How to Avoid Penalties for Incorrect Reporting of Capital Gains in Your ITR Filing

Filing Income Tax Returns (ITR) accurately and on time is essential to avoid penalties and ensure compliance with tax regulations. However, the complexity of tax laws makes it easy for taxpayers to make mistakes, which can lead to delays or penalties. Common mistakes include incorrect reporting of income, missing deductions, failing to account for TDS (Tax Deducted at Source) credits, or filing under the wrong tax regime. These errors can trigger scrutiny from tax authorities and result in fines or interest on unpaid taxes. To minimize these risks, it's crucial to carefully review all financial documents, ensure that income is reported correctly, and verify TDS credits before filing. The use of reliable platforms like TaxBuddy, which offer error-checking features and professional support, can further reduce the chances of mistakes. By following a clear, step-by-step process and double-checking all details, taxpayers can navigate the filing process efficiently and avoid unnecessary penalties.

---

Table of Contents

• Key Steps to Avoid Penalties

• Penalties for Incorrect Reporting

• Specific Questions Answered

• Conclusion

• FAQs

---

Key Steps to Avoid Penalties

Avoiding penalties when filing your ITR requires careful attention to detail. Below are key steps that taxpayers should follow to minimize the risk of mistakes and ensure their returns are filed accurately:

• Ensure Accurate Income Reporting: One of the most common reasons for penalties is the incorrect reporting of income. Whether it's salary, business income, capital gains, or other income types, ensure all sources of income are accurately reported. If you are unsure about how to categorize or calculate any income, it’s best to seek assistance or use reliable platforms like TaxBuddy, which help guide you through the process.
  

• Double-Check Deductions and Exemptions: Claiming deductions and exemptions is an important part of tax filing. However, incorrect claims can trigger penalties. Familiarize yourself with Section 80C (for investments like PPF, ELSS, etc.), Section 80D (health insurance), and other tax-saving sections to ensure that you claim only eligible deductions. It’s essential to keep proper documentation for these claims in case the tax department asks for supporting documents.
  

• Verify TDS (Tax Deducted at Source) Credits: TDS credits play a significant role in reducing your final tax liability. Ensure that all TDS amounts are correctly reflected in your return. Mismatched TDS credits can cause delays in processing and result in penalties. Platforms like TaxBuddy automatically verify your TDS credits, reducing the risk of mismatches.
  

• File Within the Deadline: One of the simplest ways to avoid penalties is to file on time. Late filing results in penalties, interest on unpaid taxes, and delayed refunds. Ensure you file your ITR before the due date or, if necessary, file a belated return within the allowed timeframe.
  

• Review Your Return for Errors: Before submitting your ITR, review all the information carefully. Check for errors in personal details, income figures, deductions, and tax calculations. A simple mistake, such as entering the wrong PAN number or forgetting to update your income details, can lead to penalties.

Penalties for Incorrect Reporting

The Income Tax Department has stringent provisions for penalties when it comes to incorrect or incomplete reporting of income, deductions, or tax liabilities. These penalties are designed to ensure that taxpayers comply with tax laws and accurately report their financial details. In this section, we’ll explore the common penalties imposed for various types of errors or omissions in the Income Tax Return (ITR), and how they are calculated.

Penalty for Underreporting or Non-Reporting of Income

Underreporting or non-reporting of income is one of the most serious errors that can occur when filing an ITR. If a taxpayer fails to disclose all sources of income or reports a lower amount of income than actually earned, it may lead to penalties under Section 270A of the Income Tax Act. The severity of the penalty depends on the nature and extent of the underreporting.

• Underreporting of Income: If a taxpayer underreports their income, the penalty can be as high as 50% to 200% of the understated tax payable. In simpler terms, if you report ₹100 less in income, the penalty could amount to ₹50 to ₹200 in taxes, depending on the nature of the mistake (whether it was a deliberate attempt to evade taxes or a mere oversight).
  

• Non-Reporting of Income: If you fail to report any income entirely, the penalty could also be imposed, depending on the amount of unreported income and the tax payable on that income. The penalty is often higher if the omission is found to be deliberate or intentional.

The Income Tax Department takes underreporting or non-reporting of income very seriously, as it affects the overall tax revenue. Therefore, it’s essential to accurately report all income, including salary, business income, capital gains, interest, and rental income, to avoid hefty penalties.

Penalty for Late Filing

Filing your ITR after the prescribed due date can also lead to penalties under Section 234F of the Income Tax Act. If you fail to file your tax return by the original deadline of July 31, 2025, the Income Tax Department allows taxpayers to submit a belated return, but this comes with a penalty.

• Late Filing Penalty: If the return is filed after the original due date but before the extended deadline (September 15, 2025), the penalty imposed can be up to ₹5,000.
  

• Increased Penalty for Late Filing After the Extended Deadline: If the taxpayer files the return after the extended deadline, the penalty increases. The penalty can rise to ₹10,000 if the return is filed after the extended deadline (September 15, 2025) but before December 31, 2025. Additionally, if the taxpayer has a total income of less than ₹5 lakh, the penalty is reduced to ₹1,000.

Late filing not only attracts a monetary penalty but also delays the processing of refunds and may increase the scrutiny of your return by the Income Tax Department.

Penalty for Wrongful Claim of Deductions

Claiming deductions or exemptions that you are not eligible for can also result in penalties and interest. If a taxpayer incorrectly claims deductions for which they do not have valid documentation or eligibility, the Income Tax Department can disallow these claims.

• Disallowance of Claims: In such cases, the taxpayer will be required to pay back the taxes that would have been saved by the wrongful claim. In addition to disallowance, penalties may be imposed on the taxpayer for making an improper claim.
  

• Interest and Penalty on Disallowed Deductions: If deductions or exemptions are wrongly claimed, the taxpayer may be liable to pay interest on the taxes owed, as well as a penalty for misrepresentation. This can lead to significant financial implications and should be avoided by ensuring that only eligible deductions are claimed with proper documentation.

Common examples of wrongful claims include incorrectly claiming deductions for medical insurance premiums, home loan interest, or incorrect exemptions under Section 80C for investment schemes.

Interest on Unpaid Taxes

In addition to the penalties mentioned above, the Income Tax Department charges interest on any unpaid taxes. This interest is calculated under the following sections of the Income Tax Act:

• Section 234A – Interest for Late Filing: If the taxpayer fails to file the return by the prescribed deadline (including the extended deadline), interest is charged under Section 234A. This interest is calculated on the amount of tax payable after deducting any advance tax or TDS. The interest is charged at the rate of 1% per month on the outstanding tax amount from the due date of filing the return until the actual date of filing.
  

• Section 234B – Interest for Underpayment of Advance Tax: If a taxpayer has not paid sufficient advance tax (i.e., the taxpayer did not pay the required amount of tax during the year), interest is charged under Section 234B. This interest is levied at a rate of 1% per month on the shortfall in advance tax payments.
  

• Section 234C – Interest for Failure to Pay Advance Tax in Time: Under Section 234C, interest is charged when the taxpayer fails to pay advance tax on time. This penalty is typically applicable when taxpayers underpay their advance tax in the first, second, or third installments of the year.Interest charges can quickly add up, making it crucial for taxpayers to file on time and make appropriate advance tax payments throughout the year to avoid additional interest costs.

Failure to File a Revised Return

If an error or omission is found after submitting the ITR, the taxpayer can file a revised return under Section 139(5) of the Income Tax Act. However, if the taxpayer fails to file a revised return before the end of the assessment year, they could face additional penalties or increased scrutiny from the Income Tax Department.

• Revised Return: If errors are identified in your filed return (e.g., incorrect income details, missed deductions), you must file a revised return before the assessment year ends. The revised return allows the taxpayer to correct errors and avoid penalties.
  

• Failure to File a Revised Return: If you make an error in your return and do not file a revised return within the stipulated time frame, you could face penalties for incorrect reporting. In such cases, the Income Tax Department might issue a notice for rectification or impose penalties.

It’s important to monitor your filing carefully and address any mistakes promptly through a revised return to avoid the consequences of prolonged errors.

Specific Questions Answered

Q1: How can I avoid penalties for late ITR filing? To avoid penalties for late filing, ensure that you file your ITR before the due date. If you miss the deadline, file a belated return as soon as possible to minimize penalties and interest. You can also use automated platforms like TaxBuddy to help track deadlines and ensure timely filing.

Q2: What happens if I claim deductions I am not eligible for? If you claim deductions without meeting the eligibility criteria, the tax department will disallow those claims, and you may face penalties. It’s important to review the specific eligibility requirements for each deduction under sections like 80C, 80D, etc.

Q3: Can I amend my ITR if I make a mistake? Yes, you can amend your ITR by filing a revised return before the end of the assessment year. This will help correct any errors and avoid penalties. Ensure that the revised return includes the correct information and is filed promptly.

Conclusion

Accurate capital gains reporting is essential to avoid penalties, scrutiny, and unnecessary legal hassles. Keeping up with changing rules and maintaining proper documentation ensures smooth tax compliance. TaxBuddy can help streamline your tax filing by automating calculations, ensuring the right ITR form is selected, and providing reminders for advance tax payments. For anyone looking for assistance in tax filing, it is highly recommended to download theTaxBuddy mobile app for a simplified, secure, and hassle-free experience.

FAQs

Q1: What are the latest LTCG tax rates for property and shares in AY 2025-26?

Long-Term Capital Gains (LTCG) tax on property is taxed at two different rates depending on whether indexation benefits are applied or not. If you choose not to use indexation, the LTCG tax rate on property is 12.5%. However, if you opt for indexation, the tax rate increases to 20%. For listed shares and mutual funds, LTCG exceeding ₹1,25,000 is taxed at a rate of 12.5%. It is important to note that the threshold limit of ₹1,25,000 applies to the aggregate gains from both property and shares, and the tax is applicable only on the amount above this threshold.

Q2: Is it mandatory to disclose exempt capital gains in my ITR?

Yes, even if the capital gains are exempt under certain provisions (such as Section 54 for property or Section 10 for certain bonds), they must still be disclosed in the relevant section of your Income Tax Return (ITR). While you may not be required to pay tax on exempt capital gains, failing to report them can lead to complications, such as scrutiny or even penalties for non-disclosure.

Q3: What documents should I keep for capital gains reporting?

To report capital gains accurately, you should keep the following documents:

• Sale and Purchase Agreements: These will help establish the purchase price and the sale price of the asset.
  

• Brokerage Statements: These confirm the transactions made, especially for securities like stocks or mutual funds.
  

• Cost Records: This includes receipts for additional costs related to the purchase, like stamp duty or improvement costs, which may be deducted from the sale price.
  

• Exemption Proofs: If claiming exemptions (e.g., under Section 54), keep relevant documents that prove the reinvestment or other qualifying expenses.
  

• Advance Tax Challans: These are important for tracking advance tax payments, especially if the capital gains tax liability exceeds ₹10,000.
  

Q4: Can TaxBuddy help with capital gains tax filing?

Yes, TaxBuddy can assist in filing your capital gains tax by offering step-by-step guidance. The mobile app automates calculations, verifies your data for accuracy, and checks for compliance with tax regulations. TaxBuddy ensures that you report capital gains correctly, including the application of exemptions, to minimize your tax liabilities.

Q5: What should I do if I receive a notice for incorrect capital gains reporting?

If you receive a notice for incorrect reporting of capital gains, you should respond promptly. Rectify any errors by revising your ITR or providing the correct details. Ensure you submit supporting documents, such as sale/purchase agreements, TDS receipts, or exemption proofs, to substantiate your claims. If needed, you can consult a tax expert or use TaxBuddy for assistance to ensure your response complies with the Income Tax Department's requirements.

Q6: Can I claim exemptions for capital gains if the property is sold at a loss?

No, exemptions for capital gains are only available when there is a positive capital gain. If you incur a loss from the sale of property or any other asset, you cannot claim exemptions for it. Instead, you can carry forward the capital loss and set it off against any future capital gains under the provisions of the Income Tax Act.

Q7: How do I report LTCG from mutual funds in ITR-2?

To report LTCG from mutual funds in ITR-2, you must:

• Report the sale value (amount received from the sale of the mutual fund units).
  

• Deduct the purchase price (original investment in the mutual fund).
  

• Adjust for indexed cost (if indexation benefits are claimed).
  

• Disclose any applicable exemptions under the section provided in Schedule CG of ITR-2. Ensure that all the relevant details are included accurately to avoid errors in your filing.
  

Q8: What happens if I under-report capital gains?

Under-reporting capital gains can lead to serious consequences, including penalties, interest on unpaid taxes, and scrutiny by the Income Tax Department. If discrepancies are found during an audit or investigation, you may be asked to provide an explanation or supporting documentation. The penalties for under-reporting can be substantial, and you could also face a tax audit.

Q9: Is advance tax necessary on capital gains?

Yes, if the total tax liability from capital gains exceeds ₹10,000, it is mandatory to pay advance tax in the applicable instalments during the financial year. If you fail to pay advance tax, interest under sections 234B and 234C will apply, and penalties may be imposed. It’s essential to calculate your potential capital gains tax early in the year and pay the required advance tax to avoid unnecessary charges.

Q10: How can TaxBuddy help in case of tax audits or notices?

TaxBuddy can help by guiding you through the process of correcting any mistakes in your ITR filing, offering expert support for responding to notices, and ensuring compliance with tax laws. The mobile app provides a platform to help manage documentation and streamline the audit process, reducing the stress of dealing with the tax authorities. If you're facing a tax audit, TaxBuddy offers a secure and organized way to track your tax filing and make necessary adjustments.

Q11: How can I avoid penalties while filing capital gains?

To avoid penalties when filing capital gains, ensure that all gains are accurately reported, the correct ITR form is used, and applicable exemptions are claimed. Make sure that TDS details are correctly reflected, and advance tax is paid if required. Timely filing of your return before the deadline and providing supporting documents for your capital gains will help prevent penalties.

Q12: What are the common mistakes to avoid when filing capital gains?

The most common mistakes when filing capital gains include:

• Under-reporting gains: Ensure all gains are fully reported to avoid penalties.
  

• Using the wrong ITR form: Use ITR-2 for reporting capital gains; using the incorrect form can lead to rejection or delays in processing.
  

• Failing to claim exemptions: Ensure that you claim any exemptions available, like Section 54 for property sales, and keep supporting documents ready.
  

• Discrepancies in AIS and TIS: Always verify your Annual Information Statement (AIS) and Tax Information Statement (TIS) to ensure that the information is consistent with your filing.