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Feb 07, 2026
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Pay reduced tax at 39% rate on unexplained income compared to 78% earlier, with close eye on penalty, Budget 2026 announcement?
According to the Income Tax Act, 1961 (Old Act), the Income Tax Act, 2025 (New Act), and the Finance Bill 2026, there is a significant cut in the tax rate for unexplained income and investments. The Finance Bill 2026 proposes to rationalise the tax rate on such income under the new Act to 30%, down from the 60% prevalent under the Old Act and the unamended New Act.
The effective tax burden on unexplained income (excluding penalty) drops significantly from 78% under the old law to 39% under the new law. However, the penalty mechanism has shifted from a flat 10% surcharge-like penalty to a stricter misreporting penalty (200%), unless settled via the additional income tax route (120%).
Key provisions and changes 1. Income Tax Act, 1961 - Section 115BBE)
Taxability: Income determined by the Assessing Officer under sections 68 to 69D (unexplained credits/investments) is taxed at a flat rate of 60%.
No Deductions: No deduction for any expenditure or allowance is allowed against such income.
Penalty: A penalty of 10% of the tax payable is leviable under Section 271AAC.
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