A new set of provisions under the Income Tax Rules, 2026, which are to come into effect from April 1, has again put the spotlight on the powers vested in tax authorities to estimate the income of a taxpayer in certain situations, especially where there are deficiencies in the records or where there is a lack of compliance.

Under Rule 9, the Assessing Officer (AO) can estimate the income where the same cannot be clearly ascertained. The provision applies especially to non-residents earning income in connection with any asset or property or business in India.

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The power to estimate income was available to tax authorities earlier as well; however, tax experts are of the view that greater clarity has been added to these provisions in the new rules.

When can tax officers step in?

The rules outline limited and defined situations where income estimation is permitted.

As per a report by Financial Express, Mihir Tanna, Associate Director of Direct Tax at SK Patodia & Associate LLP, said that failure to comply remains a key trigger. “If a taxpayer fails to file a return or ignores statutory notices, the AO can proceed with a best judgment assessment,” he explained.

In cross-border cases, the provision becomes more relevant. “If a non-resident’s income from Indian operations cannot be precisely calculated due to lack of records or unsatisfactory responses, the AO may estimate income using reasonable methods,” Tanna added.

This was echoed by Harsh Bhuta, the Managing Partner at Bhuta Shah & Co LLP, said the power is not unrestricted. “It arises only in defined circumstances, such as non-resident income cases or failure to comply with statutory obligations,” he noted.

How income may be calculated

The rules provide tax officers the option to use various methods depending on the information available. The options are:

Applying a reasonable percentage to turnover

Using global profit ratios related to Indian receipts

Bhuta stressed that the provision is a fallback mechanism.

Compliance remains the safeguard

Experts underline that the risk of estimated assessment can largely be avoided through timely compliance.

“Responding to notices with proper documentation is the most effective way to prevent a best judgment assessment,” Tanna said. He also pointed to advance rulings as a tool for taxpayers seeking clarity, particularly in complex or cross-border cases.

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Bhuta added that maintaining records and transparency is critical. “The risk arises mainly where there is lack of clarity, documentation, or compliance,” he said.

What the new rules change

The revised framework doesn't extend the powers of tax officials in any significant way; rather, it rationalises existing provisions.

The rules clarify the scope and methodology of estimation in an effort to remove any ambiguity in the process, while also emphasising the importance of compliance.

The new rules send a clear message to taxpayers, especially those with international earnings, to ensure they are organized in their dealings with tax officials, lest they face the possibility of having their earnings estimated on a best-judgment basis.