Penalty on Under-Reporting of Income under the Income Tax Act Under the Income Tax Act, 1961, under-reporting of income is penalized under Section 270A. The penalty is imposed when a taxpayer declares lower income than what is assessed by the tax department. 1. What is Considered Under-Reported IncoRead more
Penalty on Under-Reporting of Income under the Income Tax Act
Under the Income Tax Act, 1961, under-reporting of income is penalized under Section 270A. The penalty is imposed when a taxpayer declares lower income than what is assessed by the tax department.
1. What is Considered Under-Reported Income?
A taxpayer is considered to have under-reported income if:
✔️ The assessed income exceeds the declared income.
✔️ Loss claims are reduced due to incorrect reporting.
✔️ Expenses are disallowed due to non-compliance.
✔️ Income is detected during reassessment exceeding earlier returns.
✔️ Income is found in search/survey operations but not reported.
2. Penalty for Under-Reporting Income (Section 270A)
| Nature of Under-Reporting | Penalty Rate |
|---|---|
| Normal under-reporting (without misreporting) | 50% of tax payable on under-reported income |
| Misreported income (fraud, false entries, fake invoices, suppression of facts, etc.) | 200% of tax payable on under-reported income |
📌 Example:
- Declared Income = ₹8 lakh
- Assessed Income (after adding under-reported income) = ₹12 lakh
- Additional Tax Due = ₹1.2 lakh
- Penalty (50% of ₹1.2 lakh) = ₹60,000 (if not misreported)
- Penalty (200% of ₹1.2 lakh) = ₹2.4 lakh (if misreported)
3. When No Penalty is Levied?
The penalty will not be imposed if:
✔️ The taxpayer voluntarily revises the return before scrutiny.
✔️ The under-reporting happened due to genuine differences in tax interpretation.
✔️ The income addition is due to a transfer pricing adjustment.
✔️ The taxpayer can justify the mistake with reasonable evidence.
4. How to Avoid Penalty for Under-Reporting?
✅ File accurate tax returns with complete disclosures.
✅ Respond to tax notices and justify any discrepancies.
✅ Maintain proper documentation for deductions and income sources.
✅ If errors are found, revise the return voluntarily before scrutiny begins.
Final Thought
Under-reporting income can attract a minimum 50% penalty and up to 200% in case of misreporting. To avoid penalties, ensure accurate reporting and comply with tax regulations.
Read 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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