Union Budget, 2026 was presented by Hon’ble Finance Minister on 1st February, 2026  wherein various new reforms were proposed in direct taxes as well as Indirect Tax. The New Income tax Act, 2025 will come into effect from April 2026. Also the simplified Income Tax Rules and Forms will be notified shortly. Further, Various changes proposed by the 56th GST Council meeting has been proposed to incorporate in GST Law. various TCS rates have been reduced such as the TCS on Overseas tour program package and amount remitted under LRS for medical and education purposes.

This article contains the various amendments proposed by the Union Budget, 2026 under Direct tax and Indirect Taxes:

A. Amendment under Direct Tax

1. Personal Tax:

A. Income to be exempted:

Union Budget, 2026 has proposed to exempt following incomes:

1.1 Interest on compensation awarded under Motor Vehicle Act:

• After making the Insurance Policies exempted under GST, the Union Budget has made a step further toward building a citizen centric insurance eco-system by exempting the interest on compensation rewarded by Motor Accident Claims tribunal.
• So far, interest on compensation under motor vehicle act is liable to TDS as well as Income Tax.
• Union budget has proposed to exempt interest income on motor accident claims and also remove the requirement to deduct TDS on such interest amount.

1.2 Capital Gain on Redemption of RBI Bonds are limited to original Holders

• Presently, Transfer of Sovereign Gold Bond issued by the RBI under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an individual is not considered as transfer. Therefore, the same is not liable to tax.
• However, Union Budget has limited such benefits to  the individual holding such bonds from the date of original issue till maturity.

B. No TAN required for deduction of TDS on transfer of immovable property to Non-residents

• Presently, an Individual or HUF is required to obtain TAN if TDS is to be deducted on transfer of an immovable property to a non-resident.
• Union budget has removed the requirement of obtaining TAN.
• Therefore, the TDS can be deducted and deposited without obtaining any TAN.
• The provisions shall come into effect from 01.10.2026.

C. Foreign Assets of Small Taxpayer Disclosure Scheme, 2026

• The Union budget, 2026 has introduced a new scheme for the small taxpayers to disclose their foreign Income and Assets.

• Under this scheme disclosure can be made by any person, on or after the date of commencement of this Scheme, for any previous year, in respect of foreign income or asset where:

1. He has failed to furnish a return under section 139 of the Income-tax Act, 1961; or 
2. he has failed to disclose such asset or income before the date of commencement of this Scheme; or
3. such asset or income has escaped assessment within the meaning of section 147 of the Income-tax Act, 1961. 

• Amount payable while filing declaration:

The Declaration shall be made subject to payment of following amount:

• Immunity from prosecution from penalty and prosecution. 
  
  • Where a declarant makes a valid declaration under this Scheme and pays applicable amount shall be granted immunity from the levy of any further tax or penalty and also from prosecution under the said Act in respect of income or asset so declared, for the previous year ending on the 31st March, 2026 or any earlier previous year. 

• Effective date of the scheme is yet to be notified by the Government.

2. Corporate Tax

A. Income Tax on Buyback of shares:

• Presently, Profit arising on buyback of shares is taxed as:

1. Dividend Income;
2. Capital Loss as difference between cost of acquisition and sales consideration (considered as NIL).

• However, amendment is made in Section 69 of Income Tax Act, 2025 (2025 Act) has provided that such profit shall not be considered as Dividend Income and shall be taxed as capital gain only.

B. Additional Income Tax on buyback of shares of promoter:

• Presently, income tax treatment is the same on buy of shares of promoters and non-promoter.

• However, as per Section 69 of 2025 Act, in additional to capital gain tax, promoters are required to pay following additional tax:

• Promoter means:
  
  • In case of Listed Companies: same meaning as assigned to it in regulation 2(k) of the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018;
  • For other companies:  “promoter” as defined in section 2(69) of the Companies Act, 2013 or a person who holds, directly or indirectly, more than 10% of the shareholding in the company;  

C. Rationalisation of MAT Provisions (Section 206 of 2015 Act and Section 115JAA of 1961 Act):

• Rate of Minimum Alternate Tax has been reduced from 15% to 14%.

• In case of domestic companies, MAT credit carried forward under provisions of Section 115JAA of the 1961 Act as on 31.03.2026:
  
  • Such carried shall be allowed only to the domestic companies opting for new tax regime on or after 01.04.2026;
  • Such credit shall be allowed to be set off in any tax year only to the extent of 25% of the tax payable for that tax year;
  • the remaining credit shall be carried forward to the subsequent tax year;
  • Carry forward or set off shall not be allowed beyond the 15 tax year immediately succeeding the tax year in which the tax credit first became allowable under section 115JAA of the Income-tax Act, 1961

• In case of foreign companies, setoff of MAT Credit shall be allowed to the extent of difference between the tax on total income and the MAT for the tax year in which normal tax is more than MAT.

D. Change in TCS Rate:

Following TCS rates are changed under Section 394 of the 2025 Act:

E. Clarification on TDS Rates:

• Supply of manpower to a person to work under his supervision, control or direction shall be classified as work and TDS shall be applicable as “payment to contractors”.

• The guidelines issued by the CBDT to remove difficulties in giving effect to the provisions of TDS/TCS would be binding on the Income Tax Authority and on the person liable to deduct/ collect TCS.

3. Change in due date of Filing of Income Tax Return

A. Extended time limit of filing of Income Tax Return

B. Time Limit of filing of revised return

• Presently, taxpayers are allowed to file revised ITR upto 9 months from the end of the financial year.
• Union budget has proposed to increase the time limit of filing of revised return upto 12 months from end of Financial year.

C. Option to file updated return

Union Budget has proposed to provide the option of filing updated ITR in following case:

1. Where original return is filed with loss and updated return has the effect of reducing losses or report income.
2. Where reassessment proceedings are initiated and additional tax payable will be increased by a further sum of 10% of aggregate tax liability

4. Security Transaction Tax

Security Transaction tax has been increased on future and options with effect from 01.04.2026 to following extent:

5. Other Amendments

A. Reduction in amount of pre-deposit

• The quantum of pre-payment prior to appeal has been reduced from 20% to 10%

B. Assessment Proceedings

• Assessment & penalty proceedings will be integrated by way of a common order for both.
• Reassessment notice issued by the AO shall be valid. Notice is not required to be issued through NaFAC.
• Normal assessment time limits do not apply to assessments referred to DRP. Instead, such assessments must be completed within the specific time limit prescribed for DRP cases
• Non-quoting of a computer-generated DIN shall not render the assessment invalid.
• Penalty orders for under-reporting or mis-reporting of income is to be included in the draft assessment / assessment / reassessment order passed on or after 1 April 2027

C. Other Amendments:

• Interest expenditure incurred for earning dividend income or income from units of mutual funds shall not be allowed as deduction.
• Tax on unexplained cash credits, investments, assets, expenditure etc. is rationalised by reducing existing rate of 60% to 30% subject to penalty provisions.

B. Amendment under Indirect Tax

1. Post Sales Discount are not to be linked to invoices

• Presently, as per Section 15)(3)(b) of the Act, the discount shall not be included under taxable value is such discount is linked against the agreement entered into at or before the time of such supply and specifically linked to invoices.

• However, Union budget has proposed to remove the condition of linking discounts to the relevant invoices and agreements.

• E.g. Earlier, annual gross discounts were not eligible for reversal of GST output. However, Union budget has allowed to reverse GST output Tax liability against such invoices

2. Amendment of GST refund provisions related to Inverted Duty Structure

• Section 54(6) of the Act has been amended to incorporate that a provisional refund of 90% shall also be provided in case of refund under IDS.

• The Union budget has proposed to remove conditions of minimum refund amount of INR 1000.

• The effective date of change is yet to be notified.

3. National Appellate Authority for Advance Ruling.

• Section 101A contains the provisions related to the constitution of the National Appellate Authority for Advance Ruling.

• In the absence of National AAAR, the Union budget has provided that till the Appellate Authority is constituted, the Government may empower any existing Authority to hear appeals made under section 101B of the Act.

• In such case, provisions of Section 101A(2) to (13) of the Act;

4. Place of supply for “Intermediary Services”

• Presently, as per section 13(8)(b) of the Act, Place of Supply against “Intermediary Services” is the location of the service provider. Therefore, intermediary services provided to the recipient located outside India shall not be considered as “Export of Service” as location of service provider and Place of supply is in India.

• However, In line with the recommendation of the GST Council, the Union Budget has proposed to remove the clause of place of supply for intermediary services.

• Therefore, place of supply for Intermediary services shall be the Location of Recipient and Services provided outside India shall now qualify as “Export of Service”

Conclusion

The Union Budget 2026 proposes significant reforms under the new Income Tax Act, 2025 (effective April 2026) to simplify compliance and rationalise taxation. Key direct tax changes include exemption of interest on motor accident compensation, reduction in selected TCS rates revised taxation of share buybacks as capital gains, lower MAT rate (15% to 14%), extended ITR filing timelines, and introduction of a Foreign Assets Disclosure Scheme offering immunity on voluntary disclosure.

On the indirect tax front, the Budget focuses on GST simplification by allowing post-sale discounts without strict invoice linkage. Further, granting 90% provisional refunds to IDS and revised place of supply for intermediary services shall be relief for the taxpayers. Overall, the reforms aim to enhance ease of compliance, reduce litigation, and promote a transparent and growth-oriented tax regime.