Updated tax return reduces hefty penalties

An updated tax return, which was introduced in the Union budget 2022, allows taxpayers to rectify any incorrect disclosure of income within two years of the end of the relevant assessment year (AY).

 For example, taxpayers who miss disclosing some income in the income tax return for the financial year 2021-22 (AY 22-23) can file an updated return until 31 March 2025.

Until now, a taxpayer could revise such omission or any error in the income tax return by filing a revised return, which has to be filed by 31 December of the AY; that is within about 5 months from the due date of filing the original return by an individual (without audit).

After that, there was no option to rectify the return and disclose additional income. This was a problem as under-reporting of income under the Income-Tax Act attracts hefty penalties ranging between 50% and 200% of the tax amount.

“This action of the I-T department was not taxpayer-friendly, especially in cases where an assessee could not correct the mistakes for genuine reasons. To mitigate hardship and provide an additional time to file a correct return on noticing omission and/or withdrawal of debatable claims, the updated tax return has been introduced, subject to payment of taxes and interest,” said Dhaval Selwadia, partner, N.A. Shah Associates.

 Thus, one can use the updated return as an opportunity when a revised return could not be filed within the end of an AY.

Note that the updated return can be filed only once for an FY and should be done so carefully.

The other important difference between an updated return and the revised return is that the former can be used only when updating a return results in additional income.

“If the taxpayer intends to take any benefit by availing of any exemption/deduction/loss not claimed earlier, this facility can’t be used. It cannot be filed even in cases where there are certain proceedings already pending against the taxpayer for the same year,” said Sandeep Sehgal, tax partner, AKM Global.

Besides tax on the additional income disclosed and the applicable interest on such an amount, taxpayers filing updated returns must shell out more.

This is in the form of additional taxes, which is equal to 25% of the extra dues if an updated return is filed within 12 months from the end of the assessment year.

If it is filed after 12 months but before 24 months from the end of the assessment year, the additional tax rate will be 50%of the extra dues.