Reported wrong income in your ITR? Here’s how you can avoid up to 200% penalty

Reporting incorrect income in an income tax return can attract penalties under the Income Tax Act, 2025, with misreporting of income liable for a penalty of up to 200% of the tax payable. The fine amount depends on whether the error is classified as under-reporting or misreporting.

Under-reporting of income occurs when a taxpayer declares a lower income than what the tax authorities assess, typically due to omissions, incorrect claims, or calculation errors. In such cases, a penalty of 50% of the tax payable on such income is applicable. Misreporting, in contrast, involves deliberate actions to conceal or distort income details, such as hiding income, claiming bogus expenses, or failing to record transactions.

Both under-reporting and misreporting of income can have serious consequences for taxpayers. Whether due to errors or deliberate actions, discrepancies in reported income can attract penalties, tax liability and scrutiny from tax authorities. Ensuring accurate disclosure of income and claims is therefore important.

However, taxpayers now have certain provisions in place to avoid such steep penalties and prosecution for under-reporting or misreporting their income. This immunity is applicable only if the defaulters voluntarily disclose their errors and pay the required tax and interest, subject to conditions. Here's how the entire process works and what you need to do.

How can you avoid the steep 200% penalty?

At times, taxpayers may under-report income, either due to oversight or for other reasons. Under the existing framework, Section 440 provides for a waiver of penalty and immunity from prosecution in such cases.

The Union Budget 2026 proposed extending similar relief to cases of misreported income as well. However, to avail this immunity, the taxpayer would be required to pay the tax and interest due, along with an additional income tax equal to 100% of the tax payable on the under-reported or misreported income, in lieu of the prescribed penalty.

For instance, if the tax due is ₹10 lakh, a penalty of 200% ( ₹20 lakh) is levied. In such a case, the taxpayer can pay ₹10 lakh as tax, an additional ₹10 lakh to secure immunity, and ₹10 lakh to avoid litigation, according to Gaurav Makhijani, Managing Partner at MGA.

“To avail this (immunity), the taxpayer must pay the tax and applicable interest in full and should not file an appeal against the assessment order,” Makhijani said.

He further explained that an application for immunity must be filed within one month of the end of the month in which the assessment order is received, to avoid additional penalty exposure. The amendment for granting immunity came into effect from 1 April 2026.

What other penalties are applicable?

There is a separate fine if the income tax authorities flag unexplained credits, unexplained investments, or unexplained assets, among others, during your income tax return filing assessment. It is proposed that such cases be treated as instances of income misreporting. A taxpayer can claim immunity in such cases by paying tax and interest due, and additional income tax equal to 120% of the tax payable on the misreported income, in lieu of penalty.

The immunity aims to give taxpayers an opportunity to settle disputes at an early stage by paying additional tax, thereby reducing the burden of litigation and compliance.