No arrest by income tax recovery officer if you have failed to pay pending tax demands; amended Finance Bill 2026

One of the major taxpayer-friendly initiatives undertaken by the Ministry of Finance is to eliminate the authority of tax recovery officers to arrest individuals for recovering overdue tax payments.

According to the explanatory memorandum to the amended Finance Bill, 2026, the Income-tax Act, 1961 and the Income-tax Act, 2025 both provide that one of the methods available to the Tax Recovery Officer (TRO) to recover revenue is to arrest the taxpayer and detain them in prison. But now that power is being taken away.

The explanatory memorandum to Finance Bill, 2026 said: “It is proposed to do away with such power as other modes of recovery are considered sufficient.”


The amendment is proposed in Income-tax Act, 1961 and also Income-tax Act, 2025. The date of effectivity for Income-tax Act, 1961 shall be from March 30, 2026 and effectivity for Income-tax Act, 2025 shall be April 1, 2026.

Gopal Bohra, partner N. A. Shah Associates LLP said to ET Wealth Online that if a taxpayer fails to pay their taxes in time as per notice of demand raised by the Assessing Officer (AO), he may refer to the Tax Recovery Officer (TRO) to recover the dues. The TRO is empowered to issue a certificate specifying the amount of arrears payable.

Bohra says: "While the government has moved the amendment to eliminate coercive recovery measure such as arrest and detention, the TRO continues to have extensive powers to ensure effective recovery of tax arrears through attachment and sale of taxpayer’s movable and immovable property and appoint a receiver for the management of the taxpayer’s movable and immovable properties."

Bohra says that in addition to attachment and sale of movable and immovable properties, the TRO has several other measures to recover the tax arrears such as he may direct –

• Taxpayer’s employer to deduct the outstanding tax demand from salary payments and remit the same to the Central Government.
• any third party (such as debtor, tenant or client) who owes or may owe money to the taxpayer, or who holds funds on behalf of the taxpayer, to remit such amounts directly to the Central Government to the extent of tax arrears

Mihir Tanna, associate director, S.K Patodia LLP says: “A large number of writ petitions were filed before the Supreme Court inter alia challenging the validity of the statutory provisions conferring upon the tax officers the power to arrest persons.

These petitions were heard in early 2025 together under two broad categories dealing with powers of Customs Officers and Goods and Services Tax (GST) Officers under their respective enactments i.e. Customs Act, 1962 and the Central Goods and Services Tax Act, 2017. Hon'ble Supreme Court affirmed that tax officers can only exercise arrest powers to the extent permitted by statute.

According to Tanna, the Income tax act 1961 as well as Income tax 2025 does not confer upon the Income Tax officers power to arrest persons. However, part I of third schedule of Income Tax Act 1961 provides procedure of recovery of tax and Clause 4 provides that Tax Recovery officer (TRO) shall proceed to realise the amount by one or more mode (which includes - by arrest of the defaulter and his detention in prison).

Tanna says: "These provisions were included Rule 225 of Income Tax 2026 which were notified on 20th March 2026. After 5 days, amended finance bill 2026 was presented in Lok Sabha and amendment are are made in finance bill 2026 to do away with such power."