The Finance Bill, 2026 introduces targeted reforms to India’s direct tax litigation framework, focusing on reducing the financial burden of interest during appeals and softening criminal penalties for technical defaults.
These measures are designed to provide relief to litigants as the country transitions to the new Income Tax Act, 2025.
Taxation reforms, however, require a nuanced reading to understand the actual impact on the taxpayer. Here, we endeavour to explain how the litigation reforms may benefit an average Indian taxpayer.
A major highlight of the Bill is the proposal to halt interest accrual on specific penalty demands while they are under appeal.
Section 220(2) has been amended to provide that no interest will be charged on demand notices for penalties levied under Section 270A (for under-reporting or misreporting of income) while an appeal is pending.
It ensures that the "interest clock" only starts after an independent appellate body has reviewed the case. Specifically, interest is suspended until the Commissioner (Appeals) passes an order or, in cases involving the Dispute Resolution Panel (DRP), until the Appellate Tribunal issues its decision.
This relief is proposed to take effect retrospectively from March 1, 2026.
The Bill enhances the administrative routes available for taxpayers to resolve disputes without a full trial.
Section 245MA, which governs the functioning of the Dispute Resolution Committee (DRC) for small and medium taxpayers, is broadened to give the Committee more teeth.
The amendment explicitly empowers the DRC to waive or reduce penalties and grant immunity from prosecution, provided certain conditions are met. This is intended to provide a cost-effective and expeditious alternative to long-running litigation.
Further, Section 270AA allows an assessee to apply directly to the Assessing Officer for a waiver of penalty and immunity from prosecution. The Assessing Officer can grant the waiver if the taxpayer pays the tax and interest specified in the demand notice and, crucially, agrees not to file an appeal against the assessment.
The Bill proposes a significant recalibration of criminal penalties, moving away from "rigorous" imprisonment for several offences.
Section 276D previously carried rigorous imprisonment for failing to produce accounts or documents in response to a notice.
The amendment entirely decriminalises the wilful failure to produce accounts or documents as required by a notice under Section 142(1). For other failures, such as ignoring directions for a special audit, the punishment is softened from "rigorous" to "simple imprisonment" for up to six months.
Section 483 of the 2025 Act has been modified to reduce the severity of punishments for various defaults.
It replaces "rigorous imprisonment" with "simple imprisonment" for terms up to two years for specified offences, aligning with the broader goal of making the tax regime less punitive for non-fraudulent defaults.
To this end, the Bill reduces mandatory pre-payments. The mandatory amount a taxpayer must pay to file an appeal before the first appellate authority has been reduced from 20% to 10% of the disputed tax demand. This will significantly ease cash-flow constraints for businesses and individuals while their cases are being adjudicated.
The litigation reforms in the Finance Bill, 2026 represent a transition toward a more structured tax environment. By suspending interest on specific penalties during the first stage of appeal and halving the mandatory pre-deposit to 10%, the government is reducing the immediate cost of seeking legal redress.
These measures, coupled with the decriminalisation of technical defaults and the shift to the simplified Income-tax Act, 2025, aim to foster voluntary compliance. While the focus remains on ease of doing business, the success of these reforms will depend on their consistent application across all categories of tax disputes.