Budget 2026: Key Compliance Relief Measures – Penalties Rationalised into Fixed Fees
One of the most taxpayer-friendly reforms announced in Union Budget 2026 is the restructuring of penalties for procedural and technical defaults under the Income-tax Act. In a significant move to reduce litigation and promote ease of compliance, several discretionary penalties have been replaced with mandatory and predictable fee structures.
The Government has acknowledged that penalties imposed for minor delays—especially where there is no revenue loss or mala fide intent—often result in avoidable disputes. To address this concern, Budget 2026 proposes converting select penalties into fixed or graded fees, thereby bringing certainty, transparency, and fairness into the tax administration framework.
These amendments will come into force from 1 April 2026 and will apply from Tax Year 2026-27 onwards.
1. Tax Audit Delay: Penalty Replaced with Mandatory Fee (Earlier Section 446)
Earlier Position (Before Budget 2026)
Previously, failure to get accounts audited or to furnish the audit report as required under the Act attracted a discretionary penalty under Section 446. The Assessing Officer could levy a penalty equal to the lower of:
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0.5% of total sales / turnover / gross receipts, or
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₹1,50,000
Due to its discretionary nature, even marginal or unintentional delays frequently became subject to prolonged litigation.
Amendment Proposed in Budget 2026
To remove ambiguity and reduce disputes, Budget 2026 proposes to:
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Omit the penalty provision under Section 446, and
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Introduce a mandatory fee mechanism under the proposed Section 428(c).
New Fee Structure for Audit Delay
The new framework adopts a graded fee model, independent of turnover:
| Nature of Delay | Applicable Fee |
|---|---|
| Delay up to the specified period | ₹75,000 |
| Delay beyond the specified period | ₹1,50,000 |
🔹 The fee is non-discretionary, ensuring uniform treatment across cases.
Important Clarification:
While Section 446 has been removed for tax audit defaults, it has been repurposed to cover penalties related to non-furnishing or furnishing inaccurate information in respect of crypto-asset transactions.
2. Transfer Pricing Audit Report: Shift from Penalty to Fee (Earlier Section 447)
Earlier Provision
Non-submission of the accountant’s report for international or specified domestic transactions under Section 172 earlier attracted a fixed penalty of ₹1,00,000 under Section 447.
Proposed Change
Budget 2026 proposes to:
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Replace the penalty with a mandatory fee, and
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Relocate the provision to Section 428(4).
Revised Graded Fee Structure
| Period of Delay | Applicable Fee |
|---|---|
| Short-term delay | ₹50,000 |
| Extended delay | ₹1,00,000 |
This change introduces proportionality, ensuring that minor procedural lapses are not treated at par with prolonged non-compliance.
3. Statement of Financial Transactions (SFT): Penalty Converted into Fee (Section 454(1))
Earlier Position
Failure to furnish the Statement of Financial Transactions or reportable account earlier attracted a penalty of:
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₹500 per day, for each day of default
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No certainty on the total financial exposure
Budget 2026 Proposal
The Government proposes to:
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Convert this penalty into a mandatory fee, and
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Shift the provision to Section 427(3).
This reflects a clear policy shift—treating reporting delays as compliance lapses rather than offences.
4. Relief by Capping Penalty for Continued SFT Default (Section 454(2))
Earlier Provision
Where non-compliance continued even after issuance of notice, a penalty of:
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₹1,000 per day
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No maximum limit
could be imposed, often leading to disproportionate demands.
Proposed Rationalisation
Budget 2026 introduces a much-needed safeguard by:
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Capping the penalty at ₹1,00,000 under Section 454(2)
This ensures fairness and prevents excessive penal exposure in prolonged technical defaults.
5. Policy Intent Behind the Amendments
The underlying objectives of these reforms are clear:
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To reduce litigation arising from technical and procedural lapses
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To replace discretionary penalties with certain and predictable fees
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To eliminate arbitrary assessments by tax authorities
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To strengthen India’s trust-based and taxpayer-friendly tax regime
6. Effective Date and Applicability
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Effective from: 1 April 2026
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Applicable for: Tax Year 2026-27 onwards
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Defaults pertaining to earlier tax years will continue to be governed by the existing provisions.
Summary: Penalties Replaced with Fees (Budget 2026)
| Nature of Default | Earlier Penalty | New Fee (Applicable from AY 2026-27) |
|---|---|---|
| Failure to get accounts audited | Lower of 0.5% of turnover or ₹1,50,000 | ₹75,000 / ₹1,50,000 (graded) |
| Failure to submit TP Audit Report | ₹1,00,000 | ₹50,000 / ₹1,00,000 (graded) |
| Failure to furnish SFT / Reportable Account | ₹500 per day (no cap) | Mandatory fee with cap of ₹1,00,000 |
| Failure to furnish information (earlier Sec 466) | ₹1,000 | Fixed fee of ₹25,000 |
📌 At etaxcare.in, we closely track such legislative changes to help taxpayers and professionals stay compliant with confidence. For practical guidance, implementation support, and expert assistance on Budget 2026 amendments, stay connected with us.
Budget 2026: Why Penalties Were Replaced with Fees
Tax Audit Delay: New Mandatory Fee Structure
Transfer Pricing Report: Graded Fees Explained
Statement of Financial Transactions (SFT): Key Changes
Who Will Benefit from These Amendments?
Effective Date & Applicability
Key Takeaways for Taxpayers and Professionals
Union Budget 2026 marks a decisive shift towards a taxpayer-friendly compliance framework. By replacing discretionary penalties with fixed and graded fees for procedural defaults, the Government aims to reduce litigation, ensure certainty, and promote a trust-based income-tax regime from AY 2026-27 onwards.