Economy & BudgetPriority2026-03-25

Lok Sabha Passes Finance Bill 2026

Why focus: Iron Law 4 — Acts passed. GS3 Economy. Tests Section 68 share buybacks and enactment stages via Assertion-Reason format.

In News

What Happened

On March 25, 2026, the Lok Sabha passed the Finance Bill, 2026, with 32 government amendments, officially completing the legislative phase of the budgetary approval process. Key late-stage changes included easing the tax burden on cross-border share buybacks and tripling the turnover limit for start-up tax holidays to ₹300 crore. This passage also formally triggers the historic transition from the 1961 Income-tax Act to the new, simplified Income-tax Act, 2025, starting April 1, 2026.

Why It Matters

The passage of this bill legally authorizes the Union government to collect taxes for the financial year 2026-27, preventing a government shutdown. The late amendments specifically protect foreign investment by removing unintended high taxes on offshore buybacks, while the shift to the 2025 Act represents the biggest simplification of India's direct tax code in 65 years, reducing litigation and compliance burdens.

Background

History & Context

India's direct tax framework was governed by the heavily amended Income-tax Act, 1961, which had become notoriously complex with over 800 sections. In February 2025, the government introduced the Income Tax Bill, 2025, to overhaul the system, referring it to a Select Committee chaired by MP Baijayant Panda. Based on the committee's 285 recommendations, a revised bill was passed in August 2025. The Union Budget presented on February 1, 2026, outlined the first set of tax proposals under this new 2025 Act regime. During the enactment stage in March 2026, the Finance Minister moved 32 amendments to the Finance Bill to address industry feedback regarding unintended harsh tax consequences, particularly concerning corporate share buybacks and reassessment timelines.

What Changed

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Taxation of Share Buybacks: Originally, the budget proposed heavily taxing all promoter buybacks. The amendment restricted the additional promoter tax solely to domestic buybacks governed by Section 68 of the Companies Act, 2013, exempting offshore entities and cross-border capital returns.
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Start-up Tax Holiday: The turnover threshold under Section 140 of the new Income-tax Act, 2025, was tripled from ₹100 crore to ₹300 crore, aligning with the February 2026 DPIIT notification for deep-tech start-ups.
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Reassessment Proceedings: A statutory minimum period of 30 days was prescribed for an assessee to furnish a return of income in response to a reassessment notice issued under Section 148.
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Decriminalisation of Recovery: The power of the Tax Recovery Officer (TRO) to arrest a taxpayer-in-default and detain them in prison was completely removed, shifting towards non-coercive recovery methods.
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Offshore Banking Units (OBUs): The tax holiday for OBUs in Special Economic Zones was extended from 10 to 20 consecutive years, clarifying that units whose original 10-year holiday expired in March 2025 will receive the extended benefit starting FY 2026-27.
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Statutory Transition: The shift to the Income-tax Act, 2025, was formalized for FY 2026-27, condensing the tax code into 536 sections across 23 chapters.

What Did NOT Change

The foundational personal income tax slabs and the ₹12 lakh annual basic exemption limit proposed in the February 1 Budget remained entirely unchanged. Additionally, the flat 12% surcharge on the buyback-related additional tax for domestic promoters was retained despite significant industry lobbying for its removal.

Prelims Angle

NCERT Connection

This event is a direct real-world application of concepts in NCERT Class 11 Political Science (Indian Constitution at Work), Chapter 5: Legislature. It illustrates the constitutional principle of 'No taxation without representation' (Article 265), showing how the executive cannot levy taxes without the legislature passing a Money Bill (Article 110). The Finance Bill's passage demonstrates the final stage of the legislature's financial control over the executive budget.

Common Misconceptions

✗ The Union Budget process is complete as soon as the Finance Minister presents it in February.

✓ The budget is only a proposal until the Appropriation Bill (for spending) and the Finance Bill (for taxation) are passed by Parliament and receive Presidential assent.

Media coverage peaks on Budget Day (February 1), making it seem like a finalized event rather than the initiation of a two-month legislative process.

✗ The President can send the Finance Bill back to the Lok Sabha for reconsideration if they disagree with the tax rates.

✓ The Finance Bill is categorized as a Money Bill. Under Article 111 of the Constitution, the President cannot return a Money Bill to Parliament for reconsideration.

The President has suspensive veto power for Ordinary Bills, leading to the false assumption that this veto power uniformly applies to all legislation.

✗ The Income Tax Act 1961 is completely abolished and has no legal standing after April 1, 2026.

✓ While the Income-tax Act 2025 takes over for FY 2026-27 onwards, Section 536 of the new Act ensures continuity. Pending litigation, appeals, and assessments from before April 2026 will still be governed by the 1961 Act.

People often assume new laws retroactively erase old statutes, ignoring standard 'savings and repeal' transitional provisions in jurisprudence.

Practice Questions

Q1

How Many Correct

Consider the following statements regarding the Finance Bill 2026 and the transition to the Income Tax Act 2025: 1. The Income Tax Act 2025 completely repeals the 1961 Act without transitional provisions, meaning all pending assessments from FY 2024-25 will be immediately evaluated under the 2025 Act. 2. The Finance Bill 2026 decriminalized tax recovery by stripping the Tax Recovery Officer (TRO) of the power to arrest and detain a taxpayer-in-default. 3. The start-up tax holiday turnover limit was increased to ₹300 crore to align with the revised Department for Promotion of Industry and Internal Trade (DPIIT) guidelines. How many of the above statements are correct?

Q2

Match the Following

Match the legislative and tax changes introduced via the Finance Bill 2026 (List I) with their corresponding specifics (List II): List I: A. Additional Promoter Tax on Share Buybacks B. Reassessment Notice under Section 148 C. Offshore Banking Units (OBUs) Tax Holiday D. Structure of the Income Tax Act 2025 List II: 1. Reduced to exactly 536 Sections 2. Restricted strictly to Section 68 of the Companies Act, 2013 3. Mandates a minimum of 30 days to furnish a return 4. Extended to a total of 20 consecutive years Select the correct code:

Q3

Assertion & Reason

Assertion (A): During the enactment of the Finance Bill 2026, the government restricted the newly introduced additional tax on promoter share buybacks strictly to buybacks undertaken under Section 68 of the Companies Act, 2013. Reason (R): The government intended to explicitly exempt offshore entities and cross-border capital return structures from the higher tax net to prevent an unintended flight of foreign capital. Select the correct answer:

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