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Introduction
The facility of updated returns was introduced as a landmark measure vide the Finance Act, 20221. This facility was aimed at encouraging voluntary disclosures of additional income by a certain category of taxpayers2 while developing an additional source of revenue for the government. The reform is viewed as a settlement mechanism aimed at curtailing the quantum of disputes before the tax authorities and the appellate forums and providing certainty to the taxpayers.
From the time of its introduction, the concept of updated return has undergone certain changes. The changes were aimed at enhancing the coverage of updated returns. In the recent Union Budget 2026, important changes have been introduced in the updated returns provisions. The changes aim at extending the benefit to cases where reassessments have been initiated and also where a taxpayer has filed a loss return. The amendment is a positive step by the Government aimed at preventing possible disputes.
However, as the saying goes, 'there are no free lunches in life', the opportunity to file updated returns comes with an additional cost.
In this article, the authors have discussed the concept of updated returns, the changes proposed by Union Budget 2026, its impact and the hits and misses of the amendment.
Development of updated returns under Income-tax
The original envisaged concept allowed taxpayers to file an updated return within 24 months from the end of the relevant assessment year upon payment of additional tax on a graded level basis3. This helped taxpayers to voluntarily offer their additional income (if any) to taxes without facing a risk of assessment and litigation4. Also, the penalty and prosecution risk associated with non-disclosure of income stands mitigated. Considering the success of the concept of updated return, the aforesaid timeline was extended from 24 months to 48 months vide Finance Act, 2025. However, the opportunity to file updated return comes with an additional cost. In addition to the normal tax and interest liability, the taxpayers opting to file updated return are also liable to pay additional tax in the range of 25% to 70% depending on the year in which the additional income is disclosed vide updated return.
The facility of filing updated returns came with several restrictions. The restrictions barred taxpayers from filing an updated return inter alia, in cases where (1) updated return is a return of loss, or (2) reassessment proceedings are pending5.
Recent amendments vide the Union Budget 2026
Until now, filing of updated returns was barred in case re-assessment6 proceedings were initiated for the relevant assessment year. The taxpayers had no option to self-declare the income in the reassessment proceedings and claim immunity from the penalty and prosecution proceedings upon payment of additional tax. Resultantly, the taxpayers who were even willing to offer additional income to tax refrained from doing so in the reassessment proceedings due to the looming risk of penalty. This led to multiple proceedings before the tax authorities and also increasing the quantum of litigation before the appellate forums.
In this respect, vide Union Budget 2026, the Government has permitted taxpayers to file an updated return even pursuant to the initiation of re-assessment proceedings7. However, the return must be filed within the due date specified in the notice issued u/s 148 of the IT Act, 1961. This benefit, nevertheless, is available if the taxpayer deposits an additional tax of 10%, over and above the prescribed additional tax (i.e., payable on a graded level basis). Consequently, no penalty will be levied on such additional disclosure8.
The amendment provides another opportunity to the taxpayers to offer additional undisclosed income to tax upon payment of additional taxes. The amendment is a benevolent measure and will help to reduce the ongoing litigations.
In addition, the pre-amended provisions barred the filing of an updated return in cases where updated return is a return of loss. Due to the said restriction, the taxpayers were denied of an opportunity of reporting additional income if the overall return is a return of loss. The restriction was against the overall objective of updated return which promotes disclosure of previously untaxed income.
In this respect, vide another amendment, taxpayers are now permitted to file an updated return if it leads to a reduction in losses declared earlier. Meaning thereby, just because a taxpayer is filing an overall loss return, they will not be excluded from filing an updated return now. Only where losses may increase as a result of filing updated return, the said facility shall not be available.
This is also a benevolent measure for the taxpayers and aligned with the overall concept of updated returns.
Does the Union Budget 2026 meet taxpayers' expectations?
Despite the recent amendments, there exist few areas where further legislative amendments are desirable to ensure that the concept of updated return meets the envisaged objective.
The taxpayers, while filing their updated returns, may commit some bona fide errors. However, the provisions related to the updated return do not allow any revision/ modification. This bar can lead the taxpayers to bear the costs of even unwarranted mistakes. Some cases to this effect have already reached the Tribunal9. The Tribunal, while adjudicating over such issues, has allowed the taxpayers' plea and directed the jurisdictional assessing officer to assess the corrected updated return of income10.
Further, no updated return can be filed in cases where income escaping assessment amounts or likely amounts to INR 50 Lakhs or more, and a show cause notice u/s. 148A of the IT Act is issued against the taxpayer11. The said disparity should be removed in the interest of overall objective of reducing tax litigation. It is always open for a tax officer to question the correctness of the updated return. Accordingly, extending updated return to such cases will further reduce the quantum of litigation.
Conclusion
The concept of updated return holds huge potential for enhancing the mutual trust between taxpayers and the tax authorities. The facility of updated returns has proven to be highly beneficial for non-resident taxpayers who have limited knowledge of the tax framework in India and have inadvertently failed to file return(s) of income. This facility helps buy peace of mind for the taxpayers.
However, like any other concept, certain other changes are desirable to further effectuate the remedy sought to be provided by updated returns. Accordingly, it would be appropriate if the Government re-looks and makes suitable
Footnotes
1 Section 139(8A) and Section 140B of Income-tax Act, 1961 ('IT Act, 1961').
2 Memorandum to the Finance Bill, 2022.
3 Section 140B of IT Act, 1961 provides additional tax rates of 25%, 50%, 60% and 70% depending on the timeline within which the updated return is filed by taxpayer out of the overall 48-month period.
4 As per Budget Speech of Hon'ble Finance Minister of India for Financial Year 2025-26, nearly 90 Lakh taxpayers have voluntarily updated their returns and paid additional tax upto February 2025.
5 Refer to Section 139(8A) of IT Act,1961.
6 Re-assessment proceedings are initiated against taxpayers basis notices issued u/s 148 of IT Act, 1961 or Section 280 of IT Act, 2025.
7 Ibid.
8 Section 270A(11A) of IT Act, 1961 & Section 439(13A) of IT Act, 2025 [as proposed vide Finance Act, 2026].
9 Income Tax Appellate Tribunal.
10 Nararshabh Sharma v. Assessing Officer, Ward-7(3), Pune [[2025] 178 taxmann.com 349 (Pune-Trib)].
11 Show Cause Notice is required to be issued under Section 148A(1) of IT Act, 1961 or Section 281(1) of IT Act, 2025.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
