Budget 2026 increases Penalty on Tax corrections

After the Union Budget 2026, the government has clarified the rules for filing Updated Income Tax Returns (ITR-U) through the Finance Bill, 2026.

The Income Tax Department has also released official FAQs to explain who can file an updated return, the timelines involved, and the extra tax that may apply.

Here is a simplified and reader-friendly explanation of the updated return rules, based strictly on the official FAQs issued after Budget 2026.

What Is an Updated Income Tax Return (ITR-U)

An updated return allows taxpayers to voluntarily declare income that was missed or incorrectly reported earlier.

Under Section 263(6) of the Income-tax Act, 2025, a person can file an updated return even if they:

Did not file any return earlier, or

Filed an original, revised, or belated return

This option is available only if the conditions mentioned in the law are fulfilled.

Who Can File an Updated Return and Time Limit

Any taxpayer can file an updated return for themselves or for someone whose income they are responsible for assessing.

The updated return can be filed within 48 months from the end of the financial year following the relevant tax year.

This means taxpayers get up to four years to correct past mistakes, subject to certain restrictions.

Extra Tax Payable on Updated Returns

Filing an updated return is allowed, but it comes with an additional tax cost.

Apart from regular tax and interest, extra income-tax must be paid based on how late the updated return is filed.

The additional tax rates are:

25% if filed within 12 months

50% if filed after 12 months but before 24 months

60% if filed after 24 months but before 36 months

70% if filed after 36 months but before 48 months

The longer the delay, the higher the additional tax.

Updated Return in Loss Cases

Currently, taxpayers can file an updated return if:

The original return showed a loss, and

The updated return shows income instead

However, an updated return cannot be filed to reduce an existing loss.

If the earlier return reported a loss and the taxpayer wants to reduce that loss, filing an updated return is not allowed under current rules.

Proposed Changes in Finance Bill, 2026

The Finance Bill, 2026 proposes to expand the scope of updated returns.

Once the amendment becomes law, taxpayers will be allowed to file an updated return even if they want to reduce the amount of loss declared in the original return filed on time.

Updated Return After Reassessment Notice

As per existing rules, an updated return cannot be filed if assessment or reassessment proceedings are already completed or ongoing.

However, the Finance Bill, 2026 proposes a change.

Taxpayers will be allowed to file an updated return even after receiving a reassessment notice under Section 280, within the time mentioned in that notice.

In such cases:

• No penalty will be imposed on the income disclosed

• But extra tax will increase by another 10%

Higher Additional Tax After Reassessment Notice

If an updated return is filed in response to a reassessment notice, the total additional tax payable will be:

35% if filed within 12 months

60% if filed after 12 but before 24 months

70% if filed after 24 but before 36 months

80% if filed after 36 but before 48 months

This higher rate applies only in reassessment-related cases.

Will Reassessment Stop After Filing Updated Return?

Filing an updated return does not stop reassessment proceedings.

However, no penalty for under-reporting or misreporting of income will be charged on the income voluntarily disclosed in the updated return filed after a reassessment notice.

When These New Rules Will Apply

The expanded provisions related to:

Reduction of losses, and

Filing updated returns after reassessment notices

will apply only after the Finance Act, 2026 is enacted.

No Fee for Filing Updated Return

There is no separate fee for filing an updated return.

Taxpayers only need to pay the applicable tax, interest, and additional income-tax.

Why Updated Returns Matter After Budget 2026

The post-Budget 2026 clarifications show that the government is encouraging voluntary tax compliance, while also discouraging long delays through higher additional taxes.

For taxpayers who want to correct past mistakes and avoid penalties, the updated return option remains a useful—but time-sensitive—opportunity.