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For many salaried workers and other taxpayers, the last year has been filled with a flood of emails and SMS alerts from the Income-tax Department’s NUDGE programme, with discrepancies being flagged through AIS/TIS, and reopening and scrutiny notices for previous years. Thanks to the increased use of data analytics, even minor errors—such as excess claims, incorrect deductions or unreported interest income—are now being flagged, causing a lot of stress. Typically, the problems stem from incorrect claims for exemption or deduction, missed income disclosures, or slow responses.
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The Finance Bill, 2026, aims to offer some relief for taxpayers facing such notices and ongoing assessment or reassessment processes. The amendments extend timelines for filing revised returns, allow updated returns even after reassessment notices, and rationalise penalties through a revised immunity framework. Taxpayers can now correct their mistakes by paying the tax, interest and any additional amount required, while avoiding steeper penalties and legal action.
These changes, as discussed in the article, will take effect from March 1, 2026, and are expected to provide relief to taxpayers during the fiscal year 2025–26 itself.
Why salaried taxpayers are under pressure
With employers, banks, mutual funds, registrars and other agencies reporting data through statements of financial transactions (SFTs), quarterly TDS/TCS statements, and with the tax department also receiving information from foreign jurisdictions under the Automatic Exchange of Information (AEOI), the Income-tax Department today has a near-complete picture of an individual’s financial life.
Even small mismatches—such as incorrect HRA claims, excess deductions under Section 80C, or unreported interest income—are now quickly flagged.
Many salaried employees have:
- Missed or ignored NUDGE communications sent in December 2025
- Discovered errors after the window for revising returns had closed
- Faced assessment or re-assessment proceedings following reassessment notices under Section 148 or scrutiny notices under Section 143(2) for earlier years
- Had assessments or reassessments completed during FY 2025–26, or pending for completion by March 31, 2026
- Received notices under Section 133(6) (e-verification), Section 148A (proposed reopening), or Section 148 for time-barring assessment years or may receive such notices
Under the existing law, wrong claims or non-disclosure of income or investments in the ITR, in most circumstances, are treated as misreporting of income, attracting penalties of 200% of the tax payable under section 270A, in addition to tax and interest under sections 234B and 234C.
Bigger window to revise returns
What changes
From 1 March 2026, a revised return under Section 139(5) can be filed up to the end of the relevant assessment year, instead of the current deadline of three months before its end (i.e., 31 December, which has already expired for AY 2025–26).
This is subject to payment of a small fee proposed under the new section 234I:
- Rs 1,000 where total income does not exceed Rs 5 lakh
- Rs 5,000 in other cases
Why it matters
For AY 2025–26, taxpayers effectively get time up to 31 March 2026 to correct mistakes. This is especially helpful for taxpayers who identify errors after reconciling Form 16 with AIS/TIS data or after receiving NUDGE emails from the Department.
This extension can save taxpayers from the harsh penalty of 200% for misreporting, additional interest liability, and avoidable notices from the Income-tax Department.
Updated returns now cover pending reassessment:
Until now, updated returns under Section 139(8A) were not permitted once reassessment proceedings had commenced through issuance of notice under Section 148, along with several other restrictive conditions.
Key relaxations
- With effect from 1 March 2026, updated returns can be filed even after receipt of a reassessment notice under Section 148.
- Where a notice under Section 148 has been issued but the time limit for filing the return in response to such notice has not expired as on 1 March 2026, the taxpayer may opt to file an updated return.
- In all cases, where notices under Section 148 are issued on or after 1 March 2026, taxpayers will be eligible to file an updated return within the time allowed in the notice.
Practical impact
This change converts reassessment from a combative, adversarial process into a voluntary correction mechanism. For salaried employees and other taxpayers who missed earlier opportunities while responding to notices under Section 133(6) or Section 148A, this offers a safer second chance to comply.
Predictable cost of compliance: Section 140B
Filing an updated return requires payment of additional tax, calculated as a percentage of the aggregate of tax and interest payable:
- 25% if filed within 12 months from the end of the relevant AY
- 50% if filed within 24 months
- 60% if filed within 36 months
- 70% if filed within 48 months
A new provision levies an additional 10% of the aggregate of tax and interest where the updated return is filed following a reassessment notice under Section 148.
While this marginally increases the cost of compliance, it remains significantly lower than the penalty for misreporting (200% of tax payable), along with the risk of prosecution.
Significantly, a new safeguard ensures that the income disclosed through an updated return will not be used for levying penalty under Section 270A.
Immunity from penalties on mis-reported income
The most significant relief comes from the overhaul of Section 270AA, effective from March 1, 2026. The revised provision extends relief in cases where assessment or reassessment proceedings have been completed, as well as to those that are pending.
Under the revised framework, where an application is filed within one month from the end of the month in which an assessment order under Section 143(3) or reassessment order under Section 147 is received, the Assessing Officer may waive penalty under Section 270A and grant immunity from prosecution under Sections 276C and 276CC, subject to conditions.
What’s new
- Immunity and waiver of penalty are now available even in cases of misreporting of income (earlier limited to under-reporting).
- To avail the benefit, the taxpayer must pay within the time specified in the demand notice (generally 30 days)-
○ Tax and interest as per the assessment/reassessment order, and
○ Additional income-tax equal to 100% of the tax payable on misreported income, .
- Full immunity from prosecution under Sections 276C and 276CC.
- Finality of proceedings without prolonged appeals or litigation.
Who will be eligible
- Taxpayers in whose cases a demand notice has been served before March 1, 2026, and where the tax, interest and applicable additional tax have been paid within the prescribed time, but the time limit for filing the application for immunity has not expired.
- Taxpayers in whose cases assessment or reassessment orders are served on or after March 1, 2026.
- Benefit of availing this route
- Penalty exposure capped at 100%, instead of 200% for misreporting.
- Complete peace of mind—no prosecution risk and no lingering tax disputes.
The matter reaches a clean, final closure—without appeals, penalty litigation or criminal exposure.
The big picture
The Finance Bill, 2026 signals a clear shift in tax policy—from fear-driven enforcement to trust-based voluntary compliance. By widening correction windows and rationalising penalty provisions, it acknowledges a simple reality: most taxpayers do not evade taxes; they make mistakes.
For those currently staring at tax notices or worrying about past filings, the message is unambiguous: come forward, correct, comply—and move on.
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The author O.P. Yadav is a former IRS officer with over 36 years of experience in tax administration, education, and training. The views expressed are personal.
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