Pay reduced tax at 39% rate on unexplained income compared to 78% earlier, with close eye on penalty, Budget 2026 announcement? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/wealth/tax/pay-reduced-tax-at-39-rate-on-unexplained-income-compared-to-78-earlier-with-close-eye-on-penalty-budget-2026-announcement/articleshow/127991258.cms

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According to the Income Tax Act, 1961 (Old Act), the Income Tax Act, 2025 (New Act), and the Finance Bill 2026, there is a significant cut in the tax rate for unexplained income and investments. The Finance Bill 2026 proposes to rationalise the tax rate on such income under the new Act to 30%, down from the 60% prevalent under the Old Act and the unamended New Act.

Income Tax Guide

Income Tax Union Budget FY 2026-27 LiveIncome Tax Slabs FY 2025-26Income Tax Calculator 2025

Comparative Table: Tax on Unexplained Income

The effective tax burden on unexplained income (excluding penalty) drops significantly from 78% under the old law to 39% under the new law. However, the penalty mechanism has shifted from a flat 10% surcharge-like penalty to a stricter misreporting penalty (200%), unless settled via the additional income tax route (120%).

Key provisions and changes

1. Income Tax Act, 1961 – Section 115BBE)

● Taxability: Income determined by the Assessing Officer under sections 68 to 69D (unexplained credits/investments) is taxed at a flat rate of 60%.
● No Deductions: No deduction for any expenditure or allowance is allowed against such income.
● Penalty: A penalty of 10% of the tax payable is leviable under Section 271AAC.

2. Income Tax Act, 2025 – Section 195)

• Rate Reduction: the Finance Bill 2026 proposes to amend Section 195 to reduce the tax rate to 30%,.
• Calculation:

○ Base Tax: 30%
○ Surcharge (25% of 30%): 7.5%
○ Cess (4% of 37.5%): 1.5%
○ Total: 39%

• Penalty Rationalisation:

○ Omission of Section 443: The specific penalty of 10% of tax payable on such income (Section 443) is proposed to be omitted.
○ Subsumed in Misreporting: The penalty for such income will now be subsumed under Section 439(11) as “under-reporting in consequence of misreporting,” which generally attracts a penalty of 200% of the tax payable.

● Immunity/Settlement:
○ If the taxpayer su-moto declares this income in the ITR, no penalty shall be levied.
○ If the income is determined by the Assessing Officer, the taxpayer can seek immunity/settlement by paying an additional income tax of 120% of the tax payable (instead of the 200% penalty)