, but it shall be restricted to the extent of 25% of tax liability for that tax year for domestic companies and up to the difference between normal tax liability and MAT for Foreign Companies.

• In terms of Section 263(5) of the Act, revised income-tax returns can be furnished only within 9 (nine) months from the end of the relevant tax year or before completion of assessment, whichever is earlier. The Bill proposes to extend this time limit to 12 (twelve) months, with levy of a prescribed fee under Section 428(b) for revisions made after 9 (nine) months. This change will also be made in Income-tax Act, 1961 with effect from 1st March 2026.

• Section 263(1)(c) of the Act prescribes the due date of 31st July of the succeeding relevant tax year for filing the return of income (“ITR”) for all assessees other than a company who accounts are not required to be audited and where transfer pricing provisions under Section 172 do not apply. The Bill proposes to amend this section to extend the due date to 31^st August of the succeeding relevant tax year for the following assessees:-

a. Assessee other than a “Company” having income from profits and gains of business or profession who are not required to get their accounts audited, and

b. Partner of a firm or spouse of such partner (if Section 10 applies) whose accounts are not required to be audited.

For all other assessees, ITR due date will continue to be 31^st July of the succeeding relevant tax year. This change will also be incorporated in Income-tax Act, 1961 with effect from 1st March 2026.

• Section 263(6) of the Act allows taxpayers to file an updated return within 48 (forty-eight) months from the end of financial year succeeding the relevant tax year but does not permit such filing if it results in reduction of a loss or increase in refund. The Bill proposes to amend this section by allowing taxpayers to file an updated return even for the purpose of reducing the loss originally declared, thereby enabling correction of over-reported losses. Moreover, updated income-tax returns shall be allowed to be filed even after issuance of a reassessment notice under Section 280. In such cases, an additional 10% tax over and above the prescribed additional income-tax will be payable in lieu of penalty. Corresponding changes will also be made in the Income-tax Act, 1961 with effect from 1st March 2026.

• Under section 2(40)(f) of the Act, consideration received by a shareholder on buy-back of shares by a company is treated as dividend income. The Bill proposes to shift the incidence of tax to shareholders by taxing the consideration received on buy-back under the head “Capital Gains”. Section 69(2) states that the value of consideration received by shareholders in lieu of buy-back of shares will be Nil, resulting in capital loss. This sub-section is proposed to be amended to imply that value of consideration received in lieu of buy-back of shares will be taxed at specified tax rates mentioned in point (a) below.  Where the shareholder is a promoter, income-tax payable on such capital gains shall be aggregate of –

1. specified income-tax rates (STCG – 20% and LTCG- 15%) for all shareholders , and
2. an additional income tax rate as prescribed

This change will result in higher effective tax rates for promoters (30% for individuals and 22% for companies).

Tax deducted at source

• Section 393(1) [Table: Sl. No. 6(i)] provides for tax deduction at source (TDS) in the case of payments made to contractors for carrying out any “work”. It provides for rate of deduction of 1% when payment is made to individual or HUF and 2% in other cases. Definition of “work” for the provisions of TDS is covered under Section 402(47). The Bill proposes to insert clause “f) supply of manpower to a person to work under his supervision, control or direction” in Section 402(47) to include “supply of manpower” in the definition of “work”, thereby subjecting payments for such services to contractor TDS rates of one per cent in the case of individuals or HUFs and two per cent in other cases.

• Section 395 of the Act provides for issuance of certificate for deduction of tax at source at Nil or lower rates. As per the current provisions, the payee may make an application before the assessing officer (“AO”) for obtaining lower or nil deduction certificates who verifies the application before approval. The Bill proposes to insert sub-section (6) to allow payees for making such applications before the prescribed income-tax authority and upon electronic verification of the contents of this application, certificates will be issued/rejected subject to fulfilment of prescribed conditions.

Safe Harbour Rules and Transfer Pricing

• The Finance Bill proposes to consolidate and classify the following categories of services as “Information Technology Services” for the purposes of the safe harbour and transfer pricing regime:

1. Companies engaged in software development, testing, maintenance and application support.
2. IT-enabled service (ITES) providers, including call centres, customer support, back-office, payroll and accounting services.
3. BPO and KPO service providers.
4. Companies providing engineering and design services, including product engineering and technical support.
5. Companies engaged in data analytics, AI, machine learning and digital transformation services.
6. Companies providing cloud operations, infrastructure management and managed IT services.
7. Shared service centres and Global In-house Centres (GICs) providing technology or digital services.
8. Companies providing IT consulting, systems integration and enterprise solution support

• A uniform safe harbour margin of 15.50% on operating cost is proposed for this consolidated category, and the turnover threshold is proposed to be increased from ₹300 crore to ₹2,000 crore. The approval process will be automated and rule-based, and taxpayers will have the option to continue under safe harbour rates for five consecutive years, providing long-term tax certainty.

• Transfer pricing certainty is further strengthened through time-bound unilateral APAs for IT services and it is proposed to introduce a 15% safe harbour margin for Indian entities providing data centre services to related foreign companies.

• Section 168(1) of the Act relating to Advance Pricing Agreements (APA), does not presently allow filing of modified return of income by Associated Enterprises whose tax liability is being modified by APA, but who has not entered in the APA. The Bill proposes to permit such Associated Enterprises to file revised returns within 3 (three) months from the end of month in which such APA was entered, to give effect to the change in income and tax liability of the entity, including the right to claim refunds.

Penalties for offences and other defaults

• Sections 473 to 485 and 494 of the Income-tax Act, 2025 in Chapter XXII prescribe criminal offences such as obstruction during search (sections 473–474), concealment or transfer of property to evade recovery (section 475), non-payment of TDS/TCS (sections 476–477), wilful tax evasion and failure to file returns (sections 478–480), non-production of books or non-compliance with directions (section 481), false statements and falsification of accounts (sections 482–484), repeat offences (section 485), and unauthorised disclosure by public servants (section 494). It is proposed to amend these provisions to replace rigorous imprisonment with simple imprisonment, reduce maximum punishment to 2 (two) years (three years for subsequent offences under section 485), introduce monetary thresholds, and prescribes only fine where the amount of tax involved does not exceed ₹10 lakh. Certain offences are proposed to be fully decriminalised, including failure to produce documents under section 481(1) and specified TDS defaults under section 476.

• For key offences such as TDS/TCS defaults (sections 476–477), wilful tax evasion (section 478), failure to file returns (sections 479–480), and false statements or falsification of accounts (sections 482–484), a graded penalty structure is proposed –  simple imprisonment up to 2 (two) years where tax exceeds ₹50 lakh, up to 6 (six) months where it is between ₹10 lakh and ₹50 lakh, and only fine in other cases.

• Punishment for repeat offences under section 485 is proposed to be reduced to simple imprisonment of six months which may extend to three years. Punishment under section 494 is reduced to simple imprisonment up to one month or fine, and section headings of sections 473, 474 and 478 are proposed to be aligned and simplified, with similar amendments proposed in corresponding provisions of the Income-tax Act, 1961.

• Section 446 and 447 of the Act governs penalties for defaults relating to tax audit, transfer pricing audit and specified financial transaction reporting presently provides for discretionary penalties. The Bill proposes to replace such penalties with graded mandatory fees up to ₹1.5 lakh, with an overall cap of ₹1 lakh under Section 454(2) for specified financial transaction defaults.

• Section 195 of the Act provides for tax on unexplained income referred in Section 102 to 106. At present, such income is subject to tax at a special rate of 60%along with a separate penalty. Further, section 443 provides that, 10% penalty shall be levied on an assessee if the income in any tax year includes income referred in section 102 to 106. The Bill proposes to amend Section 195 to reduce the tax rate to 30% and to repeal section 443 and henceforth, penalty will be charged for misreporting of income under section 439(11) of the Act.

Other provisions

• Presently orders passed by authorities where Document Identification Number (DIN) is not quoted or incorrectly quoted not considered valid. The Bill proposes to amend Section 292B to state that where reference to DIN exists in any manner, such orders with stand valid with retrospective effect from 1 October 2019 under Income Tax Act,1961.

• Section 2(49) states that any sum received by an assessee from employees towards provident fund, Employees’ State Insurance fund or any other notified welfare fund is treated as income in the hands of assessee. Section 29(1)(e) of the Act states that this sum is allowed as deduction only where such sum is credited to the relevant fund within the statutory payment due date prescribed under the respective labour welfare laws. The Finance Bill, 2026 (referred to as “The Bill”) proposes to amend Section 29(1)(e) and allow deduction of such employee contributions even if it is paid on or before the due date for furnishing the annual income-tax return.

• For general insurance businesses, if an expense is disallowed under Section 35 of the Act due to non-deduction of tax, it will be allowed as a deduction only in the year in which the TDS is actually paid on such expenditure. This is now expressly clarified by the Bill.

• Section 11 read with Schedule IV of the Act specifies the eligible income, which shall not be included in the total income of the eligible non-residents, foreign companies and other such persons. The provisions governing taxation of foreign companies presently subject income arising from data centre services in India to tax. The Bill proposes to insert serial no. 13C in Schedule IV to exempt income of a foreign company arising from procurement of data centre services from a notified Indian-owned data centre, routed through an Indian reseller, up to tax year ending on 31st March 2047.

• Income arising in the hands of foreign companies supplying goods to Indian contract manufacturers is presently subject such to tax. The Bill proposes to insert serial no. 13A in Schedule IV to exempt income arising to a foreign company from supply of capital goods, equipment or tooling to an Indian-resident contract manufacturer for use in electronic manufacturing in India up to the tax year 2030–31 subject to following conditions: –

a) Ownership of such capital goods, equipment or tooling remains with the foreign company,

b) These goods are under the control and direction of the contract manufacturer

c) Contract manufacturer is located in a customs bonded area

• Section 147 of the Act provides tax holiday (deduction of 100% income) for 10 consecutive tax years to an Offshore Banking Unit located in a Special Economic Zone and a unit of an International Financial Services Centre. The Bill proposes to extend such tax holiday to twenty consecutive tax years, after which such units shall be taxable at a concessional rate of fifteen per cent.

• Section 394(1) covers the provisions relating to tax collection at source (“TCS”). It prescribes TCS rate on sale of alcoholic liquor for human consumption, scrap and minerals at one per cent and sale of tendu leaves at five per cent. The Bill proposes to amend TCS rate to two per cent on sale of alcoholic liquor for human consumption, scrap, minerals and tendu leaves.

• Section 93(2) currently allows deduction of interest expense against dividend income and income from mutual fund units subject to a limit of 20% of such income in a tax year. The Bill proposes to amend this section to disallow any deduction for interest expenditure against dividend income or income from mutual fund units.

• The Bill proposes to amend section 98 of the Finance (No.2) Act, 2004 relating to charge of Securities transaction tax (“STT”). It proposes to increase STT on sale of options to 0.15% (earlier 0.125%) and on sale of futures to 0.05% (earlier 0.02%).

B. Indirect Taxes

Proposals under Goods & Services Tax Act, 2017

• Under section 15(3) of the CGST Act, the existing provisions permit reduction in taxable value on account of post-sale discounts only where such discounts are established in terms of a pre-existing agreement. The Bill proposes to amend section 15(3) to allow post-sale discounts through issuance of credit notes even in the absence of a prior agreement, subject to the condition that the recipient reverses the proportionate input tax credit attributable to such discount.

• Under section 54 of the CGST Act, the facility of provisional refund is presently available mainly in cases of zero-rated supplies. The Bill proposes to amend section 54 to extend this mechanism to cases involving inverted duty structure, thereby enabling faster liquidity for taxpayers where the input tax rate exceeds the output tax rate.

• Under section 54 of the CGST Act read with rule 89 of the CGST Rules, refunds in cases of exports made on payment of tax are currently subject to a prescribed monetary threshold. The Bill proposes to remove such minimum threshold, allowing refund claims irrespective of the amount involved.

• Under section 107 of the CGST Act, filing of appeals requires pre-deposit of a specified percentage of tax in dispute. The Bill proposes to amend section 107 to introduce a requirement of mandatory pre-deposit of 10% of the penalty amount for filing appeals in cases where only penalty is in dispute and no tax demand exists, in order to discourage frivolous litigation.

• It is proposed to insert an Explanation in section 7 of the CGST Act to clarify that supply of goods warehoused in an SEZ or FTWZ before clearance for home consumption shall be treated as neither a supply of goods nor a supply of services for GST purposes. Consequently, no refund of GST shall be available in respect of such transactions.

Proposals under Customs Act,1962 and Customs Tariff Act, 1975

• Under section 28J of the Customs Act, it is proposed to prescribe a statutory validity period for advance rulings, such that an advance ruling shall remain valid for five years or until there is a change in law or facts, whichever is earlier.

• Under sections 59 and 67 of the Customs Act, the existing requirement of prior permission for removal of warehoused goods from one bonded warehouse to another is proposed to be removed, and transfer of warehoused goods between warehouses will be permitted subject to prescribed conditions.

• Under rule 3 of the Deferred Payment of Import Duty Rules, 2016, eligibility for deferred payment of import duty is presently restricted to specified categories of importers. The Bill proposes to introduce a new class of eligible importers for availing this facility.

• Under the Courier Imports and Exports (Electronic Declaration and Processing) Regulations, 2010, exports through courier are currently subject to a value limit of ₹5 lakh per consignment and rigid procedures for returns and rejects. The Bill proposes to remove the export value limit, relax procedures for returns and rejects, and permit return of goods to the country of origin, thereby facilitating cross-border e-commerce.

• Under section 65 of the Customs Act, 1962 read with exemption notifications issued under section 25, export facilitation provisions presently limit duty-free import of inputs for seafood exporters to 1% of FOB value and prescribe export timelines of six months for textile and leather goods. The Bill proposes to increase the duty-free input limit to 3% of FOB value, extend export timelines for textile and leather garments, leather and synthetic footwear and other leather products to twelve months, and extend duty exemption on inputs used in manufacture of footwear to exporters of shoe uppers.

• Basic Customs Duty (BCD) is being rationalised on some products. Below are the key changes:

• BCD on critical minerals such as Monazite will be reduced from 2.5% to Nil.
• BCD on Sodium Antimonate, used in the manufacture of solar glass, will be reduced from 7.5% to Nil.
• BCD on goods used for nuclear power generation, including Control and Protector Absorber Rods and Burnable Absorber Rods, will be reduced from 7.5% to Nil.
• Duty on specified goods used in the manufacture of microwave ovens, components or parts (including aircraft engines) for manufacture of aircraft, and parts of aircraft proposed to be exempted.
• BCD will be fully exempted on 17 new drugs and medicines.
• Dutiable goods imported for personal use will be subject to a concessional duty rate of 10%.
• BCD on Potassium Hydroxide will be introduced at 7.5%.

Proposals under Central Excise Act,1944

• The provisions presently states that central excise duty on blended CNG is to be computed on the full transaction value. The Bill proposes to exclude the value of biogas or compressed biogas and the corresponding GST paid thereon from the transaction value for computation of central excise duty on blended CNG. To this effect, notification No. 11/2017-Central Excise dated 30.06.2017 is being suitably amended vide notification No. 02/2026-Central Excise dated 01.02.2026. This change will come into effect from 2^nd February 2026.

Source: Ministry of Finance