Budget 2026 tightens compliance, simplifies IT taxation, extends ITR revision window

The Union Budget for 2026–27 introduces a broad overhaul of India’s direct tax framework, combining compliance relief for taxpayers with sharper penalties and simplified rules for the technology sector. Finance Minister Nirmala Sitharaman on February 1 announced measures ranging from extended timelines for revising income-tax returns to significant changes in the taxation of IT services, cloud computing, and share buybacks.

As part of taxpayer-friendly reforms, Sitharaman said individuals will get additional time to revise their income-tax returns, with the deadline extended till March 31, subject to payment of a nominal fee. However, she clarified that the existing filing timelines for ITR-1 and ITR-2 will remain unchanged at July 31, maintaining certainty for regular filers.

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At the same time, the Budget adopts a tougher stance on tax non-compliance. The finance minister said misreporting of income will now attract a penalty equal to 100% of the tax due, signalling stricter enforcement. She also announced that non-disclosure of certain asset, currently not subject to penalties, will now be brought within the penal framework.

In a move aimed at widening the tax net while offering a one-time relief window, Sitharaman announced a six-month foreign asset disclosure scheme targeted at small taxpayers. The scheme will allow limited-time disclosures of overseas assets. Separately, the government will introduce tax deducted at source (TDS) on the sale of immovable property by non-residents, tightening oversight on cross-border property transactions.

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The Budget also proposes changes under the new tax regime for cooperative societies. Sitharaman said inter-cooperative society dividend income will be allowed as a deduction to the extent that such income is distributed onward to members, providing targeted relief to the sector.

A major set of announcements focused on simplifying tax treatment for India’s technology and services industry. The finance minister said IT services, IT-enabled services (ITeS), knowledge process outsourcing (KPO), and contract R&D linked to software development will be grouped under a single category of Information Technology Services. These activities will be covered under a common safe harbour framework, reflecting their interconnected nature.

To support this consolidation, Sitharaman announced a uniform safe harbour margin of 15% for these services. She also said the threshold for opting into the safe harbour regime will be increased substantially from ₹300 crore, and the process will shift to an automated, rule-based system with no requirement for tax officer examination. Once opted in, companies will be able to continue under the same safe harbour for up to five consecutive years.

In a long-term policy signal for the digital economy, the finance minister proposed a tax holiday till 2047 for foreign companies providing cloud services to Indian customers. The incentive will apply to firms that route global cloud services through data centres located in India, with a requirement to serve Indian customers via an Indian reseller entity. Sitharaman also said the government aims to conclude advance pricing agreements (APAs) for IT services companies within two years, reducing uncertainty in transfer pricing.

The Budget also alters the tax treatment of corporate actions. Sitharaman announced that share buybacks will now be taxed as capital gains across all categories of shareholders, aligning buybacks with other forms of equity income and ending differential treatment.