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Key points
- CBDT has omitted arrest and detention in prison as a mode of tax recovery under Rule 225 of the Income-tax Rules, 2026.
- Instrument: Income-tax (Fourth Amendment) Rules, 2026, Notification No. 120/2026, G.S.R. 822(E), dated 17 September 2026. The Rule 225 changes apply from 1 April 2026.
- The change follows the Finance Act, 2026, which removed the Tax Recovery Officer's arrest power from the Act itself.
- The demand does not go away. Interest keeps running, and bank attachment, property attachment and sale, and receivership all remain.
- Criminal prosecution is separate. Offences such as wilful evasion still carry imprisonment, now graded by amount.
On 17 September 2026, the Central Board of Direct Taxes notified the Income-tax (Fourth Amendment) Rules, 2026. Among other changes, it amended Rule 225 of the Income-tax Rules, 2026, the rule that sets out how tax arrears are recovered, and removed arrest and detention of the defaulter from the list of recovery modes.
The amendments to Rule 225 are treated as having come into force on 1 April 2026, the date the Income-tax Act, 2025 and the 2026 Rules took effect.
This guide covers what was removed, what recovery powers remain, and what a business should do when it receives a demand.
What the Notification Changed in Rule 225
| Provision | Change |
|---|---|
| Rule 225(4)(c) | Omitted. This clause listed arrest of the defaulter and detention in prison as a mode of recovery. |
| Rule 225(19) | Wording amended to remove the reference to a power to arrest. |
| Rule 225(75) to (83) and (91) | Omitted. These set out the procedure for arrest, inquiry, custody, detention, release and subsistence allowance. |
| Rule 225(87) | The words "except arrest and detention" removed. |
Source: Income-tax (Fourth Amendment) Rules, 2026, Notification No. 120/2026 [F. No. 370142/30/2026-TPL], G.S.R. 822(E), 17 September 2026.
The same notification also amended Rule 176 (electronic communication instead of affixing a digital signature) and extended the registration deadline for valuers and income-tax practitioners under Rules 246(4) and 256(4) from 30 September 2026 to 31 March 2027. Those changes are outside the scope of this article.
Net effect: arrest and detention are no longer part of the prescribed recovery process under the Income-tax Rules, 2026.
Why the Rules Were Changed Now
The policy decision was taken in the Finance Act, 2026. The amended Finance Bill removed the Tax Recovery Officer's power to arrest and detain a defaulter, with the explanatory memorandum stating that "other modes of recovery are considered sufficient."
Under the Income-tax Act, 2025, the detailed recovery procedure that used to sit in the Second Schedule of the 1961 Act was moved into Rule 225. Once the Act no longer allowed arrest, Rule 225 still carried the old arrest procedure. The Fourth Amendment Rules remove it so the rules match the Act, with the same 1 April 2026 start date.
How Arrest Worked Before
Under the 1961 Act, Section 222 listed arrest of the assessee and detention in prison as one of the modes a Tax Recovery Officer (TRO) could use, and the Second Schedule set out the procedure. The TRO had to first issue a notice asking the defaulter to show cause why they should not be detained. Detention could be ordered only if the TRO was satisfied that the defaulter, for example:
- was likely to abscond or leave the TRO's jurisdiction to obstruct recovery, or
- had dishonestly transferred, concealed or removed property after the recovery certificate was drawn up, or
- had, or had since the certificate, the means to pay and refused or neglected to pay.
It was an exceptional power and rarely used in practice, but its existence weighed on taxpayers with large or disputed demands.
The Demand Still Stands
The amendment changes how the department can enforce a demand, not whether it can.
| Item | Position after the amendment |
|---|---|
| Tax demand | Still payable |
| Interest on unpaid demand | Continues at 1% per month or part of a month |
| Attachment of bank accounts and money owed to you | Available |
| Attachment and sale of movable property | Available (TRO) |
| Attachment and sale of immovable property | Available (TRO) |
| Appointment of a receiver | Available (TRO) |
| Adjustment against refunds | Available |
| Arrest and detention in civil prison | Removed |
The Recovery Timeline Under the 2025 Act
- An assessment, intimation or order creates the liability.
- A notice of demand is served. Under Section 411 of the Income-tax Act, 2025, tax is payable within 30 days of service, unless the Assessing Officer (AO) allows a shorter or longer period.
- If unpaid and not stayed, you are an assessee in default and interest runs.
- The AO can use the modes in Section 416 (the old Section 226): notices to your bank, debtors, employer or anyone holding money for you, requiring them to pay the department.
- The TRO can draw up a recovery certificate under Section 413 and proceed under Rule 225 to attach and sell movable or immovable property, or appoint a receiver.
Who Can Do What
| Authority | Recovery powers |
|---|---|
| Assessing Officer | Section 416 modes: bank and deposit attachment, recovery from debtors and customers, deduction from salary, recovery from anyone holding money for you |
| Tax Recovery Officer | Everything above, plus attachment and sale of movable and immovable property and appointment of a receiver, under a Section 413 certificate and Rule 225 |
Rule 225 keeps the procedural safeguards of the old Second Schedule, such as notice before attachment, a proclamation of sale, and the right to raise objections and claims against attachment.
Recovery vs Criminal Prosecution
The amendment affects civil recovery only. Prosecution for tax offences is a separate track under the offence provisions of the Act, and it can still lead to imprisonment.
| Civil recovery | Criminal prosecution | |
|---|---|---|
| Purpose | Collect unpaid tax | Punish an offence |
| Where | Sections 411 to 421 of the 2025 Act and Rule 225 | Offence provisions of the 2025 Act, e.g. Section 478 (wilful attempt to evade tax, formerly Section 276C) |
| Who decides | AO and TRO | A criminal court, on a complaint by the department |
| Arrest or imprisonment | Removed | Still possible |
| Typical trigger | Demand not paid | Wilful evasion, TDS or TCS deducted but not paid to the government, false statements |
The Finance Act, 2026 also graded the punishment for wilful evasion under Section 478: simple imprisonment up to 2 years where the amount sought to be evaded exceeds Rs 50 lakh, up to 6 months for Rs 10 lakh to Rs 50 lakh, and fine only below Rs 10 lakh.
Practical point: not paying a demand you dispute is a recovery matter. Hiding income or keeping TDS you deducted is a prosecution matter. The rule change helps with the first, not the second.
What to Do After Receiving a Tax Demand
Step 1: Read the notice
Note the assessment year, the amount, the section under which it was raised, whether it came from CPC (for example a Section 143(1) intimation) or your AO (a scrutiny or reassessment order), and the due date.
Step 2: Check it on the portal
On the e-Filing portal, go to Pending Actions > Response to Outstanding Demand. Download the intimation or order and compare it with your return, AIS and Form 26AS.
Step 3: Choose the right response
| Situation | Response |
|---|---|
| Mistake apparent from the record (e.g. TDS credit or a deduction missed in processing) | Rectification under Section 287 of the 2025 Act (Section 154 of the 1961 Act) |
| You disagree with a scrutiny, reassessment or CPC adjustment on merits | Appeal to the CIT(A) in Form 35 |
| Demand already paid | Choose "demand already paid" on the portal and upload the challan details |
| Demand correct | Pay it to stop interest |
Step 4: Ask for a stay if you appeal
An appeal does not stop recovery on its own. File a stay application with the AO. Under CBDT's office memorandum of 31 July 2017, stay is ordinarily granted on payment of 20% of the disputed demand while the appeal is before the CIT(A), with room to ask for a lower amount in suitable cases. Budget 2026-27 announced a reduction to 10% of the core tax demand; check whether CBDT has issued the implementing instruction before relying on it.
Step 5: Ask for time or instalments if needed
If the demand is correct but you cannot pay at once, apply to the AO for extension of time or instalments before the due date. This is discretionary.
Step 6: Keep to deadlines
Every missed date moves you closer to bank attachment. Interest runs until payment, and a refund can be adjusted against the demand after notice to you.
Step 7: If recovery has started
- Expect notices to your bank and customers asking them to pay the department. Respond quickly, since money can be frozen and paid over.
- If a stay application is pending, tell the AO and ask for recovery to be held until it is decided.
- If the TRO has issued a notice of attachment of property, act before the sale proclamation.
For help reading different notice types, see our guide to income tax notices and the Section 143(1) intimation guide.
The 1 April 2026 Start Date
Because the Rule 225 changes apply from 1 April 2026, no recovery proceeding under the 2026 Rules can use arrest or detention, including one started between April and September 2026. The Finance Act, 2026 had already taken the arrest power out of the Act. If your demand relates to an older year under the 1961 Act and you have a question about how the transition applies, get specific advice on your case.
Summary
| Point | Detail |
|---|---|
| What changed | Arrest and detention removed as a mode of recovery in Rule 225 |
| Instrument | Income-tax (Fourth Amendment) Rules, 2026, Notification No. 120/2026, G.S.R. 822(E), 17 September 2026 |
| Effective from | 1 April 2026 |
| Underlying law | Finance Act, 2026 removed the TRO's arrest power |
| What remains | Bank and debtor attachment, attachment and sale of movable and immovable property, receiver, refund adjustment |
| Demand and interest | Still payable; interest at 1% per month continues |
| Prosecution | Separate; imprisonment still possible for offences such as wilful evasion |
| Stay | Not automatic on appeal; 20% benchmark, 10% of core demand announced in Budget 2026-27 |
How Tax Garden Can Help
Removing arrest does not remove the financial risk: bank accounts can still be attached and property can still be sold. Tax Garden can help you:
- Check whether the demand is correct against your return, AIS and Form 26AS
- Prepare a rectification request for processing mistakes
- Prepare an appeal to the CIT(A) and a stay application
- Request extension of time or instalments
- Reply to recovery notices from the AO or TRO
Sources: Income-tax (Fourth Amendment) Rules, 2026, Notification No. 120/2026, G.S.R. 822(E), 17 September 2026; Income-tax Act, 2025, Sections 411, 413, 416 and 478; Finance Act, 2026 and the Finance Bill, 2026 explanatory memorandum; CBDT office memorandum on stay of demand, 31 July 2017; Business Standard, 18 September 2026. Verify the current position on incometaxindia.gov.in before acting. This article is general information, not professional advice.
Frequently Asked Questions
What did CBDT change in the tax recovery rules in September 2026?
Through the Income-tax (Fourth Amendment) Rules, 2026 (Notification No. 120/2026, G.S.R. 822(E), dated 17 September 2026), CBDT omitted arrest and detention in prison as a mode of recovery in Rule 225(4)(c) of the Income-tax Rules, 2026, omitted the arrest and detention procedure in sub-rules (75) to (83) and (91), and removed related references in sub-rules (19) and (87). The changes to Rule 225 apply from 1 April 2026.
Does removal of arrest mean my tax demand is cancelled?
No. The demand stays payable and interest keeps running at 1% per month or part of a month until it is paid. The department can still recover the amount by attaching bank accounts and money owed to you, and through the Tax Recovery Officer by attaching and selling movable or immovable property or appointing a receiver.
Can the Income Tax Department still have me jailed for tax offences?
Yes, in criminal prosecution, which is separate from recovery. Offences such as wilful attempt to evade tax (Section 478 of the Income-tax Act, 2025, formerly Section 276C) still carry imprisonment. After the Finance Act, 2026, punishment is graded: simple imprisonment up to 2 years where the amount exceeds Rs 50 lakh, up to 6 months for Rs 10 lakh to Rs 50 lakh, and fine only below Rs 10 lakh.
What recovery powers does the Tax Recovery Officer still have?
Once a recovery certificate is drawn up under Section 413 of the Income-tax Act, 2025, the Tax Recovery Officer can attach and sell your movable property, attach and sell your immovable property, and appoint a receiver to manage your property. The TRO can also use the other modes in Section 416, such as notices to your bank or debtors.
How many days do I get to pay a tax demand?
Under Section 411 of the Income-tax Act, 2025, tax is payable within 30 days of service of the notice of demand. If it is not paid in time, you are treated as an assessee in default and interest applies. The Assessing Officer can extend the time or allow instalments on an application.
Does filing an appeal automatically stop recovery?
No. You must separately ask the Assessing Officer for a stay of demand. Under CBDT's office memorandum of 31 July 2017, stay is ordinarily granted on payment of 20% of the disputed demand when an appeal is pending before the CIT(A). Budget 2026-27 announced a cut to 10% of the core tax demand; check whether CBDT has issued the implementing instruction before relying on the lower figure.
Can the department attach my bank account for an unpaid demand?
Yes. Under Section 416 of the Income-tax Act, 2025 (Section 226 of the 1961 Act), the Assessing Officer or TRO can send a notice to your bank, debtors or anyone holding money for you, requiring them to pay the department directly. This does not depend on the arrest provisions and is unaffected by the change.
Where can I check my outstanding income tax demand?
Log in to the e-Filing portal at incometax.gov.in and open Pending Actions, then Response to Outstanding Demand. You can see each demand, download the intimation or order, and respond that you agree, disagree or have already paid.
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