Finance Bill 2026: Mandatory Fees Replace Discretionary Penalties Under the Income-tax Act, 2025

The Finance Bill, 2026 marks a decisive shift in India’s income-tax compliance framework. One of the most significant reforms proposed is the replacement of discretionary penalties with fixed, mandatory fees for certain procedural defaults under the Income-tax Act, 2025, effective from 1 April 2026 (Assessment Year 2026-27 onwards).

This change aims to bring certainty, transparency, and predictability to tax compliance, especially in cases relating to tax audit reports and return filing delays.


End of Discretionary Penalties: What Has Changed?

Under the existing Income-tax Act, 1961, penalties for defaults such as delayed filing of audit reports were often discretionary, leading to litigation and inconsistent outcomes.

The Income-tax Act, 2025, read with the Finance Bill, 2026, introduces a fee-based regime, where the consequences of non-compliance are clearly quantified and non-negotiable.


Fixed Fees for Tax Audit Report Defaults

Section 428(c) – Income-tax Act, 2025

One of the most impactful changes relates to delay in furnishing tax audit reports.

🔹 Old Provision (Section 446 – IT Act, 1961)

  • Penalty: Lower of
    • 0.5% of turnover/gross receipts, or
    • ₹1,50,000
  • Nature: Discretionary, subject to reasonable cause and litigation

🔹 New Provision (Section 428(c) – IT Act, 2025)

The penalty is replaced with a mandatory fixed fee, depending on the period of delay:

Period of Delay Fee Payable
Up to 1 month ₹75,000
Beyond 1 month ₹1,50,000

✅ Key Takeaway:

  • The fee is flat, irrespective of turnover or income.
  • No discretion, no percentage-based calculation, and minimal scope for disputes.

Fees for Filing Income-tax Returns: New Regime Explained

The Finance Bill, 2026 also rationalizes fees for late filing and revised returns, categorizing them based on income thresholds.


Fee for Default in Filing Original Return

Section 428(a)

Scenario: Failure to file the return of income by the due date under Section 263(1).

Total Income Fee Payable
Up to ₹5 lakh ₹1,000
Above ₹5 lakh ₹5,000

🔍 This provision ensures proportionality by protecting small taxpayers while enforcing discipline among higher-income earners.


Fee for Filing Revised Return (Delayed Window)

Section 428(b)

Scenario: Revised return filed after 9 months but before 12 months from the end of the relevant tax year.

Total Income Fee Payable
Up to ₹5 lakh ₹1,000
Above ₹5 lakh ₹5,000

📌 This is a newly structured compliance fee, encouraging timely corrections rather than prolonged delays.


Consolidated Summary of the New Fee Structure

Scenario Income ≤ ₹5 Lakh Income > ₹5 Lakh
Audit Report – Delay up to 1 month ₹75,000 ₹75,000
Audit Report – Delay beyond 1 month ₹1,50,000 ₹1,50,000
Revised Return (9–12 months window) ₹1,000 ₹5,000
Default in Original Return ₹1,000 ₹5,000

Applicability and Effective Date

  • Applicable fromTax Year 2026-27 onwards
  • Effective date1 April 2026
  • Governed by the Income-tax Act, 2025, as amended by the Finance Bill, 2026

Why This Change Matters

✅ Greater Certainty

Taxpayers now know exactly what they will pay for a default—no estimates, no discretion.

✅ Reduced Litigation

Fixed fees significantly reduce disputes around “reasonable cause” and penalty waivers.

✅ Stronger Compliance Culture

High fixed fees for audit defaults act as a serious deterrent, especially for businesses and professionals.

⚠️ Increased Compliance Responsibility

With discretion removed, even genuine delays can be costly—timely compliance becomes critical.


Final Thoughts

The Finance Bill 2026 signals a clear policy intent: move away from subjective penalties and towards a rule-based compliance ecosystem. While this simplifies administration and reduces litigation, it also places a greater onus on taxpayers, auditors, and consultants to strictly adhere to statutory timelines.

As the new Income-tax Act, 2025 comes into force, proactive compliance planning will no longer be optional—it will be essential.

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