New Delhi: The Union Budget 2026 has brought sweeping changes to India’s direct tax system, with Finance Minister Nirmala Sitharaman unveiling a package of reforms aimed squarely at easing compliance for ordinary taxpayers. From a brand-new Income Tax Act and relaxed filing timelines to sharply lower Tax Collected at Source (TCS) rates and simplified disclosures, the measures are designed to reduce paperwork, cut upfront cash outflow and give taxpayers greater flexibility to correct errors.
At the heart of the reforms is the rollout of a new Income Tax Act, scheduled to come into force on April 1, 2026. The government says the new law will modernize India’s tax framework, making it simpler, clearer and more technology-driven. To ensure a smoother transition, several interim changes have been announced to filing rules and compliance procedures.
Under the revised timelines, individuals filing ITR-1 and ITR-2 will continue to have a July 31 deadline. However, non-audit business taxpayers and trusts will now get additional time, with their filing deadline extended to August 31. In another major relief, the deadline for revising income tax returns will be pushed to March 31 each year, subject to a small fee, allowing taxpayers more breathing room to rectify mistakes without harsh consequences.
One of the most visible consumer-friendly moves is the sharp reduction in TCS on overseas spending. TCS on foreign tour packages has been cut to a flat 2 percent with no threshold, a significant drop from the earlier structure of 5 percent and 20 percent slabs. Similarly, TCS on remittances made under the Liberalized Remittance Scheme (LRS) for education and medical treatment will fall from 5 percent to 2 percent, easing the cash burden on families sending money abroad.
Tax experts have welcomed the shift. Gouri Puri, Partner at Shardul Amarchand Mangaldas & Co, noted that procedural relief for small taxpayers is clearly central to this Budget. She highlighted lower TCS rates, automated access to low or nil withholding certificates, extended timelines for revised returns and the ability to disclose foreign assets as key steps that reduce everyday compliance stress.
The Budget also addresses long-standing ambiguities. Interest awarded by Motor Accident Claims Tribunals (MACT) to individuals will now be fully exempt from tax, with no TDS applicable. This move is expected to bring relief to accident victims and their families, who often faced confusion and deductions while receiving compensation.
In another flexibility-enhancing measure, taxpayers will be allowed to update their returns even after assessment proceedings have begun, provided they pay an additional 10 percent tax. For small investors, the process around TDS will be simplified, as depositories CDSL and NSDL will now accept Forms 15G and 15H and share them directly with companies, helping avoid unnecessary tax deductions for eligible individuals.
A significant compliance window has also been opened through a one-time, six-month foreign asset disclosure scheme. Aimed at students, NRIs and small taxpayers, the scheme allows regularization of undisclosed foreign assets without fear of prosecution. Assets up to Rs 1 crore can be declared under Category A, with a combined tax and penalty of 60 percent. Category B covers previously disclosed income linked to unreported assets up to Rs 5 crore, for a flat fee of Rs 1 lakh. Both categories offer immunity from further penalties and prosecution.
To reduce litigation and speed up dispute resolution, the Budget proposes integrating assessment and penalty proceedings, cutting delays and duplication. The pre-deposit required to obtain a stay on tax demands during appeals has also been halved from 20 percent to 10 percent, easing cash flow pressure on taxpayers. Additionally, non-production of books and certain minor offences will be decriminalized and replaced with monetary penalties.
Taken together, the direct tax proposals in Budget 2026 signal a clear shift towards a more taxpayer-friendly regime. By combining lower upfront taxes, simpler procedures and greater flexibility, the government aims to build trust, improve voluntary compliance and prepare the ground for the smooth introduction of the new Income Tax Act in 2026.