Category: Income Tax

Partners’ Remuneration and Interest under the Income-tax Act, 2025: Section 35(e) Limits, Book Profit and Partner’s Tax (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 03 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A firm can deduct remuneration only to working partners and only if it is authorised by the partnership deed for the period concerned (section 35(e)); the total for all working partners is limited to 90% of book profit on the first ₹6,00,000 (or ₹3,00,000 in case of a loss, if higher) and 60% of the balance.
  • Interest to partners is deductible only if authorised by the deed, and only up to 12% simple interest a year; remuneration to a partner who is not a working partner is not deductible at all.
  • Book profit is the net profit of the profit and loss account computed under the business rules, increased by the total remuneration to all partners if it was deducted; a working partner is an individual actively engaged in conducting the affairs of the firm’s business or profession.
  • In the partner’s hands, the share of profit in the profit-sharing ratio is exempt (Schedule III, Sl. No. 2), while remuneration and interest from the firm are business income and not salary (section 15(4)).

A partnership firm that pays salary, commission or interest to its partners can deduct those payments only within limits fixed by the Act. In the Income-tax Act, 2025 (from 01/04/2026) the limits are in section 35(e), in the group of “amounts not deductible”, replacing the old section 40(b).

The conditions for a deduction

Payment Deductible if
Remuneration to a partner who is not a working partner Never (section 35(e)(i))
Remuneration to a working partner Authorised by the partnership deed applicable for the period for which it is paid. Remuneration that relates to a period before the date of the deed, or that the earlier deed did not authorise, is not deductible (section 35(e)(ii))
Interest to any partner Authorised by the partnership deed on the same conditions, and within 12% simple interest a year (section 35(e)(ii) and (iv))
Aggregate remuneration to all working partners Within the limit below (section 35(e)(iii))

Limit on remuneration to working partners

The aggregate remuneration to all working partners, as authorised by the deed, is allowed up to:

Slice of book profit Allowed remuneration
On the first ₹6,00,000 of book profit ₹3,00,000 in case of a loss, or 90% of the book profit, whichever is higher
On the balance of the book profit 60%

Book profit and working partner

  • Book profit is the net profit as shown in the profit and loss account for the tax year, computed as per Chapter IV-D, increased by the aggregate remuneration to all partners if it has been deducted in arriving at that net profit (section 35(e)(v)(A)).
  • A working partner is an individual who is actively engaged in conducting the affairs of the business or profession of the firm (section 35(e)(v)(B)).

Example. A firm has a net profit of ₹16,00,000 after deducting remuneration of ₹8,00,000 to its two working partners. The partnership deed authorises that remuneration. Book profit is ₹16,00,000 + ₹8,00,000 = ₹24,00,000. The allowed remuneration is 90% of the first ₹6,00,000 = ₹5,40,000, plus 60% of the balance ₹18,00,000 = ₹10,80,000, so ₹16,20,000 in total. The ₹8,00,000 paid is within that limit and is fully deductible. If the firm paid ₹20,00,000, only ₹16,20,000 would be allowed.

Interest to partners in a representative capacity

If an individual is a partner on behalf of, or for the benefit of, another person, interest paid to him in that representative capacity and interest paid to the person represented are both counted for the 12% limit, while interest paid to him otherwise is left out. Where a partner receives interest on behalf of another person but is not a representative partner, his interest is also left out (section 35(e)(iv)(A) and (B)).

Associations of persons and bodies of individuals

Section 35(f) applies a similar rule to an association of persons or body of individuals (other than a company, co-operative society or registered society): interest, salary, bonus, commission or remuneration to a member is not deductible, except that interest is disallowed only to the extent the interest paid by the association exceeds the interest the member paid to it.

How the partner is taxed

  • Share of profit: the sum received by a partner as his share in the total income of the firm is exempt under Schedule III, Sl. No. 2, if the firm is separately assessed and the share is as per the profit-sharing ratio in the partnership deed.
  • Remuneration, bonus, commission and interest from the firm are not salary, even if called salary (section 15(4)). The partner reports them under the head profits and gains of business or profession, as under the old section 28(v); the corresponding clause of the 2025 Act was not separately checked for this post. The partner’s share of profit is not taxed again.
  • If a firm’s remuneration is later found not deductible, the partner’s assessment is amended to remove the income, within four years from the end of the financial year of the order on the firm (section 288, Table Sl. No. 1).

Practical points

  1. Update the partnership deed before the year starts. A clause that comes into force later does not support a deduction for the earlier period.
  2. State the working partners and the remuneration formula clearly in the deed, with the 12% interest ceiling.
  3. Compute book profit each year before deciding the remuneration, because the limit depends on it.
  4. Compare firm and company structures. The tax cost of a firm depends on the rate at which the firm is taxed under the Finance Act; check the current rate when planning.

How CSM & Co LLP can help

We draft and update partnership deeds, compute book profit and partner remuneration, and file the returns of firms and partners. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section limits the remuneration and interest a firm can deduct?

Section 35(e) of the Income-tax Act, 2025, which replaces section 40(b) of the 1961 Act. Section 288 refers to it when the assessment of a partner is amended after the firm’s assessment changes.

What is the limit on partners’ remuneration?

The aggregate remuneration to all working partners, as authorised by the partnership deed, is allowed up to: on the first ₹6,00,000 of book profit, ₹3,00,000 in case of a loss, or 90% of the book profit, whichever is higher; and on the balance of the book profit, 60% (section 35(e)(iii)).

Who is a working partner?

An individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner (section 35(e)(v)(B)). Remuneration to a partner who is not a working partner is not deductible (section 35(e)(i)).

What is the limit on interest to partners?

Interest authorised by the partnership deed is allowed up to 12% simple interest a year; the excess is not deductible (section 35(e)(iv)). Rules apply where an individual is a partner in a representative capacity, so that interest paid to him in that capacity and to the person he represents is taken into account together.

What is book profit?

The net profit shown in the profit and loss account for the tax year, computed under Chapter IV-D (the business and profession rules), increased by the aggregate remuneration to all partners if it has been deducted in arriving at that net profit (section 35(e)(v)(A)).

How is a partner taxed?

The sum received by a partner as share in the firm’s total income is exempt in the partner’s hands, provided it is as per the profit-sharing ratio in the partnership deed (Schedule III, Sl. No. 2). Remuneration, bonus, commission and interest received from the firm are not salary (section 15(4)); they are business income of the partner, and the firm’s payment of them is deductible only as above.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Expenditure Relating to Exempt Income under the Income-tax Act, 2025: Section 14 and Rule 14 (Old Section 14A and Rule 8D) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 15 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 14 of the Income-tax Act, 2025 (old section 14A) disallows any expenditure incurred in relation to income that does not form part of the total income, even if the exempt income was not earned in that year (section 14(3)).
  • If the Assessing Officer is not satisfied with the assessee’s claim of expenditure, or with a claim that none was incurred, he determines the amount by the prescribed method, which is Rule 14: expenditure directly related to exempt income plus 1% of the annual average of the monthly averages of the opening and closing value of investments that yield exempt income, subject to a cap at the total expenditure claimed.
  • The old Rule 8D had separate parts for interest and a 0.5% charge; Rule 14 of the Rules 2026 is shorter and uses 1% of the investment value.
  • Dividend income is taxable and no deduction is allowed against it at all from 01/04/2026 (section 93(2)), so the disallowance in section 14 matters for genuinely exempt income such as agricultural income, exempt interest and exempt capital gains.

A taxpayer cannot claim a deduction for the cost of earning income that is not taxed. In the Income-tax Act, 2025 (from 01/04/2026) this is section 14, which replaces the old section 14A, and the method for working out the amount is in Rule 14, which replaces Rule 8D.

What section 14 says

  1. No deduction is allowed for expenditure incurred by the assessee in relation to income that does not form part of the total income (section 14(1)). This applies irrespective of anything to the contrary in the Act.
  2. Determination by the Assessing Officer (section 14(2)): if he is not satisfied with the correctness of the expenditure claimed in relation to the exempt income, or with the assessee’s claim that no expenditure was incurred, he determines the amount by a method that is prescribed.
  3. Year of the expenditure (section 14(3)): the section applies where the expenditure was incurred in a tax year even though the exempt income has not accrued, arisen or been received in that year.

Rule 14: the prescribed method

The expenditure in relation to income that does not form part of total income is the sum of:

  • (a) the expenditure directly relating to such income; and
  • (b) an amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments, income from which does not or will not form part of total income.

The total of (a) and (b) cannot exceed the total expenditure claimed by the assessee (Rule 14(2)).

Compared with the old Rule 8D

The old rule worked in three parts: direct expenditure, interest not directly attributable (by a formula on investments and total assets) and 0.5% of the average investment. Rule 14 of the Rules 2026 has only two parts, direct expenditure and 1% of the investment value, so there is no separate interest apportionment. Check the text of the Rule if a case turns on a particular head, such as interest.

Example. A company’s investments that yield exempt income (for example, tax-exempt bonds) had an annual average of the monthly averages (of opening and closing balances) of ₹1,00,00,000. The 1% charge is ₹1,00,000. If direct expenditure on those investments (such as demat charges) is ₹20,000, the disallowance is ₹1,20,000, provided the company has claimed at least that much total expenditure. If it claimed only ₹90,000 in total, the disallowance is capped at ₹90,000.

What is “income that does not form part of total income”

This covers income excluded under section 11 and Schedules II to VII, agricultural income and other exempt receipts. Dividend is not exempt: it is taxed under section 92(2)(a), and Finance Act 2026 substituted section 93(2) to say that no deduction at all is allowed against dividend income or income from units of specified mutual funds and UTI units. So the earlier practice of claiming interest up to 20% of the dividend is gone, and the section 14 question for dividend does not arise.

Practical points

  1. Show the exempt-income expenditure in the accounts. An assessee who shows that no expenditure was incurred must be able to support the claim, because the Assessing Officer can disbelieve it under section 14(2)(b).
  2. Separate funds. Using separate bank accounts and clearly separate investments helps show that borrowed funds were not used for exempt investments.

How CSM & Co LLP can help

We compute the section 14 disallowance, plan investments and funding and defend the claim in assessment. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section replaces 14A and Rule 8D?

Section 14 of the Income-tax Act, 2025 and Rule 14 of the Income-tax Rules, 2026.

What is the rule in section 14?

No deduction is allowed for expenditure incurred in relation to income that does not form part of the total income (section 14(1)). It applies even where the expenditure was incurred in a tax year in which the exempt income was not earned, accrued or received (section 14(3)).

How is the disallowed amount computed?

If the Assessing Officer is not satisfied with the correctness of the assessee’s claim of expenditure, or with a claim that no expenditure was incurred in relation to exempt income, he determines the amount as prescribed (section 14(2)). Under Rule 14 it is the sum of (a) expenditure directly relating to exempt income and (b) 1% of the annual average of the monthly averages of the opening and closing balances of the value of investments, income from which does not or will not form part of total income. The total cannot exceed the expenditure claimed (Rule 14(2)).

Does the 1% apply to all investments?

Only to investments whose income does not or will not form part of the total income. Investments that give taxable income are left out of the average.

Is interest on borrowings to buy shares separately disallowed?

Rule 14 does not have a separate interest limb; the 1% of investment value covers the indirect expenses. Interest that relates directly to an investment giving exempt income is part of the direct expenditure in (a).

What about dividend income?

Dividend is taxable under section 92(2)(a), and from 01/04/2026 no deduction is allowed against it (section 93(2)). The section 14 disallowance therefore concerns income that is genuinely outside the total income, such as agricultural income and exempt interest or gains under the Schedules.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Unexplained Cash Credits, Investments, Assets and Expenditure under the Income-tax Act, 2025: Sections 102 to 107 and Tax at 30% (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 06 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Sections 102 to 106 of the Income-tax Act, 2025 (old sections 68, 69, 69A, 69B, 69C and 69D) treat an unexplained credit in the books, unrecorded investment, unexplained asset, unexplained expenditure and an amount borrowed or repaid through a negotiable instrument or hundi, otherwise than by account payee cheque, as the assessee’s income.
  • The tax on this income is a flat 30% from 01/04/2026 (section 195(1), which Finance Act 2026 reduced from 60%), with no deduction for any expenditure or allowance and no set-off of loss (section 195(2)); section 107 sends all of it to section 195.
  • For a loan or credit, the lender or the person in whose name the credit stands must also explain it (section 102(2)); for share capital of a company in which the public is not substantially interested, a resident subscriber must explain it (section 102(3)).
  • Penalty for under-reporting or misreporting can follow under section 439, and the misreporting limbs include failure to record investments or receipts in the books.

When a taxpayer cannot explain where money came from, or where it went, the law treats it as income and taxes it at a special rate. These rules are in sections 102 to 107 of the Income-tax Act, 2025 (from 01/04/2026), with the tax in section 195. They replace the old sections 68 to 69D and 115BBE.

The five deeming provisions

Section Old section Trigger Deemed income
102 68 A sum is found credited in the books, and the assessee gives no explanation or an unsatisfactory one The sum credited, of that tax year
103 69 An investment made in the year is not recorded in the books (or exceeds the recorded amount), and there is no satisfactory explanation The investment, or the excess
104 69A, 69B An asset (money, bullion, jewellery, virtual digital asset, other valuable article) is owned but not recorded, or the amount spent on acquiring it exceeds the recorded amount, without a satisfactory explanation The value, or the excess, in the year the asset is found
105 69C Expenditure incurred in the year with no explanation or an unsatisfactory one on its source The amount of the expenditure
106 69D An amount (with interest) borrowed or repaid through a negotiable instrument or hundi otherwise than by account payee cheque or another mode specified by the Board The amount, in the year of borrowing or repayment

Section 102: credits in the books

If a sum is found credited in the books for a tax year and the assessee offers no explanation about its nature and source, or the explanation is not satisfactory in the opinion of the Assessing Officer, the sum is charged as income of that year (section 102(1)).

  • Loans and borrowings: the explanation is deemed unsatisfactory unless the person in whose name the credit is recorded also explains the nature and source of the sum, and the explanation is found satisfactory (section 102(2)).
  • Private company share capital: for a company in which the public are not substantially interested, share application money, share capital, share premium or similar amounts must be explained by the resident in whose name the credit stands, and the explanation must be satisfactory (section 102(3)).
  • Venture capital: the extra requirements in sub-sections (2) and (3) do not apply if the person is a venture capital fund or company in Schedule V (section 102(4)).

Section 105: no deduction of the expense

An amount treated as income as unexplained expenditure is not allowed as a deduction under any provision (section 105(2)).

Section 106: cash or hundi borrowing

If an amount is borrowed or repaid through a negotiable instrument or hundi, other than an account payee cheque or a mode specified by the Board, the amount including interest is deemed to be the income of the person borrowing or repaying in the year of borrowing or repayment. If it was taxed on borrowing, the person is not assessed again on repayment (section 106(2)).

Tax on this income (sections 107 and 195)

Item Rule
Rate 30% on the income in sections 102 to 106 (section 195(1)(i)). Finance Act 2026 substituted 30% for 60% from 01/04/2026
Rest of the income Taxed as if the total income were reduced by the unexplained income (section 195(1)(ii))
Deductions and losses No deduction of any expenditure or allowance, no set-off of any loss against this income (section 195(2))
Where it applies Income included in the return, or determined by the Assessing Officer (section 195(1)(a) and (b))

Example. An assessment adds an unexplained credit of ₹10,00,000 to a person who has other taxable income of ₹15,00,000. The tax on the ₹10,00,000 is 30%, which is ₹3,00,000, with no deduction. The ₹15,00,000 is taxed at the normal rates. Before 01/04/2026 the rate on the unexplained part was 60%.

Penalty and prosecution risk

Unexplained income is usually assessed with a penalty under section 439. Failure to record investments in the books, recording false entries and failure to record a receipt that bears on total income are misreporting cases (section 439(11)), where the penalty is 200% of the tax on the under-reported income. The Finance Act 2026 waiver scheme (section 440) allows waiver of the penalty and immunity from prosecution on payment of additional income-tax of 100% (or 120%) of the tax on the under-reported income and on not appealing; read the conditions before relying on it.

How to protect yourself

  1. Keep proof of source for every large deposit, loan and share subscription: bank statements, loan agreements, the lender’s return and capital account, and the identity of the investor.
  2. Use banking channels. Loans of ₹20,000 or more by cash breach section 185, and cash receipts of ₹2,00,000 or more breach section 186 (see the post on cash transaction limits).
  3. Record every investment and asset in the books of account, with the source of funds.
  4. Answer the Assessing Officer’s notices in time and explain the source in the way the section requires: for a loan, include the lender’s explanation.
  5. Consider the 60% to 30% change. For tax years from 2026-27 the rate is lower, but the penalty and disallowance rules still apply, so the cost of an unexplained credit is still high.

How CSM & Co LLP can help

We prepare source-of-funds evidence, reply to notices on cash credits and unexplained investments and appear in assessment and appeal proceedings. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections replace 68, 69, 69A, 69B, 69C and 69D?

Section 102 (unexplained credits, old 68), section 103 (unexplained investment, old 69), section 104 (unexplained asset, old 69A and 69B), section 105 (unexplained expenditure, old 69C) and section 106 (amount borrowed or repaid through a negotiable instrument or hundi, old 69D). Section 107 and section 195 deal with the tax.

What is the tax rate on unexplained income?

30% on the income referred to in sections 102 to 106 (section 195(1)(i)), as substituted by Finance Act 2026 from 01/04/2026; the earlier rate was 60%. The balance of the total income is taxed in the usual way, and no deduction of expenditure or allowance and no set-off of loss is allowed against the unexplained income (section 195(1)(ii) and (2)).

What must I show to explain a credit in my books?

The nature and source of the credit. If the credit is a loan or borrowing, the person in whose name it is recorded must also offer an explanation that the Assessing Officer finds satisfactory (section 102(2)). For share application money, share capital or share premium of a company in which the public are not substantially interested, a resident in whose name it is recorded must offer an explanation (section 102(3)). This is not required where the contributor is a venture capital fund or company in Schedule V (section 102(4)).

What counts as an “asset” for the unexplained asset rule?

Money, bullion, jewellery, a virtual digital asset or any other valuable article (section 104(2)). If an asset is owned but not recorded in the books, or the amount spent on it is more than the amount recorded, and there is no satisfactory explanation, its value or the excess is the income of the year in which it was found (section 104(1)).

Can a loan taken by cash or hundi be income?

Where an amount, including interest, is borrowed or repaid through a negotiable instrument or on a hundi otherwise than by an account payee cheque (or a mode specified by the Board), it is deemed to be the income of the person borrowing or repaying in the year of borrowing or repayment (section 106). Cash loans of ₹20,000 or more also attract section 185 and a penalty equal to the amount (section 450).

Is a penalty also possible?

Yes. Under-reporting attracts 50% of the tax and misreporting 200% of the tax (section 439). Failure to record investments, recording false entries and failure to record receipts are misreporting (section 439(11)). The waiver scheme in section 440 can apply on payment of additional income-tax and no appeal.

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

New Income Tax Forms under the Income-tax Rules, 2026: Index of Key Forms, Rules and Old Form Numbers (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 18 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The Income-tax Rules, 2026 renumber the forms from 1 onwards: for example Form 99 is the appeal to the Commissioner (Appeals) (old Form 35), Form 115 the Tribunal appeal (old Form 36), Form 26 the tax audit report, Form 41 the treaty information form (old 10F), Form 44 the foreign tax credit statement (old 67), Form 48 the transfer pricing report (old 3CEB) and Form 93 the PAN application for an Indian citizen (old 49A).
  • Salary and TDS forms are 121 (declaration for no deduction, section 393(6)), 122 (other income details), 123 (perquisites, old 12BA), 124 (employee’s claims, old 12BB), 125 (specified senior citizen declaration) and 128 (lower or nil deduction certificate, old Form 13); the TDS statements are Forms 138 to 144 and certificates are Forms 130 to 133.
  • Registration and compliance of trusts use Forms 104 to 114.
  • The list below is built from the titles and rule references in the Rules; old form numbers are shown only where the earlier posts in this series or the form titles establish them.

The Income-tax Rules, 2026 prescribe all forms afresh, numbered in one series. This index lists the key forms with the rule that prescribes each, taken from the Rules. Old form numbers are shown only where they are established by the form title or by earlier posts in this series; for other forms, use the Rules to find the purpose.

Returns, appeals and registrations

Form Purpose Rule Old form
99 Appeal to the Joint Commissioner (Appeals) or the Commissioner (Appeals) 167 35
115 Appeal to the Appellate Tribunal 193(1) 36
116 Memorandum of cross-objections before the Tribunal 193(2) 36A
93 PAN application: individual who is a citizen of India 158 49A
94 PAN application: Indian company or entity 158
95 PAN application: individual who is not a citizen of India 158 49AA
96 PAN application: entity incorporated outside India 158
97 Declaration by a person (other than a company or firm) who does not have a PAN 159 and 160
98 Statement of declarations received in Form 97 160
134, 135 Application for a Tax Deduction and Collection Account Number (TAN) 216

Audit reports

Form Purpose Rule
26 Audit report and statement of particulars under section 63 (tax audit) 47
32 Audit report for deductions under sections 138 to 144 (Chapter VIII-C) 66
24 Audit report under section 59 for royalty and fees for technical services of non-residents 43
112 Audit report of a registered non-profit organisation under section 348 188
100, 101 Audit report and inventory valuation report under section 268(5) 171
66 Report for computation of book profit under section 206(1) 137
67 Report for computation of adjusted total income and alternative minimum tax 138

Salary, TDS and TCS

Form Purpose Rule
121 Declaration under section 393(6) for receiving certain income without deduction of tax 211
122 Details of other income under section 392(4)(a) for TDS on salary 204(1)
123 Statement of perquisites, fringe benefits and amenities 204(2)(b)
124 Employee’s claims for deduction of tax on salary 205
125 Declaration by a specified senior citizen 208
126 Application for a certificate under section 395(1) 209
127 Declaration under section 394(2) by a buyer to obtain goods without collection of tax 212
128 Application for a certificate for lower or nil deduction or collection 213
129 Application for a certificate under sections 395(2) and 400(3) 214
130 TDS certificate on salary under section 395 215(1)
131, 132 TDS certificates under section 395(4) for deduction other than on salary 215(1)
133 TCS certificate 215(1)
138 Quarterly statement of deduction of tax on salary, and on income of a specified senior citizen under section 393(1) Table Sl. No. 8(iii) 219(1)
140 Quarterly statement of deduction of tax on payments other than salary 219(1)
144 Quarterly statement of deduction of tax on payments other than salary made to non-residents 219(1)
143 Quarterly statement of collection of tax at source 219(1)
141 Challan-cum-statement of deduction of tax under section 393(1) Table Sl. Nos. 2(i), 3(i), 6(ii) and 8(vi) 218(3), 219(5)
142 Quarterly statement of tax deposited on transfer of virtual digital assets, by an exchange 219(2)
145 Information for payments to a non-resident other than a company, or to a foreign company 220
146 Accountant’s certificate for such payments 220(1)(c)

Treaties, foreign tax and transfer pricing

Form Purpose Rule Old form
41 Information to be provided under section 159(8) for treaty relief 75(1) 10F
42 Application for a certificate of residence 75(3)
43 Certificate of residence 75(4)
44 Statement of foreign income and foreign tax credit 76(10) 67
45 Intimation of settlement of dispute on foreign tax 76
46, 47 Option for arm’s length price (section 166(9)) and accountant’s certificate 82
48 Accountant’s report on international and specified domestic transactions 85 3CEB
49 Application for safe harbour 90, 91, 98, 101
51 Application for an Advance Pricing Agreement 106
56, 59 Master file and country-by-country report 123, 124(3)

Registered non-profit organisations

Form Purpose Rule
104 Application for provisional registration or approval 181(1)
105 Application for registration under section 332 or approval under section 354 181(1)
106, 107 Orders granting or rejecting registration and approval 181
108 Option for deemed application under section 341(7) 184
109 Statement of accumulation under section 342(1) 185
110, 111 Application for change of purpose of accumulation and the order 186
112 Audit report under section 348 188
113 Statement of donations by the donee 190(2)
114 Certificate of donation 190(7)

Information reporting and others

Form Purpose Rule
165 Statement of specified financial transactions under section 508(1) 237
166 Statement of reportable account 239
167 Statement of transactions in crypto-assets 243
168 Annual Information Statement 245
162 Annual statement under section 505 by a non-resident with a liaison office in India 234
169, 170 Valuer registration and valuation report 246, 248
188 Application for approval of a superannuation or gratuity fund 313

How to use the table

  1. Find the purpose, then the rule, then read the form in the Rules for its parts and attachments.
  2. Check that the form is available on the portal for the tax year, because some forms are activated later than the Rules.
  3. For forms that carry a due date (audit report, Form 48, statements), the due date is in the Act section or the rule that prescribes it, as explained in the other posts of this series.

How CSM & Co LLP can help

We prepare and file these forms for businesses, employers, trusts and non-residents. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Why have the income tax form numbers changed?

The Income-tax Rules, 2026, which accompany the Income-tax Act, 2025 from 01/04/2026, prescribe the forms afresh and number them in one series (Form 1 to about Form 190 and beyond). Many old forms are now different numbers, and some old forms with similar purposes have been merged.

What is the new form for lower or nil deduction of TDS?

Form 128 (Rule 213), the application for a certificate for lower or nil deduction of income-tax. Form 129 (Rule 214) is the application for a certificate under sections 395(2) and 400(3) for determining the tax to be deducted or collected.

Which forms do employers use for salary TDS?

The employee gives details of other income in Form 122 (Rule 204(1)), the employer’s statement of perquisites and other benefits is Form 123 (Rule 204(2)(b)), and the employee’s statement of claims for deduction is Form 124 (Rule 205). The salary TDS certificate is Form 130 (Rule 215(1), Table Sl. No. 1), and the quarterly statement for salary is Form 138 (Rule 219).

Where is the PAN application form?

Form 93 for an individual who is a citizen of India (Rule 158), Form 94 for an Indian company or entity, Form 95 for an individual who is not a citizen of India and Form 96 for an entity incorporated outside India. Forms 97 and 98 are the declaration by a person without a PAN and the statement of declarations received.

Are the old forms still valid?

For tax years starting from 01/04/2026 the Income-tax Act, 2025 and the Rules 2026 apply, so the new forms are used for those years and for events after that date. Old forms continue to apply to matters under the 1961 Act; check the transition provisions for any particular case.

Where can I find the complete list?

The Income-tax Rules, 2026 on the Income Tax Department website (rule number and form number are given on each form). The department’s portal lists the forms available for e-filing.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Penalties under the Income-tax Act, 2025: Under-Reporting, Misreporting, Waiver Scheme and Other Penalties (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 04 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 439 of the Income-tax Act, 2025 (old section 270A) imposes a penalty of 50% of the tax on under-reported income and 200% of the tax on misreported income; misreporting means misrepresentation or suppression of facts, unrecorded investments, unsubstantiated expenditure, false entries, unrecorded receipts, unreported transfer pricing transactions and income referred to in section 195(1)(b).
  • Finance Act 2026 replaced the immunity scheme in section 440 with a waiver: the assessee pays the tax and interest, plus additional income-tax of 100% (120% in the section 195(1)(b) case) of the tax on under-reported income in place of the penalty, files no appeal, and applies within one month from the end of the month of the order.
  • Other penalties are fixed in the Act: ₹25,000 for not keeping books (section 441), 2% of transaction value for transfer pricing documentation failures (section 442), the amount of tax not deducted or collected (sections 448 and 449) and the amount involved in breaches of the cash rules (sections 450 to 453).
  • No penalty is levied for a listed default if there was reasonable cause (section 470); a show-cause notice and prior approval apply (section 471).

Penalties are in Chapter XXI (sections 439 to 472) of the Income-tax Act, 2025, in force from 01/04/2026. This post covers the main ones: under-reporting and misreporting of income (the old section 270A), the changed waiver scheme, and the fixed penalties for other defaults.

Section 439: under-reporting and misreporting (old 270A)

When income is under-reported (section 439(2))

  • Income assessed is more than the income determined in the return processed under section 270(1)(a).
  • Where no return was filed, or the first return was filed under section 280, income assessed is more than the maximum amount not chargeable to tax.
  • Income reassessed is more than the income assessed or reassessed before.
  • Deemed total income under section 206 (minimum alternate tax and alternative minimum tax) is more than in the processed return, or is more than the exemption limit where there was no return.
  • The assessment reduces a loss or converts it into income.

Amount of under-reported income and tax (section 439(3) to (5) and (12))

Case Under-reported income
Return filed and income assessed for the first time Income assessed less income in the processed return
No return, or first return on a section 280 notice: company, firm or local authority The whole income assessed
No return, or first return on a section 280 notice: others Income assessed less the maximum amount not chargeable to tax
Reassessment or recomputation Income reassessed less income in the preceding order
Loss reduced or converted into income The difference between the loss claimed and the income or loss assessed

The tax on the under-reported income is worked out as the extra tax caused by that income (section 439(12)). No addition that has already been a basis for penalty can be penalised again (section 439(13)), and income on which additional income-tax was paid on an updated return under section 267(5)(ii) is outside the penalty (section 439(13A)).

Rates

Case Penalty
Under-reporting 50% of the tax payable on the under-reported income (section 439(9))
Misreporting 200% of the tax payable on the under-reported income (section 439(10))

Misreporting (section 439(11)): misrepresentation or suppression of facts; failure to record investments in the books; a claim of expenditure not substantiated by evidence; recording a false entry; failure to record a receipt that has a bearing on total income; failure to report an international transaction, deemed international transaction or specified domestic transaction under Chapter X; and, added by Finance Act 2026, income referred to in section 195(1)(b).

Not treated as under-reported income (section 439(8))

  1. Income for which the assessee offers a bona fide explanation and has disclosed all material facts to the satisfaction of the Competent Authority.
  2. An addition on an estimate, where the accounts are correct and complete but the method is such that income cannot be properly deduced.
  3. An addition on an estimate, where the assessee had on his own estimated a lower amount of addition or disallowance on the same issue, included it in his income and disclosed all material facts.
  4. An addition in line with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained the prescribed documents, declared the international transaction and disclosed the facts.

The Competent Authority is the Assessing Officer, Joint Commissioner (Appeals), Commissioner (Appeals), Commissioner or Principal Commissioner, and the penalty is imposed by a written order (section 439(14) and (15)).

Example. An assessment adds ₹10,00,000 to the income in the return (a deduction claim that is not allowed), with tax on that addition at 30%, so ₹3,00,000. The penalty for under-reporting is 50% of ₹3,00,000, which is ₹1,50,000. If the same addition is a misreporting case (for example, an expense not backed by any evidence), the penalty is 200%, which is ₹6,00,000.

Section 440: waiver of penalty and immunity (new from 01/04/2026)

Finance Act 2026 substituted section 440. Earlier, an assessee could get immunity from the penalty by paying the tax and interest and not appealing, except in misreporting cases. Now an assessee can apply for waiver of the penalty and immunity from prosecution under sections 478 and 479, even in misreporting cases, on these conditions (section 440(1)):

  1. The tax and interest under the assessment (section 270(10)) or reassessment (section 279) order are paid within the period in the notice of demand.
  2. Where the penalty is for misreporting under section 439(11)(a) to (f), additional income-tax of 100% of the tax payable on the under-reported income is paid within that period, in place of the penalty.
  3. Where the penalty is for misreporting of income under section 195(1)(b) (section 439(11)(g)), the additional income-tax is 120%.
  4. No appeal is filed against the assessment or reassessment order or the penalty.

The application is made within one month from the end of the month in which the order is received, in the prescribed form (section 440(2)). The Assessing Officer grants the waiver and immunity after the period for appeal under section 358(3)(a) has expired (section 440(3)), but not where a proceeding has been initiated under Chapter XXII (section 440(4)). He decides within three months from the end of the month of receipt, and after hearing the assessee if rejecting (section 440(5) and (6)). The order is final, and if the application is accepted no appeal or revision against the assessment order is admissible (section 440(7) and (8)).

Other penalties

Default Penalty Section
Not keeping and maintaining books under section 62, or not retaining them for the prescribed period ₹25,000 441
Transfer pricing documents not kept, transaction not reported or incorrect information 2% of the value of each transaction 442(1)
Failure to furnish group information to the prescribed authority ₹5,00,000 442(2)
False or omitted entry in the books to evade tax Amount of the false or omitted entry 444
Failure to deduct tax at source (or to pay it) Equal to the tax 448
Failure to collect tax at source Equal to the tax 449
Loan, deposit or specified sum taken in breach of section 185 Equal to the amount 450
Cash receipt in breach of section 186 Equal to the amount 451
No digital payment facility where required (section 187) ₹5,000 for every day 452
Repayment in breach of section 188 Equal to the amount 453
Benefits to related persons by a registered non-profit organisation Equal to the income so applied (first time), 200% (repeat) 445

Late return and audit-related defaults carry a fee under section 428 (late return, audit report, transfer pricing report) rather than a penalty.

Safeguards (sections 470 to 472)

  • Reasonable cause: no penalty is imposed for failures under sections 441, 442, 446, 448 to 453 and the other sections listed in section 470 if the person proves reasonable cause (section 470). The under-reporting penalty has its own exclusions in section 439(8).
  • Procedure: the assessee must be heard and, after Finance Act 2026, given a show-cause notice (section 471(1)); prior approval of the Joint Commissioner is needed where the penalty exceeds ₹10,000 (order by the Income-tax Officer) or ₹20,000 (order by an Assistant or Deputy Commissioner) (section 471(2)).
  • Limitation: the order must be passed within six months from the end of the quarter in which the proceedings are completed, the appeal order is received or the penalty notice is issued, as applicable (section 472(1)).

How CSM & Co LLP can help

We reply to penalty show-cause notices, argue reasonable cause and bona fide explanation, and advise on the new waiver scheme in section 440. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section replaces 270A?

Section 439 of the Income-tax Act, 2025, which imposes penalty for under-reporting and misreporting of income. Section 440 deals with waiver of penalty and immunity from prosecution, and section 441 with failure to keep and maintain books.

When is income “under-reported”?

When the income assessed is greater than the income in the processed return (or greater than the maximum amount not chargeable to tax, where no return was filed or the first return was filed on a notice under section 280); when income reassessed is greater than the income assessed; when the deemed total income under the minimum alternate tax provisions is greater than that in the return; or when the assessment reduces a loss or converts it into income (section 439(2)).

What is the penalty?

50% of the tax payable on the under-reported income (section 439(9)), and 200% of the tax payable on the under-reported income if it results from misreporting (section 439(10)).

What is misreporting?

Misrepresentation or suppression of facts, failure to record investments in the books, a claim of expenditure not substantiated by evidence, recording of a false entry, failure to record a receipt that has a bearing on total income, failure to report an international transaction or a specified domestic transaction under Chapter X, and, from 01/04/2026, income referred to in section 195(1)(b) (section 439(11)).

When is under-reported income excused?

Where the assessee offers an explanation that the authority is satisfied is bona fide and discloses all material facts; where the income is determined on an estimate and the accounts are correct and complete; where the assessee had himself estimated a lower addition or disallowance and disclosed the facts; and where the addition follows the arm’s length price determined by the Transfer Pricing Officer and the assessee had maintained the documents, declared the transaction and disclosed the facts (section 439(8)).

How does the waiver of penalty work?

Under section 440, as substituted by Finance Act 2026, an assessee can apply to the Assessing Officer for waiver of the penalty and immunity from prosecution under sections 478 or 479 if the tax and interest are paid within the time in the demand notice, additional income-tax of 100% of the tax on the under-reported income (120% where the case is under section 439(11)(g)) is paid within that time in place of the penalty, and no appeal is filed. The application is made within one month from the end of the month in which the order is received, and the Assessing Officer decides within three months from the end of the month of its receipt, after a hearing if rejecting.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Income Tax Appeals and Rectification under the Income-tax Act, 2025: Forms 99, 115 and 116, Time Limits and Fees (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 06 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A first appeal against an intimation, assessment, reassessment or penalty order lies to the Joint Commissioner (Appeals) or Commissioner (Appeals) under sections 356 and 357, in Form 99 (the old Form 35), within thirty days of service of the notice of demand or the order (section 358).
  • The fee is ₹250, ₹500 or ₹1,000 depending on assessed income, the tax due on the income returned must be paid first (section 358(6)), and late appeals can be admitted for sufficient cause.
  • A second appeal to the Appellate Tribunal lies in Form 115 (the old Form 36) within two months from the end of the month in which the order is communicated, with a fee of ₹500, ₹1,500 or 1% of assessed income up to ₹10,000; cross-objections go in Form 116 within thirty days.
  • A mistake apparent from the record in an order or intimation can be rectified under section 287 within four years from the end of the financial year of the order, and a High Court appeal on a substantial question of law is filed within 120 days (section 365).

An assessee who disagrees with an order of the Assessing Officer can appeal, first to the Joint Commissioner (Appeals) or Commissioner (Appeals), then to the Appellate Tribunal, then to the High Court on a question of law. A smaller mistake can be corrected by rectification. The Income-tax Act, 2025 (from 01/04/2026) keeps this ladder in sections 356 to 365 and 287.

Old and new references

Old New
Section 246, 246A (orders appealable) Sections 356 and 357
Section 249 (form and limitation), Form 35 Section 358, Form 99 (Rule 167)
Section 250 (procedure) Section 359
Section 251 (powers) Section 360
Section 252, 253 (Tribunal), Form 36 Sections 361 and 362, Form 115 (Rule 193)
Form 36A (cross-objections) Form 116 (Rule 193(2))
Section 254 (Tribunal orders) Section 363
Section 260A (High Court) Section 365
Section 154 (rectification) Section 287
Section 263, 264 (revision) Sections 377 and 378

First appeal: Joint Commissioner (Appeals) or Commissioner (Appeals)

Which orders can be appealed (sections 356 and 357)

An assessee, deductor or collector aggrieved by:

  • an intimation under section 270(1) or 399(1) where adjustments are objected to;
  • an assessment order under section 270(10) or 271 where the assessee objects to the income assessed, the tax, the loss computed or the status;
  • an assessment, reassessment or recomputation under section 279 or 283;
  • a penalty order under Chapter XXI (including enhancement) or a section 412 penalty for default in payment;
  • an order under section 287 or 288 amending any of these, or refusing the claim;
  • an order treating the assessee as agent of a non-resident (section 306), and other listed orders in section 357,

may appeal. Appeals against orders below the rank of Joint Commissioner go to the Joint Commissioner (Appeals) (section 356); the wider list in section 357 goes to the Commissioner (Appeals). No appeal lies before the Joint Commissioner (Appeals) if the order was passed by or with the prior approval of an authority above the rank of Deputy Commissioner (section 356(2)). Orders following directions of the Dispute Resolution Panel are not appealable at this stage (section 357(d) and (e)) and go to the Tribunal.

Form, fee and time limit (section 358)

Item Rule
Form Form 99, filed electronically and verified as for the return (section 358(1), Rule 167)
Fee ₹250 (assessed income up to ₹1,00,000); ₹500 (above ₹1,00,000 up to ₹2,00,000); ₹1,000 (above ₹2,00,000); ₹250 where the subject matter is not covered by these (section 358(2))
Time Within thirty days of the service of the notice of demand (assessment or penalty), or of the service of the intimation of the order in any other case (section 358(3))
Delay The period from an application under section 440(1) to its rejection is excluded; a late appeal can be admitted for sufficient cause (section 358(4) and (5))
Pre-condition The tax due on the income returned must have been paid; if no return was filed, an amount equal to the advance tax payable (section 358(6)); exemption possible on application, reasons recorded (section 358(7))

Hearing (section 359)

The appellate authority fixes the hearing, gives notice to the appellant and the Assessing Officer, and both can be heard. He can adjourn, make further inquiry, direct the Assessing Officer to inquire and report, and allow a new ground of appeal if its omission was not wilful or unreasonable. The order is in writing with the points for determination, the decision and the reasons (section 359). The powers include enhancing the assessment or penalty after notice (section 360). Additional evidence can be produced only in the cases in Rule 192.

Second appeal: Appellate Tribunal (section 362)

Any assessee aggrieved by an order of the Commissioner (Appeals) or Joint Commissioner (Appeals), by certain orders of a Principal Commissioner or Commissioner (including under sections 377, 439 and 465, and on registration of non-profit organisations), or by an assessment order passed on the directions of the Dispute Resolution Panel or with the approval of the Principal Commissioner or Commissioner under section 274(12), can appeal to the Tribunal (section 362(1)). The Principal Commissioner or Commissioner can direct the Assessing Officer to appeal against an order that he objects to (section 362(2)).

Item Rule
Form Form 115 (appeal) and Form 116 (memorandum of cross-objections), signed by the person who signs the appeal under Rule 167(3) (Rule 193)
Time Two months from the end of the month in which the order is communicated (section 362(3))
Cross-objections Within thirty days of the receipt of notice of the other party’s appeal, even if no appeal was filed (section 362(4))
Delay Admitted if sufficient cause is shown (section 362(5))
Fee ₹500 (income up to ₹1,00,000); ₹1,500 (above that up to ₹2,00,000); 1% of the assessed income up to a maximum of ₹10,000 (above ₹2,00,000); ₹500 for other matters. No fee for the department’s appeal or cross-objections. A stay application costs ₹500 (section 362(6) to (8))

The Tribunal can pass orders after hearing both sides and can rectify a mistake apparent from the record within six months from the end of the month in which the order was passed (section 363).

High Court (section 365)

An appeal lies to the High Court from an order of the Tribunal only if the High Court is satisfied that the case involves a substantial question of law (section 365(1)). It is filed within 120 days of receipt of the order, with a memorandum stating the question precisely, and the High Court can admit it late for sufficient cause (section 365(2) and (3)). The High Court formulates the question and hears the appeal on it (section 365(4) and (5)).

Rectification of mistakes (section 287)

An income-tax authority can amend any order passed by it, an intimation or deemed intimation under section 270(1), or an intimation under section 399, to rectify a mistake apparent from the record (section 287(1)).

  • The authority can act on its own motion, and must act on a mistake brought to its notice by the assessee, deductor or collector (section 287(3)).
  • It cannot amend a matter that was considered and decided in an appeal or revision (section 287(2)).
  • An amendment that increases the liability or reduces the refund needs a notice of intention and a hearing (section 287(4)); a demand notice follows (section 287(7)).
  • If it reduces the liability, the refund is made (section 287(6)).
  • Time: no amendment after four years from the end of the financial year in which the order or intimation was passed (section 287(8)). An application must be disposed of within six months from the end of the month of receipt (section 287(9)).
  • Section 288 allows other amendments in specified cases, such as the order of a partner or a member of an association of persons when the firm’s or association’s assessment changes.

What to do on receiving an adverse order

  1. Note the date of service of the order and the notice of demand; compute thirty days.
  2. Pay the tax due on the income returned (and decide whether a stay of the balance is needed).
  3. File Form 99 with the grounds and the fee; attach the order and the demand notice.
  4. If a mistake is apparent, consider a rectification application as well, but do not let the appeal deadline pass while you wait for it.

How CSM & Co LLP can help

We prepare and file appeals, rectification applications and stay requests and represent clients before the Commissioner (Appeals) and the Tribunal. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections of the 2025 Act deal with appeals?

Sections 356 and 357 (orders appealable to the Joint Commissioner (Appeals) and the Commissioner (Appeals), old 246 and 246A), section 358 (form, fee and limitation, old 249), section 359 (procedure and powers, old 250), sections 361 and 362 (Appellate Tribunal and appeals to it, old 252 and 253), section 363 (orders of the Tribunal, old 254) and section 365 (High Court, old 260A).

What is the time limit for the first appeal?

Thirty days from the date of service of the notice of demand where the appeal relates to an assessment or penalty, and in any other case from the date the intimation of the order is served (section 358(3)). The Joint Commissioner (Appeals) or the Commissioner (Appeals) can admit a late appeal if satisfied that there was sufficient cause (section 358(5)).

What must be paid before filing the first appeal?

The tax due on the income returned by the assessee where a return was filed, or an amount equal to the advance tax payable where no return was filed; the appellate authority can exempt a person from the second requirement on application, with reasons recorded in writing (section 358(6) and (7)).

What is the fee for the appeal?

₹250 where the total income as computed by the Assessing Officer is ₹1,00,000 or less; ₹500 where it is more than ₹1,00,000 but not more than ₹2,00,000; ₹1,000 where it is more than ₹2,00,000; and ₹250 where the subject matter is not covered by those cases (section 358(2)).

What are the time limit and fee for the Tribunal appeal?

The appeal in Form 115 must be filed within two months from the end of the month in which the order is communicated (section 362(3), Rule 193). The fee is ₹500 for total income up to ₹1,00,000, ₹1,500 up to ₹2,00,000, and 1% of the assessed income subject to a maximum of ₹10,000 above that, and ₹500 for other matters; a stay application costs ₹500 (section 362(6) and (8)). A memorandum of cross-objections is filed in Form 116 within thirty days of the notice of the appeal (section 362(4)).

How do I correct a mistake in an assessment order or intimation?

By an application under section 287 to the authority that passed the order or intimation. The authority must pass an order within six months from the end of the month in which the application is received, and no amendment can be made after four years from the end of the financial year in which the order was passed (section 287(8) and (9)). An amendment that increases the liability needs a prior notice and a hearing (section 287(4)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Income Escaping Assessment (Reassessment) under the Income-tax Act, 2025: Sections 279 to 285, Show-Cause Notice and Time Limits (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 19 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Sections 279 to 285 of the Income-tax Act, 2025 replace the old sections 147 to 153: the Assessing Officer can assess, reassess or recompute income that has escaped assessment, but only after a show-cause notice (section 281, old 148A) and an order that it is a fit case, followed by a notice under section 280 (old 148).
  • Time limits: a section 280 notice cannot be issued after four years and three months from the end of the tax year, or after six years and three months where books or evidence show escaped income of ₹50 lakh or more (section 282); the show-cause notice has limits of four and six years.
  • The notice needs information that suggests escaped income (section 280(4), defined in 280(6)); the section 281 hearing is skipped for cases from the information-sharing scheme, Approving Panel directions and appellate findings, and approval of the Additional or Joint Commissioner (or Director) is required.
  • A return in response to the notice must be furnished in the period in the notice (at least thirty days, at most three months from the end of the month of the notice after Finance Act 2026); the order must be made within one year from the end of the financial year in which the notice was served (section 286).

If the department believes income chargeable to tax has escaped assessment for an earlier year, it can reopen the year. This is called income escaping assessment or reassessment. In the Income-tax Act, 2025 (from 01/04/2026) the rules are in sections 279 to 285, with the time limit for the order in section 286. They replace the old sections 147 to 153.

The steps

Step Section What happens
1. Information 280(4), 280(6) The Assessing Officer must have information suggesting that income has escaped assessment
2. Show-cause notice 281(1), (2) Notice with the information, and a chance to reply
3. Order 281(3) Order, with prior approval of the specified authority, on whether it is a fit case to issue a notice under section 280
4. Notice 280(1) Notice requiring a return within the period in the notice; the order under section 281(3) is attached
5. Assessment 279 Assessment, reassessment or recomputation
6. Time limit 286 Order within one year from the end of the financial year in which the notice under section 280 was served

What counts as “information” (section 280(6))

Information that suggests income has escaped assessment means any of:

  • information for the assessee and tax year as per the risk management strategy of the Board;
  • an audit objection that the assessment was not made as per the Act;
  • information received under a tax treaty (section 159);
  • information under the scheme notified under section 260;
  • information that requires action in consequence of a Tribunal or court order;
  • information from a survey under section 253 (other than section 253(4));
  • directions of the Approving Panel under section 274(6); or
  • a finding or direction in an order in an appeal, reference or revision, or by a court in any other law.

Show-cause step (section 281)

Before issuing a notice under section 280, the Assessing Officer must serve a show-cause notice accompanied by the information, and the assessee can reply within the time given. After considering the reply, the Assessing Officer passes an order with the prior approval of the specified authority (Additional Commissioner, Additional Director, Joint Commissioner or Joint Director, section 284) on whether it is a fit case to issue a section 280 notice (section 281(3)).

The show-cause step does not apply where the information is from the scheme under section 260, from directions of the Approving Panel, or from a finding or direction in an appellate, revision or court order (section 281(4)). In those cases the notice under section 280 needs the prior approval of the specified authority (section 280(5)).

Time limits (section 282)

Notice Within Longer limit
Show-cause notice, section 281 Four years from the end of the relevant tax year Up to six years if the escaped income is or is likely to be ₹50 lakh or more, as per the information with the Assessing Officer
Notice, section 280 Four years and three months from the end of the relevant tax year Up to six years and three months if the Assessing Officer holds books of account, documents or evidence relating to an asset, expenditure, transaction or entry showing escaped income of ₹50 lakh or more

No notice under section 280 or 281 is to be issued within one year from the end of any tax year (section 282(3)).

Example. For tax year 2026-27 (ended 31/03/2027), a section 280 notice can be issued up to 30/06/2031 (four years and three months), or up to 30/06/2033 if the evidence test of ₹50 lakh is met.

Appeal and court orders. A notice under section 280 can be issued at any time to give effect to a finding or direction in an order of an authority, Tribunal or court, or Approving Panel directions (section 283(1)), but not for a year that was already time-barred when the order or proceeding began (section 283(2)), and it must be issued within three months from the end of the quarter in which the certified copy of the order is received by the Principal Commissioner or Commissioner (section 283(3)).

Return in response to the notice (section 280)

The notice requires a return of income within the period it specifies, which is at least thirty days from the date of the notice and not more than three months from the end of the month in which it is issued (section 280(1)(c), as substituted by Finance Act 2026, which added the thirty days minimum). The return is on the prescribed form and treated as if furnished under section 263 (section 280(2)). A return filed after the period is not deemed a return under section 263 (section 280(3)).

The assessment

  • The Assessing Officer can assess or reassess the escaped income, or recompute loss, depreciation or any allowance or deduction for the relevant tax year (section 279(1)). He can also assess other issues that escaped assessment and come to notice during the proceedings, even though section 281 was not followed for them (section 279(2)).
  • For sections 280 and 281 the “Assessing Officer” is an officer other than the National Faceless Assessment Centre or an assessment unit (section 279(3)).
  • Tax is charged at the rates at which it would have been charged had the income not escaped assessment (section 285(1)).
  • Proceedings are dropped on the assessee’s claim if he has been assessed on an amount not lower than the amount for which he would be rightly liable even after including the escaped income, and has not challenged the original assessment (section 285(2)); a claim under this sub-section bars reopening matters concluded by orders under sections 287, 288, 365(10), 368 or 377 (section 285(3)).
  • The order must be made within one year from the end of the financial year in which the notice was served (section 286, Table Sl. No. 4). Interest for failure to file in response to a notice is charged under section 423.

What to do on receiving a notice

  1. Note the date of the show-cause notice or the section 280 notice and compare it with the limits above.
  2. Reply to the show-cause notice with documents; this is the chance to stop the case before it is opened.
  3. If a section 280 notice is served, file the return within the period given, even if you disagree with the reasons, and read the order under section 281(3) that comes with the notice.
  4. Check that the specified authority’s approval was obtained, where required.

How CSM & Co LLP can help

We reply to show-cause and reassessment notices, represent clients before the Assessing Officer and challenge notices that are out of time or lack approval. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections replace 147, 148 and 148A?

Section 279 (assessment, reassessment or recomputation of income that has escaped assessment, old 147), section 280 (notice, old 148), section 281 (procedure before the notice, show-cause and order, old 148A), section 282 (time limits, old 149), section 283 (assessments in consequence of appellate orders, old 150), section 284 (sanction, old 151) and section 285 (other provisions).

What is the time limit for a reassessment notice?

No notice under section 280 can be issued once four years and three months have elapsed from the end of the relevant tax year, unless the Assessing Officer has books of account, documents or evidence relating to an asset, expenditure, transaction or entry showing that the escaped income is or is likely to be ₹50 lakh or more, in which case the limit is six years and three months (section 282(1)). For the show-cause notice under section 281 the limits are four years and six years (section 282(2)). No notice under section 280 or 281 is to be issued within one year from the end of any tax year (section 282(3)).

What does the assessee get before the notice is issued?

A show-cause notice with the information that suggests escaped income, a chance to reply, and then an order, with the prior approval of the specified authority, deciding whether it is a fit case for a section 280 notice. The order is sent with the notice (sections 280(1)(a) and 281).

When is the show-cause step not required?

Where the Assessing Officer has received information under the scheme notified under section 260, directions of the Approving Panel under section 274(6), or a finding or direction in an order of an authority, Tribunal or court (section 281(4)). In these cases the notice under section 280 needs the prior approval of the specified authority (section 280(5)) and can be issued at any time for giving effect to appellate findings (section 283), within three months from the end of the quarter in which the order is received.

How long do I have to file the return in response to the notice?

The period in the notice, which must be at least thirty days from the date of the notice and not more than three months from the end of the month in which the notice is issued (section 280(1)(c), as substituted by Finance Act 2026). A return filed after that period is not treated as a return under section 263 (section 280(3)).

Can the proceedings be dropped?

Yes, on the assessee’s claim and showing that he has been assessed on an amount not lower than what he would be rightly liable for even if the escaped income had been taken into account, and that he has not challenged any part of the original assessment order in appeal or revision (section 285(2)).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Income Tax Assessment under the Income-tax Act, 2025: Processing, Scrutiny Notice, Best Judgment and Time Limits (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 01 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Every return is first processed under section 270(1) (old section 143(1)): arithmetical errors, apparent incorrect claims and similar adjustments are made only after a communication and thirty days to reply, and the intimation must be sent within nine months from the end of the financial year in which the return is made.
  • Scrutiny starts with a notice under section 270(8) (old 143(2)), which cannot be served after three months from the end of the financial year in which the return is furnished; the order under section 270(10) follows after hearing the assessee.
  • A notice under section 268(1) (old 142(1)) asks for a return, accounts, documents or information; failure to comply with it or with a section 270(8) notice, or not filing a return, leads to best judgment assessment under section 271 after a show-cause notice.
  • Assessments in notified cases are faceless under section 273, and the order must be made within one year from the end of the financial year succeeding the tax year (section 286).

“Assessment” is how the department decides the income and tax of a taxpayer after the return is filed. The Income-tax Act, 2025 (from 01/04/2026) keeps the same stages as the 1961 Act, in sections 268 to 273 and 286.

Old and new sections

Old section New section Stage
142(1) 268(1) Notice for a return, accounts, documents, information
142(2A) 268(5) Direction for special audit
142A 269 Reference to the Valuation Officer
143(1) 270(1) Processing of the return and intimation
143(2) 270(8) Notice for scrutiny
143(3) 270(10) Scrutiny assessment order
144 271 Best judgment assessment
144B 273 Faceless assessment
153 286 Time limit for assessment

Stage 1: Processing of the return (section 270(1))

When a return is made under section 263 or in response to a notice under section 268(1), it is processed:

  1. Adjustments are made to the total income for: an arithmetical error; an incorrect claim apparent from the return; an inconsistency with the return of an earlier year as prescribed; disallowance of a loss claimed where the return for the year of the loss was filed late; disallowance of expenditure or increase in income shown in the audit report but not taken into account in the return; and disallowance of a Chapter VIII-C deduction where the return is late.
  2. An incorrect claim apparent from the return means a claim that is inconsistent with another entry, a claim for which the supporting information required by the Act has not been furnished, or a deduction above a statutory limit (section 270(5)(a)).
  3. Communication first. Before any adjustment, the assessee must be sent a communication, in writing or electronically, the response must be considered, and if no response comes within thirty days the adjustment is made and the intimation sent (section 270(2)).
  4. Tax, interest and fee are computed on the adjusted income, and credit is given for TDS, TCS, advance tax, reliefs, self-assessment tax and other payments. The intimation states the sum payable or the refund due, and the refund is granted (section 270(1)(b) to (e)).
  5. Time limit: no intimation after nine months from the end of the financial year in which the return is made (section 270(4)). The acknowledgement of the return is treated as the intimation where nothing is payable or refundable and no adjustment is made (section 270(5)(b)).

Stage 2: Notice for information (section 268)

The Assessing Officer can serve a notice on a person who has filed a return, or for whom the time to file has expired, requiring a return (if none was filed in time), accounts and documents, and written information including a statement of assets and liabilities (section 268(1)). Limits and safeguards:

  • The previous approval of the Joint Commissioner is needed before asking for a statement of assets and liabilities not in the accounts, and accounts of a period more than three years before the relevant tax year cannot be required (section 268(2)).
  • The Assessing Officer can make any inquiry he considers necessary (section 268(4)).
  • Special audit or valuation of inventory can be directed, after hearing the assessee and with the previous approval of the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner, because of the complexity or volume of accounts, doubts about their correctness, multiple transactions or specialised business. The accountant is nominated by that authority and the cost is paid by the Central Government. The report must be furnished within the period set, which with extensions cannot exceed six months from the end of the month of the direction (section 268(5) to (11)).
  • The assessee must be given an opportunity to be heard on material gathered from an inquiry or special audit that is proposed to be used (section 268(12)).

Stage 3: Scrutiny (section 270(8) to (10))

If the Assessing Officer considers it necessary to ensure that the assessee has not understated income, computed an excessive loss or under-paid tax, a notice is served requiring the assessee to attend or produce evidence (section 270(8)).

  • Time limit: the notice cannot be served after three months from the end of the financial year in which the return is furnished (section 270(9)).
  • Order: on the day specified, or soon after, after hearing the evidence and taking relevant material into account, the Assessing Officer makes an assessment of the total income or loss by an order in writing and determines the sum payable or refundable (section 270(10)).
  • Tax and interest paid on the intimation are treated as paid towards the regular assessment (section 270(15)).
  • For registered non-profit organisations, specified violations lead to a reference to the Principal Commissioner or Commissioner before assessment (section 270(13)).

Best judgment assessment (section 271)

If a person (a) fails to file the return required under section 263, (b) fails to comply with all the terms of a notice under section 268(1) or a direction under section 268(5), or (c) having filed a return, fails to comply with a notice under section 270(8), the Assessing Officer, after considering the material gathered and giving an opportunity of being heard, makes the assessment to the best of his judgment and determines the sum payable. A show-cause notice must first be served, but it is not needed where a section 268(1) notice has already been issued (section 271(2) and (3)).

Faceless assessment (section 273)

Assessment, reassessment or recomputation under sections 270(10), 271 or 279 in the cases specified by the Board is made in a faceless manner. The National Faceless Assessment Centre assigns the case to an assessment unit, serves the notices under section 268(1) or 270(8) and forwards the assessee’s replies. Assessment units, verification units, technical units and other units set up by the Board perform the specific functions (section 273(3)).

Time limit for completing the assessment (section 286)

Order Time limit Calculated from
Assessment order under section 270(10) or 271 One year End of the financial year succeeding the relevant tax year
Where an updated return is furnished under section 263(6) One year End of the financial year in which the updated return was furnished
Assessment, reassessment or recomputation under section 279 One year End of the financial year in which the notice under section 280 was served
Fresh assessment after an order setting aside an assessment One year End of the financial year in which the order is received or passed
Order giving effect to an appellate or revision order (no fresh assessment) Six months, extendable to nine months End of the month in which the order is received or passed

If a reference is made to the Transfer Pricing Officer under section 166(1), the time for the first five cases above is extended by twelve months (section 286(2)). Periods of stay by a court, reopening at the assessee’s request and similar periods are excluded (section 286(3)).

Example. For tax year 2026-27 (income of 01/04/2026 to 31/03/2027), the financial year succeeding is 2027-28, which ends on 31/03/2028. The assessment order must be made by 31/03/2029. A scrutiny notice for a return filed on 31/07/2027 must be served by 30/06/2028, which is three months from the end of financial year 2027-28.

What to do on receiving a notice

  1. Check the section under which the notice is issued and the date, and the time limit that applies to it.
  2. Reply on the portal by the due date; ask for time in writing if you need it.
  3. Keep the working papers for the period covered; accounts older than three years before the tax year cannot be demanded under section 268.
  4. Do not ignore a notice: non-compliance with sections 268 and 270(8) can lead to best judgment assessment and penalties.

How CSM & Co LLP can help

We represent clients in scrutiny, reply to notices on the portal and appear before the Assessing Officer and appellate authorities. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section of the 2025 Act replaces 143(1), 143(2), 142(1) and 144?

Section 270(1) (processing and intimation, old 143(1)), section 270(8) to (10) (scrutiny notice and order, old 143(2) and 143(3)), section 268 (inquiry before assessment and notice, old 142), and section 271 (best judgment assessment, old 144). Faceless assessment, old 144B, is section 273.

What adjustments can be made in processing a return?

Arithmetical errors; an incorrect claim apparent from the return (inconsistent entries, missing information needed to substantiate the claim, or a deduction above a statutory limit); inconsistency with the return of a preceding year as prescribed; disallowance of a loss where the earlier year’s return was late; disallowance of expenditure or increase in income shown in the audit report but not taken into account; and disallowance of a Chapter VIII-C deduction where the return is late (section 270(1)(a) and (5)). A communication must be sent first, and if there is no reply within thirty days the adjustment is made (section 270(2)).

How long does the department have to send the intimation?

Nine months from the end of the financial year in which the return is made (section 270(4)).

When can a scrutiny notice be served?

Not after three months from the end of the financial year in which the return is furnished (section 270(9)). On the date in the notice the assessee attends or produces evidence, and the Assessing Officer then makes an assessment by a written order (section 270(10)).

What happens if I do not respond to a notice or do not file a return?

The Assessing Officer, after considering the material gathered and after a show-cause notice (unless a section 268(1) notice has already been issued), makes the assessment to the best of judgment (section 271).

What is the time limit for completing the assessment?

One year from the end of the financial year succeeding the relevant tax year (for tax year 2026-27, the financial year succeeding is 2027-28, so by 31/03/2029). The period is longer where a reference is made to the Transfer Pricing Officer (an extra twelve months) and in other listed cases, and certain periods are excluded (section 286).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Transfer Pricing under the Income-tax Act, 2025: Arm’s Length Price, Documentation, Form 48 Report and Fee (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 31 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Transfer pricing rules (sections 161 to 173 of the Income-tax Act, 2025, old sections 92 to 92F) require income, expense and interest from an international transaction or a specified domestic transaction to be worked out at the arm’s length price.
  • Associated enterprises are linked by shareholding of 26% or more of the voting power, a loan of 51% or more of total assets, guarantees of 10% or more of borrowings, control of the board, dependence on intangibles or raw materials, and similar tests (section 162).
  • The method is chosen from comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin or a prescribed method (section 165); a variation of up to 3% (as notified) from the arm’s length price is tolerated when one price is determined.
  • The accountant’s report goes in Form 48 at least one month before the return due date (Rule 85); late filing now attracts a fee of ₹50,000 (up to one month) or ₹1,00,000 (section 428(d)), since the penalty in section 447 was omitted by Finance Act 2026, and a penalty of 2% of the transaction value applies for failing to keep documents (section 442).

When two related businesses deal with each other, the price they charge may not be the price independent parties would have agreed. Transfer pricing rules make sure the profit is not shifted out of India by such pricing. In the Income-tax Act, 2025 (from 01/04/2026) they are in Chapter X, sections 161 to 173 (old sections 92 to 92F), and the Rules in Rules 84 and 85.

Section map

Old New Subject
92 161 Income and expense at arm’s length price
92A 162 Associated enterprise
92B 163 International transaction
92BA 164 Specified domestic transaction
92C 165 Determination of arm’s length price
92CA 166 Reference to Transfer Pricing Officer
92CB 167 Safe harbour
92CC, 92CD 168, 169 Advance pricing agreement
92CE 170 Secondary adjustment
92D 171 Information and documents
92E 172 Accountant’s report
92F 173 Definitions
3CEB Form 48 Accountant’s report

Who is an associated enterprise (section 162)

Two enterprises are associated if, for example:

  • the same persons take part in the management, control or capital of both;
  • one holds 26% or more of the voting power of the other, or a person holds 26% or more in each;
  • one has lent a loan that is 51% or more of the book value of the other’s total assets, or guarantees 10% or more of its total borrowings;
  • one appoints more than half of the other’s board or an executive director;
  • one depends wholly on intangibles owned by the other, or 90% or more of its raw materials come from the other on influenced terms, or its goods are sold to the other on influenced terms;
  • common control by an individual or relatives, or a HUF and a member;
  • one is a firm, association or body of individuals and the other holds 10% or more interest in it; or
  • they have a prescribed relationship of mutual interest.

International and specified domestic transactions

An international transaction (section 163) is a transaction between associated enterprises, one of which is necessarily a non-resident, covering tangible and intangible property, capital financing (borrowing, lending, guarantee, marketable securities, advances), services (market research, management, technical, legal, accounting and others), business restructuring, cost-sharing arrangements and any other transaction having a bearing on profits, income, losses or assets. A transaction with an outsider is deemed an international transaction if a prior agreement exists with an associated enterprise, or its terms are determined in substance between the outsider and the associated enterprise (section 163(2)).

A specified domestic transaction (section 164) includes certain transactions between the assessee and related persons (for example those covered by sections 122, 140(9), 140(13) and 205(4)) and prescribed ones, where the aggregate of such transactions in the tax year exceeds ₹20 crore.

Determining the arm’s length price (section 165)

  1. Choose the most appropriate method from: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin, or another method the Board prescribes (section 165(1) and (2)).
  2. If one price results, it is the arm’s length price; but the price actually charged is accepted if it differs by no more than a notified percentage, not exceeding 3% (section 165(3)(a)). If more than one price results, the price is determined as prescribed (section 165(3)(b)).
  3. The Assessing Officer can determine the arm’s length price if the price was not determined correctly, documents were not kept, the data used is unreliable or information was not furnished in time, after giving a show-cause notice (section 165(4) and (5)). No deduction under Chapter VIII is allowed on the income that is increased (section 165(7)).
  4. Where the AO makes the adjustment on a payment from which tax was deducted, the other associated enterprise’s income is not recomputed (section 165(8)).
  5. The Assessing Officer can refer the case to the Transfer Pricing Officer (section 166), and a secondary adjustment can be required to align the books with the transfer price (section 170).

Safe harbour rules (section 167) and advance pricing agreements (sections 168 and 169) can give certainty in advance.

Documentation (section 171, Rule 84)

Every person who has entered into an international or specified domestic transaction, and every constituent entity of an international group, must keep and maintain information and documents as prescribed. Rule 84(1) lists them: ownership structure, group profile, business description, terms of each transaction, functional analysis (functions, risks, assets), forecasts, comparability analysis, methods considered, the reasons for the method chosen, and the computation of the arm’s length price.

  • Exemption: the list does not apply to international transactions whose aggregate value in the books for the year does not exceed ₹1 crore, but the assessee must substantiate that the income from them was computed at arm’s length (Rule 84(2) and (3)).
  • Retention: nine years from the end of the relevant tax year (Rule 84(8)).
  • On request: documents must be furnished within ten days of a notice, extendable by up to thirty days on application (section 171(2) and (3)).

The accountant’s report: Form 48 (section 172, Rule 85)

Every person who entered into an international or specified domestic transaction in the tax year must obtain a report from an accountant and furnish it in Form 48, at least one month before the due date of the return (Rule 85). “Specified date” is one month before the due date for the return under section 263(1) (section 173(d)). For a company or an audited assessee with a return due date of 31 October, that is 30 September (and one month before 30 November where the return is due on 30 November).

Consequences of default

Default Consequence Section
Report not furnished by the specified date Fee of ₹50,000 (up to one month) or ₹1,00,000 thereafter 428(d)
Failure to keep documents, to report a transaction or incorrect information Penalty of 2% of the value of each transaction 442(1)
Failure to furnish information required for an international group Penalty of ₹5,00,000 442(2)
Adjustment of income Assessed after notice and the AO’s determination 165(4) to (6)

The old penalty of ₹1,00,000 for not furnishing the report (section 447) was omitted by Finance Act 2026 from 01/04/2026 and replaced by the fee under section 428(d).

Practical points

  1. Build the transfer pricing file during the year, not at filing time.
  2. Check whether the 26%, 51% or 10% tests apply to every group company, since a small shareholding can still make two companies associated.
  3. Treat management fees, royalties, loans to subsidiaries and guarantees as international transactions.
  4. Keep the Form 48 date in the compliance calendar, one month before the return.

How CSM & Co LLP can help

We prepare transfer pricing documentation, benchmarking studies and the accountant’s report in Form 48 for businesses with related party dealings. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections of the 2025 Act deal with transfer pricing?

Sections 161 to 173 in Chapter X: section 161 (income at arm’s length price), 162 (associated enterprise), 163 (international transaction), 164 (specified domestic transaction), 165 (determination of arm’s length price), 166 (reference to the Transfer Pricing Officer), 167 (safe harbour), 168 and 169 (advance pricing agreements), 170 (secondary adjustment), 171 (information and documents), 172 (accountant’s report) and 173 (definitions).

Who is an associated enterprise?

An enterprise that participates in the management, control or capital of the other, or in which the same persons do; or one holding 26% or more of the voting power of the other (or a person holding 26% in both); or one that has lent 51% or more of the other’s total assets (book value); or guarantees 10% or more of its borrowings; or appoints more than half its board; or the business of which depends wholly on the other’s intangibles or on 90% or more of raw materials supplied by the other; and certain cases of common control by an individual or HUF (section 162).

What is an international transaction?

A transaction between two or more associated enterprises, one of which is necessarily a non-resident, covering the purchase, sale or use of tangible or intangible property, lending and borrowing, provision of services, business restructuring, cost sharing and any other transaction affecting profits, income, losses or assets (section 163). A transaction with an outsider can be deemed an international transaction if there is a prior agreement with an associated enterprise, or its terms are in substance determined with it (section 163(2)).

Is there a minimum value for documentation?

Rule 84(2) says the detailed documentation list does not apply to an international transaction where the aggregate value recorded in the books for the tax year does not exceed ₹1 crore, but the assessee must substantiate that income from them was computed at arm’s length. Specified domestic transactions count only where the aggregate in the year exceeds ₹20 crore (section 164). Documents are kept for nine years from the end of the tax year (Rule 84(8)).

What is the tolerance for the arm’s length price?

Where one price is determined by the most appropriate method, the price actually charged is accepted if the difference from that price is not more than a percentage, not exceeding 3%, notified by the Central Government (section 165(3)(a)(ii)).

What if the accountant’s report is late?

A fee of ₹50,000 for a delay up to one month and ₹1,00,000 thereafter (section 428(d)). The separate penalty of ₹1,00,000 in section 447 was omitted by Finance Act 2026 from 01/04/2026. A penalty of 2% of the value of each transaction applies for failure to keep and maintain documents, to report a transaction, or for incorrect information (section 442(1)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

DTAA and Foreign Tax Credit under the Income-tax Act, 2025: Sections 159 and 160, Forms 41 to 44 and Rule 76 (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 15 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A tax treaty (DTAA) under section 159 of the Income-tax Act, 2025 applies to an assessee only to the extent it is more beneficial than the Act (section 159(4)); a non-resident must hold a residence certificate from the other country and provide the documents in Form 41 (the old Form 10F) to claim it (section 159(8), Rule 75).
  • A resident of India who pays tax abroad claims foreign tax credit under Rule 76: the lower of the Indian tax on that income and the foreign tax paid, country by country and source by source, with the statement in Form 44 (the old Form 67) furnished within twelve months from the end of the tax year.
  • For countries with no agreement, section 160 gives a deduction at the lower of the Indian rate or the foreign rate.
  • An Indian resident who needs a residence certificate for a treaty applies in Form 42 to the Assessing Officer, who issues it in Form 43.

Income earned across borders can be taxed twice, once by the country where it arises and again by the country where the earner lives. India avoids this through Double Taxation Avoidance Agreements (DTAA) and through foreign tax credit rules. In the Income-tax Act, 2025 (from 01/04/2026) these are sections 159 and 160, supported by Rules 75 and 76 of the Income-tax Rules, 2026.

Old and new references

Old New
Section 90 and 90A (agreements) Section 159
Section 91 (no agreement) Section 160
Form 10F (information for treaty claim by a non-resident) Form 41 (Rule 75(1))
Tax Residency Certificate application and certificate Form 42 (application) and Form 43 (certificate) (Rule 75(3) and (4))
Rule 128 and Form 67 (foreign tax credit) Rule 76 and Form 44

Section 159: treaties

  • The Central Government may enter into an agreement with another country or a specified territory to give relief for income taxed in both, to avoid double taxation without creating chances of non-taxation or reduced taxation through evasion or treaty-shopping, to exchange information and to help recover tax (section 159(1) and (3)).
  • Where an agreement applies to an assessee, the Act applies to the extent it is more beneficial to the assessee (section 159(4)).
  • The special rules in Chapter XI (anti-avoidance) apply even if they are not beneficial (section 159(6)).
  • A term defined in the agreement has that meaning; if not, the Act’s meaning is used (section 159(7)).
  • A non-resident can claim relief under an agreement only when it obtains a certificate of residence from the government of its country and provides the other documents and information prescribed (section 159(8)). Rule 75 prescribes Form 41, and the assessee must keep the documents to support it.

A resident who wants a treaty benefit abroad

A resident of India who needs a certificate of residence applies in Form 42 to the Assessing Officer, who on being satisfied issues it in Form 43 (Rule 75(3) and (4)).

Foreign tax credit for a resident (Rule 76)

A resident is allowed credit for foreign tax paid, by deduction or otherwise, in a country or specified territory outside India, in the tax year in which the corresponding income is offered or assessed to tax in India (Rule 76(1)). If the income is offered in more than one year, credit is spread in the same proportion (Rule 76(2)).

  • Foreign tax means the tax covered by the agreement, where there is one, and otherwise the tax in the nature of income-tax (including excess profits or business profits tax) under the law of that country (Rule 76(3) and section 160(3)(a)).
  • Credit is against tax, surcharge and cess, and not interest, fee or penalty (Rule 76(4)).
  • Calculation, source by source and country by country: the lower of the Indian tax on that income and the foreign tax paid on it. Foreign tax above the amount payable under the agreement is ignored (Rule 76(7)(a)).
  • Currency: the telegraphic transfer buying rate on the last day of the month before the month in which the tax was paid or deducted (Rule 76(7)(b)).
  • Minimum alternate tax: credit is allowed against the tax under section 206 in the same way, with the excess ignored for the credit under section 206(1)(m) to (p) and 206(2)(e) to (h) (Rule 76(8) and (9)).
  • Disputed foreign tax: no credit while disputed (Rule 76(5)); allowed later within six months from the end of the month the dispute is settled, with proof of payment and an undertaking that no refund has been or will be claimed (Rule 76(6)).

Documents and time limit

  1. Form 44: statement of income from outside India offered for tax, the foreign tax on it, the treaty article and rate, and the credit claimed.
  2. A certificate or statement of the nature of income and the tax, from the foreign tax authority, the person who deducted the tax, or signed by the assessee, with an acknowledgement of payment, bank counterfoil or challan, or proof of deduction.
  3. Both within twelve months from the end of the tax year in which the income is offered to tax or assessed in India, and the return for that year must have been furnished within the time in section 263(1) or (4) (Rule 76(10) to (12)).

Example. A resident individual earns ₹10,00,000 of foreign income from one country, on which ₹1,50,000 tax was paid there. The Indian tax on that income (at the average rate on total income) is ₹2,00,000, and the treaty allows a maximum of ₹1,20,000. The foreign tax above the treaty limit, ₹30,000, is ignored, so the foreign tax counted is ₹1,20,000, which is lower than ₹2,00,000. The credit is ₹1,20,000 and the Indian tax payable on that income is ₹80,000.

Section 160: no agreement

A resident who has paid income-tax in a country with which there is no agreement under section 159, on income that accrued or arose outside India and is not deemed to accrue or arise in India, is entitled to a deduction from the Indian tax of a sum on the doubly taxed income at the Indian rate or the foreign rate, whichever is lower (the Indian rate if both are equal) (section 160(1)). The same applies to a non-resident taxed on a share in a registered firm that is resident in India (section 160(2)). The foreign credit rules of Rule 76 apply to credit under section 160 as well.

Practical points

  1. Check the treaty for the particular country and article. The treaty rate for dividend, interest, royalty and fees for technical services differs by country and can change by protocol, so verify it in the notified text.
  2. Get the foreign paperwork early. Form 44 needs the foreign tax certificate or statement, and the twelve month limit runs from the end of the tax year.
  3. Residents with foreign assets also have reporting duties under section 263(1)(a)(ix).

How CSM & Co LLP can help

We prepare Form 44 and the foreign tax documents, advise on treaty rates, residence certificates and Form 41, and file returns with foreign income. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Does a tax treaty always reduce Indian tax?

The Act applies to an assessee to whom an agreement applies only to the extent it is more beneficial (section 159(4)). The provisions of Chapter XI (the general anti-avoidance rules) apply even if they are not beneficial (section 159(6)). A non-resident can claim treaty relief only if it holds a certificate of residence from the government of its country and provides the other prescribed documents and information (section 159(8)).

What replaces Form 10F?

Form 41, under Rule 75(1): the documents and information to be provided by a non-resident assessee claiming double taxation relief under an agreement. The assessee must keep the supporting documents, and the tax authority can call for them to verify the claim (Rule 75(2)).

How does a resident in India get a tax residency certificate?

By applying to the Assessing Officer in Form 42, who issues the certificate of residence in Form 43 (Rule 75(3) and (4)).

How is foreign tax credit calculated?

For each source of income in each country, the credit is the lower of the Indian tax payable on that income and the foreign tax paid on it, and any foreign tax above what the treaty allows is ignored. The foreign tax is converted at the telegraphic transfer buying rate on the last day of the month before the month in which it was paid or deducted. Credit is against tax, surcharge and cess but not interest, fee or penalty (Rule 76(4) and (7)).

What documents are needed to claim the credit, and by when?

A statement in Form 44 (income from outside India offered to tax and the foreign tax on it, verified as the Form says) and a certificate or statement of the nature of the income and the tax, from the foreign tax authority, the deductor or signed by the assessee, with proof of payment or deduction. Both are to be furnished within twelve months from the end of the tax year in which the income is offered to tax or assessed in India, and the return for the year must be furnished within the time in section 263(1) or (4) (Rule 76(10) to (12)).

What if foreign tax is disputed?

No credit is given for the disputed part (Rule 76(5)). If the dispute is settled and tax is paid, the credit is allowed for the year the income was offered to tax, if evidence and an undertaking that no refund has been or will be claimed are furnished within six months from the end of the month in which the dispute is finally settled (Rule 76(6)).

Official sources

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