Budget 2026: New Income Tax Act 2025, TDS-TCS overhaul and compliance relief headline sweeping tax reforms

Union Budget 2026 marked a decisive shift in India’s tax policy, with Finance Minister Nirmala Sitharaman unveiling a wide-ranging reform package aimed at simplifying laws, reducing litigation and easing the compliance burden for individuals, businesses and non-residents. At the centre of the reforms is the Income Tax Act, 2025, which will come into force from April 1, 2026, replacing the six-decade-old Income Tax Act of 1961.

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Presenting the Budget in Parliament, Sitharaman said the new law has been drafted in record time and focuses on clarity rather than revenue extraction. The Act is revenue-neutral, with no changes to income tax rates or slabs, but reduces the number of sections by nearly half and removes layers of interpretational ambiguity that have accumulated over decades.

One of the most significant changes is the introduction of a single “tax year”, replacing the confusing distinction between assessment year and previous year. The redesigned income tax return forms will be notified shortly, with the government promising simpler language and layouts that allow ordinary taxpayers to comply without professional assistance.

Stability in personal taxation

For individuals, the government chose continuity over surprise. Income tax slabs remain unchanged, with taxpayers earning up to ₹12 lakh annually under the new tax regime generally paying no tax. For salaried employees, the ₹75,000 standard deduction pushes the effective tax-free threshold to ₹12.75 lakh.

At the same time, the compliance framework has been softened. The deadline to revise or update income tax returns has been extended from December 31 to March 31, subject to a nominal fee. Importantly, taxpayers will now be allowed to claim TDS refunds even if returns are filed after the due date, a long-standing grievance among small taxpayers.

Major TDS, TCS rationalisation

Budget 2026 delivered significant relief through a rationalisation of TDS and TCS provisions. The TCS rate on overseas tour programme packages has been slashed to 2%, down from the earlier 5% and 20%, with no minimum transaction threshold. Similarly, TCS under the Liberalised Remittance Scheme (LRS) for education and medical purposes has been reduced to 2%, easing cash-flow pressure on families sending money abroad.

To simplify withholding taxes, TDS on the supply of manpower services will be capped at 1% or 2%, benefitting labour-intensive businesses and MSMEs. Small taxpayers will also be able to obtain lower or nil deduction certificates through a rule-based automated process, eliminating the need for discretionary approvals.

Depositories will now be permitted to accept Form 15G and Form 15H centrally from investors holding securities across multiple companies, simplifying dividend and interest-related compliance.

Relief for NRIs and foreign asset disclosures

For non-resident Indians, the Budget removed a key pain point by allowing TDS on property purchases from non-residents to be deducted and deposited using the buyer’s PAN, eliminating the need to obtain a separate TAN for one-time transactions.

The government also announced a one-time six-month foreign asset disclosure window for small taxpayers, including students, professionals and NRIs, to voluntarily declare overseas income or assets below a specified threshold. Eligible cases will receive immunity from prosecution, reinforcing the government’s trust-based approach to compliance.

Decriminalisation and dispute reduction

A notable theme of Budget 2026 is the decriminalisation of procedural lapses. Non-production of documents, minor TDS failures and technical defaults have been taken out of the criminal framework, with penalties converted into fees in many cases. The scope of immunity from penalty and prosecution has also been expanded to cover certain misreporting cases on payment of additional tax.

To further reduce litigation, assessment and penalty proceedings are proposed to be integrated, and block assessments in search cases involving third parties have been restricted to a single year.

Corporate tax and buyback changes

On the corporate side, the government aligned share buyback taxation with the capital gains regime for all shareholders, while imposing an additional levy on promoters. The Minimum Alternate Tax (MAT) is proposed to be made a final tax, with limited set-off of MAT credit allowed under the new regime, improving certainty for companies transitioning to lower tax structures.

Customs and indirect tax relief

The Budget also delivered broad-based customs relief, including basic customs duty exemption on 17 cancer drugs, duty-free imports for additional rare disease treatments, and a single digital window for cargo clearance approvals. A Customs Integrated System is set to be rolled out over the next two years to streamline trade processes.

Taken together, the tax measures in Budget 2026 signal a clear policy direction: fewer disputes, simpler laws and predictable taxation. While the absence of major rate cuts may disappoint some, the government’s bet is that simplicity and certainty will ultimately deliver stronger compliance, deeper markets and sustained economic growth.