Big Relief in Budget 2026: No More Heavy Penalty on Tax Audit Delay | Big Change in Tax Audit Rules from April 2026

One of the important compliance-friendly measures introduced in Budget 2026 is the rationalisation of penalties into mandatory fees for certain procedural and technical defaults under the Income-tax law.

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The Government has acknowledged that penalties for technical delays often lead to unnecessary litigation, even in cases where there is no revenue loss or mala fide intention. To reduce disputes and provide certainty, penalties for specific compliance failures are proposed to be converted into fixed or graded fees.

These amendments will be effective from 1 April 2026 and will apply from Tax Year 2026-27 onwards.

1. Change in Late Fee for Tax Audit – Section 446

Earlier Provision (Before Budget 2026)

Under Section 446 of the Act, penalty was leviable for failure to get accounts audited as required under the Act.

If a person failed, without reasonable cause, to get accounts audited or to obtain the audit report, the Assessing Officer could levy a penalty equal to the lower of:

• 0.5% of total sales / turnover / gross receipts, or
• ₹1,50,000

This penalty was discretionary and often became a subject matter of litigation, particularly in cases of minor or unintentional delays.

Proposed Amendment – Conversion of Penalty into Fee

Budget 2026 proposes to:

• Omit penalty under Section 446, and
• Convert it into a mandatory fee under proposed Section 428(c).

New Fee Structure (Tax Audit Delay)

A graded fee structure has been introduced:

📌 This fee is mandatory, non-discretionary, and not dependent on turnover or receipts.

Important Note:
While Section 446 has been omitted for audit default, it has been repurposed to deal with penalties relating to failure to furnish information or furnishing inaccurate information on crypto asset transactions.

2. Change in Penalty for Transfer Pricing Audit Report – Section 447

Earlier Provision

Under Section 447, failure to furnish an accountant’s report under Section 172 (applicable to international transactions and specified domestic transactions) attracted a fixed penalty of ₹1,00,000.

Proposed Amendment

The penalty under Section 447 is proposed to be:

• Converted into a fee, and
• Shifted to Section 428(4).

New Graded Fee Structure

This change introduces proportionality and fairness, especially in cases where the delay is procedural rather than intentional.

3. Change in Penalty for Statement of Financial Transactions – Section 454(1)

Earlier Provision

Under Section 454(1), failure to furnish a Statement of Financial Transactions (SFT) or reportable account attracted a penalty of:

• ₹500 per day for the period of default.

Proposed Amendment

Budget 2026 proposes to:

• Convert the penalty under Section 454(1) into a mandatory fee, and
• Shift it to Section 427(3).

This change again reflects the Government’s intention to treat technical reporting delays as compliance issues rather than offences.

4. Capping of Penalty under Section 454(2)

Earlier Provision

Under Section 454(2), if a person failed to furnish SFT even after receiving notice, a penalty of:

• ₹1,000 per day was leviable
• No upper monetary limit was specified

Proposed Relief

Budget 2026 proposes to introduce:

• An upper cap of ₹1,00,000 on penalty under Section 454(2)

This brings certainty and prevents disproportionate penalties in long-pending technical defaults.

5. Key Rationale Behind the Amendments

The Government has clearly stated that:

• Penalties for technical and procedural defaults lead to avoidable litigation
• Converting penalties into mandatory fees ensures certainty
• Fees are non-discretionary, reducing arbitrary assessments
• The approach aligns with a trust-based tax administration system

6. Effective Date and Applicability

• Effective from: 1 April 2026
• Applicable for: Tax Year 2026-27 and onwards

All defaults relating to earlier tax years will continue to be governed by the old provisions.

PENALTIES CONVERTED TO FEES

Effective from: 01.04.2026 (Tax Year 2026-27 onwards)

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