Budget 2026: EY flags tax uncertainty as Budget nears, warns gaps in New Income Tax Act

With less than four weeks to go for the Union Budget, Ernst & Young has flagged unresolved areas in the New Income Tax Act, 2025, warning that a lack of clarity could undermine the government’s push for tax certainty and ease of doing business.

The New Income Tax Act is scheduled to come into force from April 1, 2026, replacing the six-decade-old 1961 legislation. While the government has positioned the new law as a step towards simplification and reduced litigation, EY believes the transition risks remain significant unless clear guidance is issued well in advance.

According to EY, the most immediate concern relates to the absence of transition rules, prescribed forms and detailed guidance that would help taxpayers move smoothly from the existing law to the new regime. The firm has said that without clarity on these aspects, businesses could face uncertainty during the transition year, particularly in relation to ongoing assessments, carry-forward provisions and legacy transactions.

EY has also highlighted ambiguities arising from changes in language between the old and the new law. One key issue is the treatment of fast-track demergers. While demergers have traditionally been tax neutral subject to certain conditions, the revised wording in the new Act has created uncertainty over whether fast-track demergers undertaken under the Companies Act will continue to enjoy tax-neutral status. This is significant as fast-track demergers have been actively promoted by the government as part of its ease-of-doing-business agenda.

Another area of concern is the taxation of share buybacks. Under the new framework, questions remain on whether buybacks will be fully treated as deemed dividends without allowing shareholders any deduction for the cost of acquisition. EY has said this could materially alter the tax outcome for investors and promoters and may influence corporate capital allocation decisions.

The treatment of employee stock options is another unresolved issue. While startups currently enjoy the benefit of deferring taxation on ESOPs until a liquidity event, EY has flagged uncertainty over whether this relief will be extended uniformly to employees of non-startup companies under the new law.

Also Read | New Income Tax Act from April 1: Key changes taxpayers should note

EY has also drawn attention to anti-abuse provisions governing share acquisitions. Under existing rules, if shares are acquired at a price lower than the prescribed fair value, the difference is treated as taxable income in the hands of the buyer. With the valuation rules under the new Act yet to be notified, there is concern that genuine commercial transactions could be inadvertently taxed.

The firm believes several of these issues require legislative amendments rather than clarification through rules or circulars. As a result, the upcoming Budget is being seen as a crucial opportunity for the government to address these concerns and provide certainty before the new tax regime comes into effect.

Industry experts say clarity on these issues will be critical to sustaining investor confidence, facilitating mergers and restructurings, and ensuring that the transition to the new Income Tax Act does not result in avoidable disputes.

Also Read | Budget 2026 must anchor growth continuity, tax certainty and sector-led investments: EY India

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