How tax is calculated on under reported Income?
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How Tax is Calculated on Under-Reported Income? Under the Income Tax Act, 1961, if an assessee under-reports income, tax and penalties are levied under Section 270A. The tax calculation depends on the nature of the under-reported income and whether the misreporting was deliberate or unintentional. 1Read more
How Tax is Calculated on Under-Reported Income?
Under the Income Tax Act, 1961, if an assessee under-reports income, tax and penalties are levied under Section 270A. The tax calculation depends on the nature of the under-reported income and whether the misreporting was deliberate or unintentional.
1. What is “Under-Reported Income”?
Under Section 270A, under-reported income includes:
✔️ Income assessed by the tax officer exceeding income declared in the return.
✔️ Reduction in loss claims due to incorrect reporting.
✔️ Expenses disallowed due to incorrect claims.
✔️ Income found during reassessment exceeding previously assessed income.
2. Tax Calculation on Under-Reported Income
Tax is calculated as follows:
📌 Step 1: Compute Total Income (including the under-reported portion).
📌 Step 2: Apply the income tax slabs/rates applicable to the assessee.
📌 Step 3: Compute additional tax liability due to under-reported income.
📌 Step 4: Add penalty under Section 270A:
✅ Example:
3. Exceptions: No Penalty on Under-Reporting
No penalty is levied if:
✔️ The taxpayer voluntarily corrects the mistake in the return before receiving notice.
✔️ Income was under-reported due to a genuine difference in opinion in tax interpretation.
✔️ The under-reporting results from a tax audit adjustment (not intentional suppression).
4. How to Avoid Penalty on Under-Reported Income?
✔️ Ensure accurate tax filing with full disclosures.
✔️ Respond to notices and explain differences properly.
✔️ If errors are found, file a revised return before scrutiny starts.
✔️ Consult a tax professional for complex income classifications.
Final Thought
Tax on under-reported income is calculated based on normal tax slabs, but penalties can go up to 200% of the tax amount for misreporting. To avoid heavy penalties, always ensure accurate and transparent tax reporting.
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