If you have income that was never reported on your tax returns, Union Budget 2026 may have just offered you a way out without paying massive tax. The government has introduced a provision that allows individuals to self-report undisclosed or unexplained income by paying a concessional 50% tax.
By self-reporting their undisclosed income, the taxpayers can avoid steeper penalties and possible prosecution that usually follow if such income is detected by the Income Tax Department. The move is to encourage people to come forward on their own instead of waiting for a tax notice.
At present, if unexplained income is detected during scrutiny, it can attract an effective tax of nearly 79%, which includes a 60% base tax plus surcharge and cess. If a taxpayer receives a notice and contests the case, the penalty can go up to 200 per cent of the tax amount, along with the risk of prosecution charges.
Now, under Section 195 of the new Income-tax Act, 2025, the base tax rate on unexplained income has been reduced to 30%.
However, under the new proposal, if a person voluntarily discloses such income while filing their income tax return, before receiving any notice from the department, the tax liability is just 39%, which includes 30% tax plus applicable surcharge and cess.
However, this benefit will apply only if there is no ongoing search or survey by the tax authorities, verified funds are not linked to any criminal activity, and the income source falls within the prescribed jurisdiction.
When Section 115BBE was first introduced under the Income-tax Act, 1961, from April 1, 2013, unexplained income was taxed at a lower rate, which was 30%.
However, after demonetisation in 2016, the government made the rules much stricter. From April 1, 2017, the tax rate on such income was doubled to discourage people from parking unaccounted cash in the system.
Now, Budget 2026 has rolled back those stricter post-demonetization rules and restored the earlier, lower tax treatment, provided the income is voluntarily disclosed.
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