What Is the Finance Act, 2026?
The Finance Act, 2026 is the annual tax-amending legislation Parliament passed to revise the Income-tax Act, 2025 before that Act's own 1 April 2026 commencement date arrived. Rather than waiting for the new Act to take effect and amending it afterward, the Finance Act, 2026 reached directly into the still-dormant text — omitting some sections, substituting others, and inserting new sub-sections — so that the version of the Income-tax Act, 2025 that actually started applying on 1 April 2026 was already different from the version Parliament had enacted in August 2025.
For a foreign company or investor, this matters because commentary, checklists, or advice written between the Act's assent and its commencement can cite a section number or a rate that the Finance Act, 2026 has since changed — sometimes without changing the section number at all.
How a Law Amended an Act That Hadn't Started Yet
The Income-tax Act, 2025 (Act 30 of 2025) received presidential assent on 21 August 2025 but, under section 1(3) of that Act, came into force only from 1 April 2026. In the seven-month gap between assent and commencement, the Finance Act, 2026 amended dozens of the new Act's provisions. Every one of these edits is flagged directly in the enacted text of the Income-tax Act, 2025 by a numbered footnote — for example, "Substituted by the Finance Act, 2026, w.e.f. 1-4-2026" or "Omitted by the Finance Act, 2026, w.e.f. 1-4-2026" — with the pre-amendment wording quoted immediately below the note. This is the only reliable way to tell that a section has been touched: the main body of the Act shows only the current, post-amendment text, and the footnote is where the change and its effective date are recorded.
Because the savings clause at section 536(2)(c) keeps the old Income-tax Act, 1961 in force for any tax year beginning before 1 April 2026, most of what follows applies from FY 2026-27 onward; earlier filings still follow the 1961 Act's numbering and rates.
What the Finance Act, 2026 Changed
Tax on Unexplained Income Cut From 60% to 30% (Section 195)
Section 195(1)(i) of the Income-tax Act, 2025 sets the flat tax rate on income covered by sections 102 to 106 — unexplained credits, unexplained investment, unexplained asset, unexplained expenditure, and amounts borrowed or repaid on a hundi otherwise than by account payee cheque, the successor provisions to sections 68 to 69D of the Income-tax Act, 1961. As originally enacted, section 195(1)(i) charged this income at 60%. The Finance Act, 2026 substituted "30%" for "60%", with effect from 1 April 2026. This is a straightforward rate cut, not a renumbering: the section number is unchanged, but the rate an assessee actually pays on an assessed cash-credit or unexplained-investment addition has halved.
The 10% Add-On Penalty in Section 443 Is Gone
Before its omission, section 443 imposed an additional penalty of 10% of the tax payable under section 195(1)(i) wherever an assessee's total income included income of the kind described above (sections 102 to 106) — payable on top of, not instead of, the section 195 tax itself. The Finance Act, 2026 omitted section 443 outright, with effect from 1 April 2026. Combined with the rate cut in section 195, the total exposure on an unexplained-income addition has fallen substantially: from a 60% tax plus a further 10%-of-tax penalty, to a flat 30% tax with no separate add-on penalty under section 443.
Startup Deduction Turnover Ceiling Raised to ₹300 Crore (Section 140)
Section 140 of the Income-tax Act, 2025 carries forward the three-consecutive-year, 100%-of-profits deduction for an eligible start-up that previously sat in section 80-IAC of the Income-tax Act, 1961. One of the conditions for qualifying as an eligible start-up, at section 140(16)(b)(ii), caps the total turnover of the business for the relevant tax year. As enacted, that cap was one hundred crore rupees. The Finance Act, 2026 substituted "three" for "one", with effect from 1 April 2026, raising the ceiling to three hundred crore rupees. A start-up that would have been too large to qualify under the original figure may now qualify under the revised one — but the other conditions (incorporation between 1 April 2016 and 1 April 2030, and a certificate of eligible business from the Inter-Ministerial Board of Certification) are unchanged.
Penalty Section 447 Omitted — Replaced by a Graduated Fee
Section 447, before its omission, imposed a flat penalty of ₹1,00,000 on a person who failed to furnish the accountant's report required under section 172 — the transfer-pricing accountant's report (Form 48 (formerly Form 3CEB)), whose default was penalised under section 271BA of the Income-tax Act, 1961. The Finance Act, 2026 omitted section 447 with effect from 1 April 2026. In its place, section 428(d) now imposes a graduated fee for the same default: ₹50,000 for a delay of up to one month, rising to ₹1,00,000 thereafter. The obligation has not disappeared, but it has changed in character from a flat penalty to a fee that scales with the length of the delay — and moved to a different section.
Section 446 Rewritten — Now a Crypto-Asset Provision, Not an Audit Penalty
As originally enacted, section 446 read as the penalty for failing to get accounts audited under the tax audit requirement in section 63: the lesser of 0.5% of turnover or gross receipts, or ₹1,50,000. The Finance Act, 2026 substituted this text entirely, with effect from 1 April 2026. Section 446 now penalises failure to furnish, or furnishing inaccurate information in, a statement of crypto-asset transactions required under section 509 — a ₹200-per-day penalty for non-furnishing, and a ₹50,000 penalty for inaccurate or non-remedied information. The tax-audit-failure consequence that section 446 used to carry has not vanished; it now lives as a graduated fee under section 428(c) — ₹75,000 for a delay of up to one month, rising to ₹1,50,000 thereafter. Anyone reading a pre-2026 summary that cites "section 446" for a tax-audit default is now reading about the wrong provision.
Fee Sections 427 and 428 Restructured Together
The Finance Act, 2026 substituted sections 427 and 428 as a pair, with effect from 1 April 2026. Section 427(1) continues to set a ₹200-per-day fee (capped at the tax deductible or collectible) for late TDS/TCS statements, and now also folds in, at sub-section (3), a parallel ₹200-per-day fee (capped at ₹1,00,000) for late statements of financial transaction or reportable account. Section 428 continues to set the graduated fee for late income-tax returns under section 263, and now also absorbs — at clauses (c) and (d) — the tax-audit-default fee and the accountant's-report-default fee described above, which previously sat in the freestanding penalty sections 446 and 447. The practical effect is consolidation: four separate defaults (late TDS statement, late return, audit default, accountant's-report default) are now addressed across two sections instead of four.
New Electronic Route for Lower or Nil TDS Certificates (Section 395(6))
Section 395 lets a payee apply for a certificate authorising tax deduction at a lower rate, or no deduction at all, on income otherwise subject to withholding. The Finance Act, 2026 inserted a new sub-section (6), with effect from 1 April 2026, letting that application also be filed before a prescribed income-tax authority (in addition to the Assessing Officer), which may issue or reject the certificate after electronic verification of the application's contents. This is an additional, faster channel for the same relief — it does not change the substantive test for who qualifies for a lower or nil rate.
A Seventh Ground of "Misreporting" Added to Section 439(11)
Section 439(11) lists the specific circumstances that count as "misreporting" of income for the purposes of the heavier, 200% penalty under section 439(10) (as opposed to ordinary under-reporting, penalised at 50%). Six grounds — misrepresentation of facts, unrecorded investments, unsubstantiated expenditure claims, false book entries, unrecorded receipts, and undisclosed international or specified domestic transactions — were already there. The Finance Act, 2026 inserted a seventh, at clause (g): income referred to in section 195(1)(b) — that is, unexplained income under sections 102 to 106 that the Assessing Officer determines, rather than income the assessee voluntarily returns. The distinction carries through to the penalty-waiver mechanism in section 440: a taxpayer settling under the six original grounds pays an additional 100% of the tax on under-reported income in lieu of penalty, but settling under the new clause (g) ground costs 120%. An assessment that turns on undisclosed cash credits or investments now sits in a distinctly more expensive settlement bracket than the other six grounds.
Section 536(2)'s Own Cross-Reference Was Corrected
Section 536 is the repeal-and-savings clause: sub-section (1) repeals the Income-tax Act, 1961, and sub-section (2) preserves its effect for tax years, proceedings, and elections that predate 1 April 2026 — including the savings rule at clause (c) that keeps 1961-Act procedure alive for any tax year beginning before that date. As enacted, the opening words of sub-section (2) read "subject to sub-section (3)". The Finance Act, 2026 substituted this to read "subject to sub-section (4)", with effect from 1 April 2026. Sub-section (3) is only a reading rule, telling you that a reference to a tax year commencing 1 April 2025 or earlier means the corresponding previous year under the 1961 Act. Sub-section (4) is the substantive one: it applies section 6 of the General Clauses Act, 1897 to the effect of the repeal. The amendment therefore pointed the savings clause at the provision that actually qualifies it — a cross-reference correction inside the very clause that governs how the transition between the two Acts works.
Why This Matters for a Foreign Company or Investor
None of these changes required a new bill after commencement — they were folded into the enacted text before a single tax year had been assessed under the Income-tax Act, 2025. A source written or cached before the Finance Act, 2026 can be accurate on a section number and wrong on the rate, the amount, or the sub-section it sits in. Because sections 446 and 195 kept their numbers while their subject-matter or rate changed underneath them, matching a section number alone is not enough — the current wording has to be read.
A Quick Checklist Before Citing a Section
- Confirm whether the tax year in question begins before or after 1 April 2026 — the 1961 Act still governs earlier years under section 536(2)(c).
- Open the section in the enacted text of the Income-tax Act, 2025 and look for a footnote marker below it noting a Finance Act, 2026 substitution, omission, or insertion.
- If a footnote exists, read the quoted pre-amendment text to see exactly what changed, rather than assuming a section that "sounds right" still says what it used to.
- Treat a matching section number as a starting point, not proof that nothing has changed — sections 195, 140, 427, 428, 439, 446 and 536 all kept their numbers while their content moved.
Frequently Asked Questions
Did the Finance Act, 2026 amend the Income-tax Act, 1961 or the Income-tax Act, 2025?
It amended the Income-tax Act, 2025. The 1961 Act was already repealed by section 536(1) of the new Act; the Finance Act, 2026 edited the new Act's text before that Act's own 1 April 2026 commencement date, so the changes took effect on day one of the new law rather than being introduced later.
Does the 30% rate on unexplained income under section 195 apply to income for FY 2025-26?
No. Under the savings clause at section 536(2)(c) of the Income-tax Act, 2025, any tax year beginning before 1 April 2026 remains governed by the Income-tax Act, 1961, including its own rate for unexplained income (60% under section 115BBE, plus the separate additional penalty under section 271AAC). The section 195 rate of 30% applies from FY 2026-27 onward.
What happened to sections 443 and 447 of the Income-tax Act, 2025?
Both were omitted by the Finance Act, 2026 with effect from 1 April 2026. Section 443 had imposed a 10% additional penalty on top of the section 195 tax on unexplained income; that add-on penalty is gone. Section 447 had imposed a flat ₹1,00,000 penalty for failing to furnish the accountant's report under section 172; that default is now a graduated fee under section 428(d) instead.
Did the turnover cap for the start-up deduction actually change, or just the section number?
The rate change is real, not a renumbering. Section 140(16)(b)(ii) of the Income-tax Act, 2025, as enacted, capped an eligible start-up's turnover at one hundred crore rupees for the tax year in which the deduction is claimed. The Finance Act, 2026 raised that figure to three hundred crore rupees, with effect from 1 April 2026 — a start-up too large to qualify under the original cap may qualify under the revised one.
How can I tell if a section of the Income-tax Act, 2025 has been changed by the Finance Act, 2026?
Check the enacted text itself. Every amendment carries a numbered footnote directly below the affected section reading "Substituted", "Omitted" or "Inserted" "by the Finance Act, 2026, w.e.f. [date]", with the pre-amendment wording quoted immediately underneath. A section number alone does not confirm the current text — several sections, including 195, 446 and 536, kept their numbers while their content changed.
See also: Corporate Tax, Capital Gains Tax, and Concessional Corporate Tax.
Need help confirming which section of the Income-tax Act, 2025 governs your India entity's next filing? Beacon Filing's corporate tax filing service tracks these changes so you don't have to.