Budget 2026 tax imprisonment rules: One of the less discussed but important changes in Budget 2026 lies in how tax offences are dealt with under the Income-tax Act, 2025, which comes into force from April 1, 2026.
While the government has retained criminal provisions for serious tax evasion, the new law moves away from the rigid and often harsh punishment framework of the old Income-tax Act, 1961.
Under the old law, even relatively small cases of tax evasion could attract rigorous imprisonment with mandatory minimum jail terms, leaving courts with limited flexibility. The new Act introduces a graded and more proportionate punishment structure, linking the severity of punishment to the quantum of tax involved and the nature of default.
Clear thresholds, lighter imprisonment under the new law
Section 276C of the Income-tax Act, 2025 now clearly classifies offences based on the amount of tax sought to be evaded or under-reported. For instance, where the tax involved exceeds ₹50 lakh, the punishment may include simple imprisonment up to two years, or fine, or both. Where the amount is between ₹10 lakh and ₹50 lakh, imprisonment may extend up to six months.
In other cases, the offence may attract only a fine, a significant departure from the old Act where imprisonment was almost inevitable. The new law also replaces “rigorous imprisonment” with “simple imprisonment”, signalling a softer and more balanced approach.
The Act also spells out what constitutes a “wilful attempt to evade tax,” including cases where a person “has in his possession… books of account… containing a false entry or statement” or “wilfully omits… any relevant entry or statement.”
This clarity is intended to reduce interpretational disputes and ensure that prosecution is reserved for deliberate wrongdoing, not procedural lapses.
Failure to file returns: prosecution still exists, but relief built in
Section 276CC of the new Act continues to provide for prosecution where a person wilfully fails to file income tax returns. However, safeguards remain. Prosecution will not apply if the return is filed before the end of the assessment year or if the net tax payable does not exceed ₹10,000 for non-corporate taxpayers.
This mirrors the old law but aligns thresholds and timelines with the broader reform agenda of the new Act, which seeks to distinguish between intentional non-compliance and minor or technical defaults.
Search cases and undisclosed income remain tightly regulated
For search-related cases, Section 276CCC continues to penalise wilful failure to disclose undisclosed income for the block period. Here again, punishment is graded based on the tax amount involved, with simple imprisonment replacing rigorous jail terms.
What this means for taxpayers
Overall, the comparison between the Income-tax Act, 2025 and the 1961 Act shows a clear shift in philosophy. The government has retained prosecution powers for serious tax evasion but has reduced criminal harshness, introduced clear monetary thresholds, and given courts more discretion.
For honest taxpayers, the message is reassuring: compliance failures due to oversight are less likely to trigger extreme consequences. For habitual or wilful evaders, however, prosecution remains very much on the table—only now under a more structured and transparent framework.