Budget 2026 announced no interest liability on the taxpayer, on the tax penalty amount for appeal before CIT (A)

Budget 2026 has announced that racializing penalty and prosecution, multiplicity of proceedings are hindrance to the ease of doing business, thus the Finance Minister has proposed topropose to integrate assessment and penalty proceedings by way of a common order. For both, there will be no interest liability on the taxpayer, on the penalty amount for the period of appeal before the first appellate authority, irrespective of the outcome of appeal process.

Further, quantum of prepayment is being reduced from 20% to 10% and will continue to be calculated only on core tax demand as an additional measure for reducing litigation. I propose to allow taxpayers to up to to update their returns, even after reassessment proceedings have been initiated and an additional 10% tax rate over and above the rate applicable for the relevant year, the assessing officer will then use only this updated return in his proceedings. There is already a framework for immunity from penalty and prosecution in the cases of under reporting.

S. Sriram, Executive Partner, Lakshmikumaran & Sridharan Attorneys, says that the Budget 2026 proposes a meaningful reduction in the upfront cash outgo at the outset for taxpayers who contest a demand. At present, taxpayers typically pay 20% of the disputed tax to obtain a stay during the first appeal stage. There is also a dispute over whether the 20% of the pre deposit would be on the basic tax amount, or the total demand including tax and interest.


Sriram says: "In the budget 2026, it is proposed to halve this pre-payment requirement in case of appeal being pending before the first appellate authority, to 10%, and to compute it only on the “core tax demand”. This should improve liquidity, lower the cost of contest, and make appellate remedies more accessible. It should also discourage premature coercive recovery where issues are arguable and support the stated objective of reducing litigation. This amendment, being beneficial, may apply to pending litigation also."