Finance Bill 2026: Penalties Replaced with Fixed Fees for Returns, Audit & Statements

Clauses 83, 88 and 89 of the Finance Bill, 2026 introduce a major structural reform in the compliance and enforcement framework of the Income-tax Act, 2025. The amendments reflect a conscious policy shift away from discretionary penalties for technical defaults towards a rule-based, predictable fee system. The Government has recognised that:

• procedural delays (such as late filing of returns, statements or reports) often result in avoidable litigation;
• discretionary penalties create uncertainty and inconsistent outcomes; and
• compliance improves when consequences are certain, proportionate, and automatic.

Accordingly, several penalties have been converted into mandatory fees, while penalties are retained only for continued or aggravated non-compliance.

All amendments discussed below are effective from 1 April 2026, i.e. tax year 2026-27 onwards, and apply prospectively.

Clause 83: Substitution of Sections 427 and 428 – Core of the Reform

Clause 83 substitutes existing provisions with new sections 427 and 428, which comprehensively deal with fees for procedural defaults.

Section 427: Fee for Default in Furnishing Statements

Section 427 covers delays in furnishing various statutory statements, replacing earlier penalty provisions.

1. Delay in Furnishing TDS/TCS Statements (Section 397(3)(b))

Where a person fails to deliver a TDS/TCS statement within the prescribed time:

• Fee: ₹200 per day of default
• Upper limit: Amount of tax deductible or collectible
• Condition: Fee must be paid before furnishing the statement

This mirrors the earlier framework under section 234E of the 1961 Act, ensuring continuity while removing litigation-prone penalty proceedings.

2. Delay in Furnishing Statement of Financial Transaction (SFT) or Reportable Account (Section 508(1))

Where a person fails to furnish an SFT or reportable account within the prescribed time:

• Fee: ₹200 per day
• Maximum cap: ₹1,00,000

This replaces the earlier penalty under section 454(1) for routine delays.

Section 428: Fee for Delay in Returns, Audit Reports and Accountant Reports

Section 428 consolidates multiple earlier penalties into a graded fee regime, providing clarity and proportionality.

(a) Delay in Filing Return of Income (Section 263(1))

Where a person fails to file the return within the due date:

This fee applies irrespective of whether tax is payable, reinforcing timely compliance.

(b) Delay in Filing Belated Return (Section 263(5))

Where a belated return is furnished beyond nine months from the end of the relevant tax year:

• Same fee structure as above
• Ensures deterrence against excessively delayed compliance

(c) Failure to Furnish Audit Report (Section 63 – Replacement of Section 446 Penalty)

Where a person fails to get accounts audited or furnish the audit report:

The earlier turnover-linked penalty (0.5% of turnover subject to ₹1.5 lakh) is replaced with a fixed, predictable fee, reducing disputes over computation.

(d) Failure to Furnish Accountant’s Report for Transfer Pricing (Section 172 – Replacement of Section 447 Penalty)

This applies to reports relating to international transactions or specified domestic transactions.

Clause 88: Omission of Section 447

Clause 88 formally omits section 447, which earlier imposed a ₹1,00,000 penalty for failure to furnish the accountant’s report under section 172.

The omission is consequential, as the default is now fully governed by the fee-based mechanism under section 428(d).

👉 This removes discretion and aligns transfer pricing compliance with the broader fee-based approach.

Clause 89: Substitution of Section 454 -Penalty Retained for Continued Default After Notice

While routine delays are converted into fees, Clause 89 consciously retains a penalty mechanism for aggravated cases.

New Section 454: Penalty for Failure After Statutory Notice

Where a person:

• fails to furnish an SFT or reportable account under section 508(1), and
• continues to default even after notice under section 508(7),

the prescribed income-tax authority may impose:

• Penalty: ₹1,000 per day
• Maximum penalty: ₹1,00,000
• Period: From the day immediately after the notice period expires

This ensures that wilful or prolonged non-compliance remains penalised.

Key Distinction Introduced by the Amendments

Legislative Intent and Expected Impact

• reduce litigation arising from technical defaults,
• ensure certainty and uniformity, and
• allow tax authorities to focus on substantive non-compliance.

By converting penalties into fees:

• compliance becomes predictable,
• discretion is minimised, and
• taxpayers can self-correct without fear of punitive action.

Effective Date

• Effective from: 1 April 2026
• Applicable tax year: 2026-27 onwards
• Nature: Prospective application only

Conclusion

The amendments introduced through Clauses 83, 88 and 89 of the Finance Bill, 2026 mark a decisive move towards a compliance-oriented, non-adversarial tax regime. By replacing multiple procedural penalties with fixed statutory fees, and retaining penalties only for persistent defaults, the law strikes a careful balance between ease of compliance and enforcement discipline.

For taxpayers, this means greater certainty, lower litigation risk, and clearer compliance costs from tax year 2026-27 onwards.

Related Posts:

Finance Bill, 2026: Union Budget 2026-27