Union Budget 2026–27: FM Sitharaman brings major TDS, TCS relief and compliance ease for taxpayers

Union Finance Minister Nirmala Sitharaman on Saturday announced sweeping changes to India’s income tax framework, with a strong emphasis on easing TDS and TCS compliance, reducing litigation and improving ease of living for taxpayers.

Presenting the Union Budget 2026–27 in Parliament, Sitharaman said the comprehensive review of the Income Tax Act, 1961, announced in July 2024, has been completed in record time. The Income Tax Act, 2025 will come into force from April 1, 2026. She added that simplified income tax rules and redesigned forms will be notified shortly, giving taxpayers adequate time to familiarise themselves with the new system. The redesigned forms, she said, will enable ordinary citizens to comply without difficulty.

Key TDS and TCS Relief for Taxpayers

As a major relief measure, Sitharaman announced that interest awarded by the Motor Accident Claims Tribunal (MACT) to natural persons will be fully exempt from income tax, and no TDS will be deducted on such interest.

To reduce the tax burden on overseas spending, the Finance Minister proposed to cut the TCS rate on overseas tour packages to 2 per cent, from the existing 5 per cent and 20 per cent slabs, without any threshold condition.

She also announced a reduction in the TCS rate under the Liberalised Remittance Scheme (LRS) for education and medical purposes from 5 per cent to 2 per cent, providing relief to students and families.

To remove ambiguity, Sitharaman said manpower supply services will be explicitly included within the definition of payments to contractors for TDS purposes. Consequently, TDS on such services will be levied at only 1 per cent or 2 per cent, depending on the category.

Easier Compliance for Small and Individual Taxpayers

The Finance Minister proposed a rule-based, automated scheme for small taxpayers to obtain lower or nil TDS certificates, eliminating the need to apply to the assessing officer.

For investors holding securities across multiple companies, she announced that depositories will be allowed to accept Form 15G and Form 15H from investors and share them directly with the relevant companies, simplifying the process.

Sitharaman also proposed extending the deadline for revising income tax returns from December 31 to March 31, subject to payment of a nominal fee.
To ease the filing burden, return-filing timelines will be staggered. Individuals filing ITR-1 and ITR-2 will continue to file returns till July 31, while non-audit business cases and trusts will be allowed time till August 31.

In another compliance simplification, TDS on the sale of immovable property by non-residents will now be deducted and deposited through the resident buyer’s PAN-based challan, removing the requirement to obtain a TAN.

Relief for Students, Young Professionals and NRIs

Addressing practical challenges faced by students, young professionals, technology employees and relocated NRIs, Sitharaman announced a one-time six-month foreign asset disclosure scheme for taxpayers with income or assets below specified thresholds.

The scheme will cover two categories:

•    Category A: Taxpayers who did not disclose overseas income or assets, with the undisclosed amount capped at Rs 1 crore. Such taxpayers will pay 30 per cent tax on the fair market value of the asset or undisclosed income, along with 30 per cent additional income tax in lieu of penalty, and will receive immunity from prosecution.
•    Category B: Taxpayers who disclosed overseas income and paid due tax but failed to declare the acquired asset, with asset value up to Rs 5 crore. They will receive immunity from both penalty and prosecution on payment of a Rs 1 lakh fee.

Penalty and Prosecution Rationalised

To reduce litigation and improve ease of doing business, Sitharaman announced that assessment and penalty proceedings will be integrated into a single order. There will be no interest liability on penalty amounts during the pendency of appeals before the first appellate authority, irrespective of the outcome.

The pre-payment requirement for filing appeals has been reduced from 20 per cent to 10 per cent, calculated only on the core tax demand.

As an additional litigation-reduction measure, taxpayers will be allowed to update returns even after reassessment proceedings begin, by paying an additional 10 per cent tax over the applicable rate. The assessing officer will rely solely on the updated return for proceedings.

The Finance Minister said the existing framework for immunity from penalty and prosecution in cases of underreporting will now be extended to misreporting, subject to payment of 100 per cent additional tax over and above tax and interest due.

Penalties for technical defaults—such as failure to get accounts audited, non-furnishing of transfer pricing audit reports and non-filing of statements of financial transactions—will be converted into fees.

Sitharaman also announced the rationalisation of the prosecution framework under the Income Tax Act. Non-production of books of account, failure to pay TDS where payment is made in kind, and other minor offences will be decriminalised, attracting only fines. Remaining prosecutions will be graded based on the seriousness of the offence, with maximum imprisonment reduced to two years, and courts empowered to convert imprisonment into fines.
In another relief measure, Sitharaman said taxpayers with non-immovable foreign assets valued below Rs 20 lakh will be granted immunity from prosecution with retrospective effect from October 1, 2024, as no penalty currently exists for non-disclosure of such assets.