Overview of Penalties Under the Income Tax Act

Timely filing of returns and regular tax payments are essential for supporting government-funded public services. To encourage compliance, the Income Tax Act includes various penalties for non-adherence to filing, payment, and disclosure obligations. These penalties are enforced to ensure that taxpayers remain accountable. Below are some of the most significant and frequently applied penalties. We provide the best ITR filing services!

Non-Payment of Taxes

If a taxpayer does not fulfill their tax obligations—whether related to income tax, TDS, or TCS—the assessing officer may impose a penalty. However, the penalty amount will not exceed the unpaid tax liability. As per Section 139, the time frame for submitting an Updated Return has been extended from 24 to 48 months following the end of the relevant assessment year. Additionally, taxpayers served a show-cause notice under Section 148A cannot file an Updated Return if 36 months have passed from the relevant assessment year.

Failure to Maintain Books and Records

When a taxpayer does not maintain or retain financial records as mandated by the Act, a fixed penalty of ₹25,000 can be imposed.
For taxpayers involved in international transactions, the penalty increases to 2% of the transaction value.

Audit and Submission of Audit Reports

If a taxpayer fails to get their accounts audited, obtain the necessary audit report, or submit it on time, a penalty of either ₹1,50,000 or 0.5% of total turnover—whichever is lower—will apply.
For failure to furnish an audit report pertaining to international transactions, a separate penalty of ₹1,00,000 will be charged.

TDS/TCS Penalties

When a person fails to deduct tax at source as mandated, they become liable to a penalty equal to the amount of tax that was required to be deducted but wasn’t.
Similarly, failure to collect tax at source also results in a penalty equal to the uncollected tax amount.

If a person does not submit the TDS/TCS return on time, or files incorrect statements, a penalty ranging from ₹10,000 to ₹1,00,000 may be imposed.
Additionally, failure to provide or providing inaccurate information related to TDS on payments made to non-residents attracts a fixed penalty of ₹1,00,000.

Penalty for Improper Modes of Loan Transactions

Any individual who accepts or takes a loan/deposit exceeding ₹20,000 in a form other than account payee cheque, draft, or ECS, is subject to a penalty equal to the loan/deposit amount.
In cases where ₹2,00,000 or more is received from one person in a single day, a single transaction, or connected with one occasion, and the mode of receipt does not comply, an equivalent penalty will apply.

Furthermore, repayment of loans or deposits above ₹20,000 made in any form other than through account payee cheque, draft, or ECS will also result in a penalty equal to the repaid amount.

These provisions are governed under Sections 269SS and 269T of the Income Tax Act.

Penalties for Under-Reporting or Misreporting of Income

If the income assessed or re-assessed exceeds the income disclosed in the return, or if no return was filed and the income crosses the exemption limit, a penalty amounting to 50% of the tax on the under-reported income is applicable.

However, if the under-reporting stems from deliberate misreporting, the penalty rises to 200% of the tax owed on that misreported income.

Penalty for Fabricated Entries and Fake Invoices

If, during proceedings, the tax authorities discover that the taxpayer’s financial records contain any of the following:

• Fabricated or counterfeit documents such as bogus invoices or falsified proof

• Invoices issued for goods or services that were never actually delivered

• Invoices received from a non-existent supplier

• Any omission of a transaction relevant for calculating total income

Then, the taxpayer will be liable to a penalty equal to the value of the false or omitted entries involved.

Undisclosed Income Penalties

If the assessed income includes income not previously disclosed, a penalty of 10% of such income will be charged. However, this penalty will not apply if the undisclosed income has already been included in the return and tax was duly paid before the close of the applicable financial year.

In situations where a search is conducted on or after December 15, 2016:

• If the taxpayer acknowledges the undisclosed income during the search, pays the applicable tax and interest, and files the return, a penalty of 30% of the undisclosed income will be imposed.

• If these conditions are not met, the penalty increases to 60% of the undisclosed income.

Penalties for Non-Submission of Statements and Information

Not submitting a statement of financial transaction or reportable account can result in a penalty of ₹500 per day until the notice period ends. If the default persists beyond the notice deadline, the penalty increases to ₹1,000 per day.

Submitting incorrect details in a financial transaction statement or reportable account may lead to a penalty of ₹50,000. Additionally, a charge of ₹5,000 applies for each reportable account involved.

If an eligible investment fund fails to provide required statements, documents, or information within the given timeframe, a penalty of ₹5,00,000 will apply.

Failing to provide documents or data related to international transactions will result in a penalty amounting to 2% of the total value of such transactions.

If a report or certificate, which must be issued by an Accountant, Merchant Banker, or Registered Valuer, contains inaccurate information, a fine of ₹10,000 per incorrect item applies.

Any individual present at or assisting in the operations of a business or profession, where tax officials have entered the premises for information gathering, will face a penalty of up to ₹1,000 for non-cooperation.

Country-by-Country Report Defaults

If a reporting entity required to submit a Country-by-Country (CbC) report fails to do so, penalties will be as follows:

Other Penalty Scenarios

• Not applying for or quoting a PAN/TAN, or using incorrect PAN/TAN: ₹10,000 penalty per instance.

• Refusing to respond to department queries, sign statements during proceedings, appear when summoned, or produce necessary records: ₹10,000 penalty per default.