Rewriting India’s Tax Architecture: Structural and Compliance Reforms in the Union Budget 2026–27
The Union Budget 2026–27 marks the ninth consecutive Budget presentation by the Union Minister of Finance and Corporate Affairs, Nirmala Sitharaman, before Parliament. The Budget outlines the Government’s continued commitment to structural economic reform. For the fiscal year 2026–27, the fiscal deficit is targeted at approximately 4.3% of GDP, with emphasis on infrastructure investment and employment generation. The Budget reflects a calibrated approach combining fiscal discipline with legislative and administrative reform.
Including tax law changes, streamlined procedures, compliance requirements and targeted changes in both GST and indirect taxes. However, the new Income Tax Act 2025 will complement the renewed style of structural change that is taking place within India.
Table of Contents
Income Tax Act, 1961 Repealed: A New Legislative Structure
One of the most dramatic changes made to the legislative structure in India is the repeal of the Income Tax Act, 1961 with the new Income Tax Act, 2025 coming into effect on April 1, 2026. The repeal of the Income Tax Act, 1961 will be an important part of India’s transition to a modern legislative structure. The new enactment is designed to provide a more streamlined and contemporary statutory framework that is easier to understand, interpret, and administer.
The objective of the new Act is simplification. Over time, the 1961 legislation had become layered with amendments, explanations, provisos, and judicial interpretations, leading to complexity and compliance burdens. The Income Tax Act, 2025 aims to modernise the structure of the law, improve clarity, and enhance ease of compliance.
Alongside the new legislation, simplified Income Tax Rules and redesigned return forms are proposed to give taxpayers and stakeholders adequate time to familiarise themselves with the revised provisions. The redesigned return forms are intended to be more user-friendly and structured to enable individual taxpayers to comply with minimal difficulty. However, as of early February 2026, the new Income Tax Rules and forms had not yet been notified, indicating that procedural implementation will follow legislative enactment.
Direct Tax Rates: Continuity in Structure
For Assessment Year 2026–27, the slab structure for individuals and specified entities remains unchanged. Individuals, Hindu Undivided Families, Associations of Persons (other than co-operative societies), Bodies of Individuals (whether incorporated or not), and artificial juridical persons referred to under the Act are required to pay tax at the following rates:
Income up to ₹4,00,000 is exempt from tax. Income between ₹4,00,001 and ₹8,00,000 is taxed at 5 per cent. Income from ₹8,00,001 to ₹12,00,000 is taxed at 10 per cent. Income between ₹12,00,001 and ₹16,00,000 attracts 15 per cent tax. Income from ₹16,00,001 to ₹20,00,000 is taxed at 20 per cent. Income from ₹20,00,001 through ₹24,00,000 will be taxed at 25% and income over ₹24,00,000 will be taxed at 30%.
The income tax bracket rates have not changed for the 2026–27 taxation year, providing stability for taxpayers. The 4% Health and Education Cess continues on all amounts of income tax calculated, plus surcharge, if applicable. No marginal relief is available in respect of this cess, thereby maintaining its uniform application.
The old tax regime continues to remain available as an optional alternative. However, it is indicated that the old regime is intended to function as a transitional option rather than a preferred long-term framework.
Corporate and Business Taxation
The tax rates applicable to business entities remain consistent. Partnership firms continue to be taxed at 30 per cent. Domestic companies with turnover less than ₹400 crores in FY 2024-25 are taxed at 25 per cent. Other domestic companies are taxed at 30 per cent. Companies other than domestic companies are taxed at 35 per cent. The absence of rate changes indicates a policy choice favouring predictability over short-term fiscal stimulus through rate modification.
Strengthening Compliance: Audit and Return Filing Discipline
One of the major highlights of this year’s Budget is the strengthening of compliance obligations. Companies that generate revenue in excess of ₹1 Crores and professionals who have generated revenue in excess of ₹50 Lakhs must file tax audits signed by Chartered Accountants. The deadline for submitting the tax audit is September 30. If there is a one-day delay, there is a penalty of ₹75,000 and if the delay exceeds one month, the penalty will be ₹150,000. There is a clear policy shift towards tighter enforcement of calendar compliance deadlines.
The due dates for filing income tax returns are clearly structured. Returns subject to transfer pricing audit must be filed by 30 November. Returns requiring tax audit must be filed by 31 October. Taxpayers with business or professional income not liable to audit must file by 31 August, while all other taxpayers must file by 31 July. Belated returns may be filed up to 31 December, and original or belated returns may be revised up to 31 March. Where returns are filed after 31 December, a late fee of ₹1,000 applies if total income does not exceed ₹5,00,000, and ₹5,000 applies where income exceeds ₹5,00,000.
Additionally, updated returns with reduced loss are now permitted. Previously, updated returns could not be filed if they declared a loss. The amendment now allows filing of updated returns with a reduced loss compared to that declared in the original return.
ESI and PF Contributions: Relaxation in Deduction Conditions
Under the earlier framework, employee contributions to welfare funds such as ESI and PF were required to be deposited before the statutory due date each month for the amount to be claimable as an expense. The amended position allows the employer to claim deduction if the employee contribution is deposited before the due date of filing the income tax return. This brings greater alignment between payroll compliance and income tax deduction rules.
Lower or Nil Deduction Certificates and TAN Simplification
The issuance of lower or nil deduction certificates, which was previously dependent upon officer verification and discretion, has now become rule-based. This removes subjective approval processes and introduces greater procedural certainty.
Further, resident individuals and Hindu Undivided Families purchasing immovable property from non-residents are no longer required to obtain a Tax Deduction and Collection Account Number (TAN) for the purpose of deducting tax at source in such transactions. This reduces compliance burden in isolated transactions.
Minimum Alternate Tax Reform
Previously, where book profits exceeded income computed under the Act, Minimum Alternate Tax (MAT) at 15 per cent was levied on book profits. The MAT paid could be carried forward as credit and adjusted in subsequent years when regular tax liability exceeded MAT.
Under the revised framework, the MAT rate is reduced from 15 per cent to 14 per cent. However, the MAT credit mechanism is discontinued under the old regime. As a result, MAT paid becomes final tax liability, eliminating the carry-forward credit facility.
Tax Collected at Source (TCS) Modifications
With effect from 1 April 2026, several TCS rates have been revised. The rate for alcoholic liquor for human consumption has increased from 1 per cent to 2 per cent. TCS on tendu leaves has been reduced from 5 per cent to 2 per cent. Scrap and specified minerals such as coal, lignite and iron ore have seen an increase from 1 per cent to 2 per cent. Under the Liberalised Remittance Scheme, the rate for education and medical remittances exceeding ₹10 lakhs has been reduced from 5 per cent to 2 per cent. For overseas tour packages up to ₹10 lakhs, the rate has been reduced from 5 per cent to 2 per cent.
Taxation of Buybacks and Foreign Asset Disclosure
The taxation of buybacks has undergone structural change. Previously, buyback proceeds were taxed as dividend in the hands of investors, and the cost of acquisition was allowed as capital loss. The investor will be taxed on buybacks as capital gains under the new regulatory framework.
Taxpayers who own foreign assets that they failed to declare on their tax returns or who do not qualify for a tax payer’s exemption will be able to take advantage of a one-time tax disclosure opportunity that has been introduced for taxpayers who have foreign assets. The Taxpayer disclosure opportunity is intended to assist taxpayers comply with their tax obligations.
The international taxation, non-resident taxpayer, and foreign corporation changes highlighted in the budget demonstrate a coordinated approach to cross-border taxation issues. The inclusion of a separate section in the budget for international taxes reflects the recognition that India will continue to grow as a part of the global economy.
GST Reform
Structural clarifications and export facilitation for GST have been accomplished via significant changes in the GST structure. The requirement to link post-supply discounts under CGST to pre-existing agreements has been removed from Section 15(3). Post-supply discounts will not be considered part of the value-supply if the supplier issues a credit note and the recipient reverses the input tax credit based on the credit note, so long as they comply with applicable law.
Changes to Section 34 make it clear that post-supply discounts are valid reasons for issuers of credit notes. This will provide greater certainty than previously.
The provision relating to provisional refunds has been expanded. Previously, provisional refund of up to 90 per cent was generally allowed only for zero-rated supplies. The amendment extends provisional refund to cases involving inverted duty structure refunds, improving liquidity for taxpayers.
Prior to now, refunds for claims under ₹1,000 were generally not accepted. However, this may no longer be true with respect to exports of goods (including tax) for small amounts inclusive of tax. Exporters will be able to claim refunds of small amounts from the Government as well.
Another important change is regarding intermediaries. The removal of the specific provisions regarding intermediaries allows for the determination of the place of supply to intermediate services to follow the standard rules and be based on the location of the recipient. Consequently, intermediary services supplied to foreign recipients now qualify as export of services and become zero-rated. Conversely, intermediary services received from foreign suppliers qualify as import of services and are subject to tax under reverse charge.
Finally, until the constitution of the National Appellate Authority for Advance Ruling, the Government may empower an existing authority, including a Tribunal, to hear appeals in such matters. This amendment becomes effective from 1 April 2026.
Conclusion
The Union Budget 2026–27 represents a comprehensive restructuring of India’s tax framework. It replaces a six-decade-old income tax statute, reinforces compliance discipline, rationalises TCS rates, modifies MAT treatment, introduces disclosure mechanisms, and undertakes targeted GST reforms to clarify valuation, facilitate refunds, and enhance export competitiveness.
Rather than focusing on rate reductions, the Budget emphasises structural clarity, administrative efficiency, and procedural certainty. The cumulative effect is a tax framework that seeks simplification while simultaneously tightening compliance and aligning domestic taxation with evolving economic realities.
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