Govt. Proposes to Shift Certain Penalties into Mandatory Fees Under Income Tax Law from AY 2026-27

The government has proposed to convert certain penalties into mandatory fees. The key aim behind this action is to simplify the penalty system under the Income Tax rules, reduce legal actions and disputes, especially in cases where delays are technical in nature and not intentional. Fees are fixed and automatic, whereas penalties often involve discretion and lead to appeals.

Earlier, Section 446 of the Income Tax Act used to mention a penalty in case taxpayers failed to get their accounts audited. In case a person fails to get their accounts audited without any reasonable cause, then the desired Assessing Officer (AO) may impose a penalty equal to the lower of 0.5% of the total sales, turnover or gross receipts, in the business, or the gross receipts in the profession, for such tax year or years, or Rs. 1,50,000.

However, as per the new amendments, this provision has now been removed. Instead, this failure will attract a fee under a new proposed section 428(c). A graded fee structure has been introduced, where the fee will be Rs. 75,000 or Rs. 1,50,000, depending on how long the delay is stretched. It is also important to note that Section 446 has now been replaced with a new penalty provision related to failure to furnish information or furnishing incorrect information regarding crypto asset transactions.

Similarly, Section 447 of the Income Tax Act earlier used to mention a penalty amounting to Rs. 1 lakh for not furnishing an accountant’s report under Section 172 of the Act, which applies to persons involved in international transactions or specified domestic transactions. The penalty under the said act has been proposed to be converted into a fee under Section 428(4). As per the new proposed amendment, a graded fee of Rs. 50,000 or Rs. 1,00,000 depending on the period of delay in furnishing the report.

Similarly, Section 454 of the Income Tax Act used to mention penalties in case taxpayers fail to furnish a Statement of Financial Transactions or a reportable account. Under Section 454(1), a penalty amounting to Rs. 500 per day is imposed for continuing failure, and under Section 454(2), if the statement was not furnished even after a notice, the penalty amount increases to Rs. 1,000 per day. Now, as per the recent proposal, a penalty under Section 454(1) is said to be converted into a fee under Section 427(3), making it a mandatory charge instead of a discretionary penalty.

Additionally, an important relief has been proposed under Section 454(2). An upper limit of Rs. 1,00,000 is proposed to be introduced on the penalty amount, so that the daily penalty does not continue indefinitely and become excessive.

All these proposals of amendment are scheduled to take effect from April 01, 2026, and will apply from tax year 2026-27 onwards.