Finance Act 2026: changes that touch a private company's directors

The Finance Act, 2026 (Act 4 of 2026) runs to well over a hundred sections. Most of them will never reach a private company's board table. This article picks only the ones that do, and for each one it tells you three things: what the Finance Act says, which Act it amends, and from which year it applies.

Why the "which Act" question matters: the Finance Act 2026 amends two Income-tax Acts at once. Chapter III, Part A amends the Income-tax Act, 1961. Part B amends the Income-tax Act, 2025, which applies from tax year 2026-27. The Finance Act itself says that sections 2 to 129 come into force on 1 April 2026 unless it says otherwise (section 1(2)(a), Finance Act 2026). Some sections say otherwise, and those are flagged below. Section numbers in the 1961 Act and the 2025 Act differ, so each change is given in the Act it amends, with the other Act's equivalent beside it.

1. Tax on unexplained credits: rate falls from 60% to 30%, but only under the 2025 Act

What the Finance Act says. Section 55 of the Finance Act 2026 reads: "In section 195 of the Income-tax Act, in sub-section (1), in the long line, in clause (i), for the figures and symbol "60%", the figures and symbol "30%" shall be substituted." In this Part B, "the Income-tax Act" means the Income-tax Act, 2025.

What section 195 does. Under section 195(1), Income-tax Act 2025, where total income includes income referred to in sections 102, 103, 104, 105 or 106, the tax is the aggregate of tax on that income at a flat rate (clause (i), earlier 60%) and tax on the rest of the income at normal rates (clause (ii)). Section 195(2) adds that no deduction for expenditure or allowance, and no set-off of loss, is allowed against that income.

Why a director cares. Section 102(1), Income-tax Act 2025, says that where a sum is found credited in the books and the assessee offers no explanation, or an unsatisfactory one, the sum "shall be charged to income-tax as income of the assessee". For a closely held company, section 102(3) is the one to read. Where the assessee is a company in which the public are not substantially interested and the credit is "share application money, share capital, share premium or any such amount", the company's explanation is deemed not satisfactory unless the resident person in whose name the credit is recorded also explains the nature and source of the sum, and the Assessing Officer finds that explanation satisfactory. Section 102(4) exempts a venture capital fund or venture capital company from that extra step.

So the board's exposure is concrete: a share allotment or a director's loan that cannot be traced to a documented source can be taxed as the company's income, with no deduction against it.

From when. Section 55 sits within sections 2 to 129, so it applies from 1 April 2026 (section 1(2)(a), Finance Act 2026), which is tax year 2026-27 under the Income-tax Act, 2025.

What did not change. The 1961 Act equivalent of section 195 is section 115BBE, and sections 68, 69, 69A, 69B, 69C and 69D of the 1961 Act correspond to sections 102 to 106 of the 2025 Act. The Finance Act 2026 does not amend section 115BBE in Part A, and the text still reads "sixty per cent". So for assessment years up to and including AY 2026-27 (FY 2025-26), which are assessed under the 1961 Act, the 60% rate still stands. The lower rate helps only from tax year 2026-27 onward. A lower rate is not a lower risk: the burden of explaining the credit stays exactly where it was.

2. Buy-back of shares: taxed as capital gains, with an extra tax on promoters

What the Finance Act says. Section 35(b)(A) of the Finance Act 2026 provides that in section 2(40) of the Income-tax Act, 2025, "sub-clause (f) shall be omitted". Before this change, section 2(40)(f) treated "any payment by a company on purchase of its own shares from a shareholder as per section 68 of the Companies Act, 2013" as a dividend. With (f) gone, a buy-back is no longer a deemed dividend under the 2025 Act.

Section 42 of the Finance Act 2026 substitutes section 69(2) and (3) of the Income-tax Act, 2025. Section 69(1) of that Act already treats the difference between the cost of acquisition and the consideration received on a company's purchase of its own shares as capital gains of the shareholder, in the year of the purchase. The new section 69(2) adds: where the company buys back under section 68 of the Companies Act, 2013 and the shareholder "is a promoter", the aggregate tax is the tax payable on those gains in the ordinary way, plus an additional income-tax at the rate in a Table:

Who is a "promoter" for a private company. Section 69(3)(b) says that, for a company not listed in India, "promoter" means a promoter as defined in section 2(69) of the Companies Act, 2013, or a person who holds, directly or indirectly, more than 10% of the shareholding in the company. Many directors of private companies are promoters or hold more than 10%, so the additional tax will often apply to them.

What this means in practice. If your private company is thinking of a buy-back to return surplus cash to founder-directors, the shareholder-level tax is now worked out under section 69 of the 2025 Act as above. Run the numbers for each shareholder class before you pass the board resolution, because the extra layer depends on who the seller is. The Companies Act side (section 68, Companies Act 2013) is a separate set of conditions and is not changed by the Finance Act.

From when. Both sections are in the block that starts on 1 April 2026 (section 1(2)(a)), so a buy-back in tax year 2026-27 or later is covered. Part A of the Finance Act 2026, which amends the 1961 Act, contains no amendment of section 2(22), the 1961 Act counterpart of section 2(40). For buy-backs assessed under the 1961 Act, nothing in this Finance Act changes the treatment.

3. TDS not deposited: prosecution rewritten with graded punishment

A director's TDS exposure is not only the tax and interest. A company's failure to deposit tax it has deducted can also bring prosecution.

What the Finance Act says. Section 26 of the Finance Act 2026 substitutes sections 276B, 276BB, 276C, 276CC, 276CCC and 276D of the Income-tax Act, 1961, "with effect from the 1st day of March, 2026". The new section 276B applies if a person fails to "pay to the credit of the Central Government, the tax deducted at source by him as required by or under the provisions of Chapter XVII-B". The punishment depends on the amount of tax:

• Tax above ₹50 lakh: simple imprisonment up to two years, or fine, or both.
• Tax above ₹10 lakh but not above ₹50 lakh: simple imprisonment up to six months, or fine, or both.
• Any other case: fine only.

The safe harbour. The proviso says section 276B "shall not apply, if the payment referred to in clause (a) has been made to the credit of the Central Government at any time on or before the time prescribed for filing the statement for such payment under sub-section (3) of section 200." In plain words, a late deposit made before the due date for filing the TDS statement for that period takes the case out of prosecution.

Why a director cares. In the small-amount cases the punishment is a fine alone, and imprisonment is reserved for larger amounts. But the safe harbour is time-bound. A board that treats the TDS deposit as an administrative chore and lets it slip past the statement due date loses that protection.

From when. The section says "with effect from the 1st day of March, 2026", and this is a change to the Income-tax Act, 1961. The 2025 Act's counterpart is section 476, and section 111 of the Finance Act 2026 substitutes section 476(1) there with the same three tiers (above ₹50 lakh, above ₹10 lakh up to ₹50 lakh, and any other case), from 1 April 2026 (section 1(2)(a)). The company-offence provisions on the 1961 side are sections 278B onward; this article does not analyse who in the company is liable.

4. Revised return: a fee now sits inside section 139(5)

What the Finance Act says. Section 16 of the Finance Act 2026 inserts section 234-I into the Income-tax Act, 1961, deemed inserted "with effect from the 1st day of March, 2026". Where a person furnishes a return under section 139(5) "beyond nine months but before twelve months from the end of the relevant assessment year", the fee is ₹1,000 if total income does not exceed ₹5 lakh, and ₹5,000 in any other case. The same Finance Act substitutes section 139(5) so that a revised return may be furnished, "subject to the provisions of section 234-I", at any time before the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

For a company, which will usually have total income above ₹5 lakh, the fee would be ₹5,000.

A caution. Read together, the fee window (measured from the end of the assessment year) and the revised-return window (ending at the end of the assessment year) do not line up neatly on the face of the text. Do not compute a filing date from this article. File any revision early, and have your CA confirm the date and fee before the return goes in.

What the Finance Act 2026 did not change for directors

One thing directors often assume moved, and did not.

Loans to shareholders. Section 2(40)(e), Income-tax Act 2025, still treats as dividend any payment by a company in which the public are not substantially interested, as an advance or loan to a shareholder holding not less than 10% of the voting power, or to a concern in which that shareholder has a substantial interest, to the extent of accumulated profits. The Finance Act 2026 omits sub-clause (f), replaces sub-clause (v) with a rule for group finance entities, and adjusts related definitions. Sub-clause (e) is not among the amendments. So a director-shareholder loan from a closely held company remains a deemed-dividend question in the 2025 Act, and the 1961 Act's equivalent for earlier years is not touched by Part A.

What to do now

• Next step: list every credit in the company's books and confirm that each has a documented source. For share capital and share premium, the investor must be a resident who also explains the source (section 102(3), Income-tax Act 2025). For a loan or borrowing, the lender must explain the source too (section 102(2)). Deadline: before you file the return for tax year 2026-27. Consequence: a credit with no satisfactory explanation is taxed under section 195(1) with no deduction against it (section 195(2)).
• Before any buy-back: work out the tax for each selling shareholder, promoter or not, under section 69 of the Income-tax Act 2025. Deadline: before the board resolution. Consequence: the additional tax at 2%/10% or 9.5%/17.5% falls on the promoter-seller (section 69(2)).
• TDS: check that every quarter's deducted tax has been deposited, and deposit any gap before the TDS statement due date for that period. Consequence: after that date the section 276B proviso no longer protects the company, and a failure above ₹10 lakh can carry imprisonment (section 276B, Income-tax Act 1961, as substituted by section 26 of the Finance Act 2026).
• Revised returns: if the company needs to revise, file early and confirm the fee position with your CA. Consequence: a fee of up to ₹5,000 can apply under section 234-I, Income-tax Act 1961.

Have a CA review your facts before you act or file.

FAQs

Does the Finance Act 2026 cut the tax on unexplained credits for my FY 2025-26 return?
No. The FY 2025-26 return (AY 2026-27) is filed under the Income-tax Act, 1961, where section 115BBE still reads 60%. The 30% rate is in section 195 of the Income-tax Act, 2025, from tax year 2026-27.

Is a buy-back now taxed as dividend?
Not under the 2025 Act. Under the 1961 Act, section 2(22) is not amended by this Finance Act. Section 2(40)(f) is omitted, and section 69 treats the gain as capital gains. A promoter-seller pays additional tax on top (section 69(2)).

Who counts as a promoter in a private company's buy-back?
A promoter under section 2(69) of the Companies Act 2013, or anyone holding, directly or indirectly, more than 10% of the shares (section 69(3)(b), Income-tax Act 2025).

Can a director go to prison for late TDS deposit?
Section 276B (and section 476 of the 2025 Act) provides imprisonment only where the undeposited tax exceeds ₹10 lakh, and not at all if the deposit is made on or before the time for filing the TDS statement. Below ₹10 lakh the punishment is a fine.

When did these changes start?
Sections 35(b) (buy-back definition), 42 (section 69) and 55 (section 195) start on 1 April 2026 (section 1(2)(a)). Section 26 (prosecution, 1961 Act) and section 16 (section 234-I) are stated to apply from 1 March 2026. Section 111 (prosecution, 2025 Act) falls in the 1 April 2026 block.

Does the Finance Act 2026 change deemed dividend on director loans?
It does not amend sub-clause (e) of section 2(40), Income-tax Act 2025, which deals with loans to shareholders. Only sub-clause (f), the buy-back limb, was omitted.

---

See Also

• TDS on commission and brokerage paid by a company: when to deduct and what it costs to miss
• Government contract: how GST TDS under section 51 works for your company
• Applying for a lower or nil TDS certificate: how a company does it