Rationalisation of Penalties into Fees – Budget 2026

Rationalisation of Penalties into Fees (Effective from Tax Year 2026-27)

To reduce litigation and bring certainty in cases of procedural delays, the government has proposed converting certain penalties into mandatory fees. This marks a shift from discretionary punishment to a predictable compliance cost.

The amendments will apply from 1 April 2026 onwards.

Key Changes at a Glance

Particulars	Existing Provision (Penalty)	Proposed Provision (Fee)	Amount Structure	Relevant Cross-References (Income-tax Act, 1961)
Failure to get accounts audited	Penalty under Sec. 446: Lower of 0.5% of turnover/gross receipts or ₹1,50,000	Converted to fee under proposed Sec. 428(c)	Graded fee of ₹75,000 or ₹1,50,000 based on delay	Sec. 44AB (Tax Audit), Sec. 271B (Audit Penalty)
Failure to furnish accountant’s report for international/specified domestic transactions	Penalty under Sec. 447: ₹1,00,000	Converted to fee under Sec. 428(4)	₹50,000 or ₹1,00,000 depending on delay period	Sec. 92E (TP Report), Sec. 271BA
Failure to furnish Statement of Financial Transactions (SFT)	Sec. 454(1): ₹500 per day of default	Converted to fee under Sec. 427(3)	Mandatory fee structure (details as prescribed)	Sec. 285BA (SFT), Sec. 271FA
Continuing failure after notice for SFT	Sec. 454(2): ₹1,000 per day	Penalty retained but capped	Maximum limit of ₹1,00,000	Sec. 285BA, Sec. 271FA

Additional Noteworthy Point:

Aspect	Update
Section 446 replacement	Section 446 (audit penalty) is proposed to be omitted and replaced with a penalty relating to failure to furnish or for furnishing inaccurate information on crypto-asset transactions

Impact on Taxpayers

Area	Practical Effect
Litigation	Likely reduction due to fixed fee structure
Certainty	Taxpayers can estimate compliance cost in advance
Compliance Behavior	Encourages timely filing without fear of excessive penalties
Administration	Allows authorities to focus on serious non-compliance cases

Practical Takeaway