Got Income Tax Notice or Facing Scrutiny? Budget 2026 Brings Relief Through Revised & Updated ITR, and Immunity from Prosecution:

Got Income Tax Notice or Facing Scrutiny? Budget 2026 Brings Relief Through Revised & Updated ITR, and Immunity from Prosecution Over the past year, a growing number of salaried taxpayers have received income tax notices triggered by data mismatches flagged through AIS, TIS and the Income-tax Department’s NUDGE programme. With banks, employers, mutual funds and even foreign jurisdictions sharing detailed financial data, even small errors have resulted in scrutiny, reassessment, and penalty exposure. Budget 2026 seeks to reduce this stress by expanding timelines for revised returns, permitting updated returns even after reassessment notices, and introducing a more practical immunity framework to close disputes without harsh penalties or prosecution. With data analytics tightening the tax net, salaried taxpayers are increasingly under pressure. Information from employers, banks, mutual funds, registrars, and foreign jurisdictions now gives the Income Tax Department a near-complete picture of an individual’s financial activity. As a result, even minor mismatches, wrong HRA claims, excess deductions under Section 80C, or missed interest income, are quickly picked up. Many taxpayers have ignored NUDGE emails, discovered mistakes after revision deadlines had passed, or found themselves facing scrutiny or reassessment notices for earlier years. Under the existing law, such errors are often treated as misreporting of income, attracting penalties of up to 200% of the tax payable, along with interest and the risk of prosecution. Recognising this growing compliance stress, the Finance Bill, 2026, introduces a series of taxpayer-friendly changes aimed at encouraging voluntary correction rather than fear-driven enforcement. More Time to Fix Mistakes: Extended Window for Revised Returns From 1 March 2026, a revised return under Section 139(5) can be filed up to the end of the relevant assessment year. This replaces the current deadline of three months before the end of the assessment year. A modest fee is proposed under new Section 234I-Rs. 1,000 where the total income does not exceed Rs. 5 lakh, and Rs. 5,000 in other cases. Why it matters For AY 2025-26, taxpayers effectively get time until 31 March 2026 to correct mistakes. This extension is especially helpful for those who reconcile Form 16 with AIS/TIS data late or receive NUDGE alerts after the earlier revision window had closed. It allows taxpayers to fix genuine errors and avoid harsh penalties and unnecessary notices. Even After Reopening Notices: Updated Returns Get a Wider Scope Until now, updated returns under Section 139(8A) were not allowed once reassessment proceedings had begun through a notice under Section 148. This restriction often pushed taxpayers into prolonged disputes. Key relaxations From 1 March 2026, taxpayers can file updated returns even after receiving a reassessment notice under Section 148. Where such notice has been issued but the time for filing a response has not expired as on 1 March 2026, the taxpayer can opt for an updated return. For notices issued on or after that date, updated returns will be permitted within the time allowed in the notice. Practical impact This change transforms reassessment from an adversarial process into an opportunity for voluntary compliance. Salaried employees who missed earlier chances while responding to verification or reopening notices now get a safer route to correct and close the matter. Knowing the Cost Upfront: Clear Rules for Updated Return Payments Filing an updated return requires payment of additional tax calculated as a percentage of tax and interest payable:

• 25% if filed within 12 months from the end of the relevant assessment year
• 50% within 24 months
• 60% within 36 months
• 70% within 48 months

Where an updated return is filed after a reassessment notice under Section 148, an additional 10% of tax and interest applies. While this significantly increases the cost, it remains lower than a 200% penalty for misreporting and eliminates prosecution risk. Importantly, income disclosed through an updated return cannot be used to levy a penalty under Section 270A. Major Relief on the Table: Immunity From Penalties and Prosecution The most significant relief comes from the reconstruction of Section 270AA, effective from 1 March 2026. Immunity is now available not only for under-reporting but also for cases involving misreporting of income. Where a taxpayer applies within one month from the end of the month in which an assessment or reassessment order is received, the Assessing Officer may waive the penalty under Section 270A and grant immunity from prosecution under Sections 276C and 276CC, subject to payment of:

• Tax and interest as per the order, and
• Additional income tax equal to 100% of the tax payable on misreported income

This brings certainty and finality, allowing taxpayers to close matters without prolonged litigation. Who Stands to Gain From These Changes The relief applies to taxpayers whose demand notices were served before 1 March 2026 but whose immunity application window has not expired, as well as to those receiving assessment or reassessment orders on or after that date. By opting for this route, penalty exposure is capped at 100% instead of 200%, with complete protection from prosecution. The Finance Bill, 2026, reflects a clear policy shift from punitive enforcement to trust-based voluntary compliance. By expanding correction windows and rationalising penalties, it acknowledges that most taxpayers do not deliberately evade tax but make genuine mistakes. For those facing notices or worried about past filings, the message is simple, i.e., correct the error, pay the dues, and claim immunity.