ITR filing 2026: Think twice before claiming fake tax deductions — You could land in prison, face penalties

Every year, many taxpayers are tempted to inflate or falsely claim deductions in their income tax returns to reduce their tax liability. This could include claiming deductions for investments that were never made, overstating medical or education expenses or submitting fabricated receipts.

While such claims may seem like an easy way to save tax, they can have serious consequences under the Income-tax Act. Depending on the nature of the default, such taxpayers may be subjected to hefty penalties, prosecution or even imprisonment in case involving willful tax evasion.

The income tax department has become increasingly data-driven and uses information from employers, banks, financial institutions and documents such as Annual Information Statement (AIS) and Form 26AS to verify these claims made in tax returns every year.

What happens if I-T department finds a false entry?

Under Section 271AAD of the Income-tax Act, if during assessment or any other proceedings, the tax department finds that a taxpayer has made a false entry in their books of account or deliberately omitted an entry to reduce their tax liability, a steep penalty can follow.

In such cases, the law provides for a penalty equal to 100% of the value of the false or omitted entry, according to income tax department's website. This makes the cost of claiming fake deductions or concealing income far higher than any potential tax savings.

Difference between under-reporting and misreporting of income

Meanwhile, Section 270A addresses underreporting and misreporting of income. These provisions define the circumstances under which penalties may be imposed, the rates applicable, and the safeguards available to taxpayers.

• Under-reporting of income refers to situations in which a taxpayer declares a lower income than what is assessed by the tax authorities, often due to omissions, incorrect claims or computational errors.

• Misreporting of income involves deliberate concealment or falsification of facts. This includes instances such as suppressing income, claiming bogus expenses, or failing to record transactions.

Penalties for under-reporting and misreporting income

• Under-reporting of income: Such a lapse attracts a penalty of 50% of the tax payable on such income.
• Misreporting of income: If a taxpayer misreports their income, then a higher penalty of 200% of the tax payable will be levied.

These provisions have been introduced by the income tax department to penalise taxpayers evading taxes.

Can you land in prison for tax evasion?

When the tax authorities determine that a taxpayer has willfully attempted to evade tax through fake deductions or false claims, prosecution under Sections 276C and 277 may be initiated against the taxpayer.

• Under Section 276C, a person found guilty of willfully attempting to evade tax can face imprisonment ranging from three months to seven years, depending on the amount of tax sought to be evaded.
• Section 277 deals with false statements in verification or documentation and can result in imprisonment and fines.

Prosecution generally applies to cases of large-scale fraud or repeated non-compliance, often involving fake documents or professional intermediaries who assist in creating fake claims.