7 big income tax changes for 2026-27 that may reduce penalties for small mistakes

The Income Tax Act, 2025 and Income Tax Rules, 2026 which came in effect from April 1, 2026 for Tax Year 2026-27 made some changes. One notable change involves the penalty and prosecution provisions under the Income Tax Act.

Recently, there was a case in ITAT Chennai where an Indian employee faced a hefty penalty of Rs 10 lakh under Black Money Act simply for failing to report his ESOP shares in schedule FA in the income tax return (ITR). It's worth noting that the ESOP shares are already taxed. . This kind of situation is what the Budget 2026 aims to address. In the Budget 2026, the finance minister emphasized that ordinary people should not be heavily penalised for minor offences.

Also read: Good news: Immunity from penalty or prosecution in income tax under-reporting cases has been expanded in these cases: Budget 2026 announcement

Changes made in penalty and prosecution provisions

According to Chartered Accountant Naveen Wadhwa, vice-president, Taxmann, says that the law has introduced several important changes to the provisions related to penalties and prosecutions under the Income-tax Act. Here is a summary of the key amendments:

1. It is proposed that immunity from penalty and prosecution will be available even in cases of misreporting of income if the taxpayer pays tax, interest, and additional tax in lieu of penalty and does not file an appeal. The additional tax will be 100% of the tax in general misreporting cases and 120% in unexplained income cases.
2. Prescribed entities must accurately report crypto-asset transactions, failing which penalties will apply. A penalty of Rs 200 per day is proposed for non-furnishing of the statement, and a flat penalty of Rs 50,000 for inaccurate reporting or failure to correct errors.
3. From October 1, 2024, prosecution under the Black Money Act will not apply to minor foreign asset non-disclosures. If the aggregate value of foreign assets (excluding immovable property) does not exceed Rs 20 lakh, prosecution under Sections 49 and 50 will not be initiated.
4. Prosecution provisions under the ITA are significantly rationalised and softened, with rigorous imprisonment largely replaced by simple imprisonment, reduced jail terms, and graded punishment based on tax amounts (Rs 10 lakh / Rs 50 lakh thresholds). Several defaults (such as certain TDS/TCS failures) are partly decriminalised; many offences now attract fine-only penalties for smaller amounts; and corresponding relief-oriented amendments are also made to the ITA 1961 to reduce the harshness of litigation and prosecution.
5. Several penalties are being converted into fixed fees to reduce litigation and bring certainty, such as audit default, TP report delay, and non-filing of SFT. Additionally, the penalty for non-cooperation during tax information surveys is enhanced to Rs. 25,000 from Rs 1,000 (effective April 1, 2026).
6. From April 1, 2026, penalty proceedings will be merged with assessment proceedings, and the opportunity of a hearing will be given through a show-cause notice. For assessments/reassessments made on or after April 1, 2027, penalties for under-reporting/misreporting will be included in the assessment order itself, with Joint Commissioner approval covering both assessment and penalty.
7. From April 1, 2026, no interest will be charged on penalty demands for under-reporting or misreporting of income while the appeal is pending. Interest will remain suspended up to the date of the order passed by the CIT(A)/JCIT(A) or the ITAT, as applicable.