Section 107 of the Income-tax Act, 2025 — Charge of Tax on Unexplained Income (Successor to Section 115BBE)

In plain language

What Section 107 actually says

Section 107 is a one-line "charging" section. It states that income referred to in Sections 102, 103, 104, 105 and 106 of the Income-tax Act, 2025 "shall be charged to tax as per the provisions of Section 195." In plain words, whenever an amount is treated as unexplained income, Section 107 is the switch that pulls it out of the normal slab system and sends it to the special, punitive rate machinery in Section 195.

It is the direct successor to the old Section 115BBE of the Income-tax Act, 1961. The 1961 Act put the "deeming" rules (Sections 68 to 69D) and the special rate (115BBE) in different places. The 2025 Act tidies this up: Sections 102-106 define the five types of unexplained income, Section 107 says "charge it under Section 195," and Section 195 sets the rate and the rules.

The five types of unexplained income (Sections 102-106)

• Section 102 — Unexplained credits: a sum credited in your books (cash credit, share capital, loan, gift) whose nature or source you cannot satisfactorily explain.
• Section 103 — Unexplained investments: investments not recorded in books, or whose source you cannot explain.
• Section 104 — Unexplained money, bullion, jewellery, etc.: cash, gold or valuable articles you own that are not recorded or explained.
• Section 105 — Unexplained expenditure: spending for which you cannot show the source of funds.
• Section 106 — Amount borrowed or repaid on a hundi: money borrowed or repaid through a hundi (indigenous bill) otherwise than by account-payee cheque.

Who it applies to

Every taxpayer — individuals, HUFs, firms, LLPs and companies — can be hit by Section 107. There is no basic exemption limit and no benefit of the ₹4 lakh (new-regime) or ₹2.5 lakh (old-regime) threshold for this income. It applies whether you voluntarily disclose the amount in your return or the Assessing Officer discovers it during scrutiny, search or survey.

The rate and the harsh conditions (Section 195)

• Flat rate: Under the Income-tax Act, 2025 as amended by the Finance Act, 2026 (effective 1 April 2026), the rate on such income was reduced from 60% to 30% (Clause 46 of the Finance Bill, 2026 amended Section 195). Before this amendment the base rate was 60%.
• No deductions, no set-off: You cannot claim any expenditure, allowance or set-off of any loss against this income. It is taxed gross.
• Surcharge and cess: Surcharge is added as per the applicable schedule, and Health & Education Cess at 4% is levied on tax plus surcharge.
• Penalty: The Finance Act, 2026 omitted the standalone 10% penalty (earlier Section 443) and folded unexplained income into the general misreporting-of-income penalty framework (Sections 439/440), which can reach much higher amounts.

How it interacts with related sections

Section 107 is the bridge between the "what" (Sections 102-106) and the "how much" (Section 195). It works alongside the assessment, search and survey powers of the department, and any amount added under it cannot be reduced by carrying forward or setting off business losses or capital losses.

Practical implications

• Keep documentary proof of the source of every credit, investment and large cash holding — bank statements, loan confirmations, PAN of lenders, gift deeds.
• If you cannot explain a source, the money is taxed at the flat special rate with no relief, plus surcharge, cess and potential misreporting penalty.
• Voluntary disclosure of a genuine but undocumented amount still attracts the special rate — it does not get slab benefit.