Understanding the Penalties for Underreported Income in ITR and How to Fix Errors with ITR-U

Filing Income Tax Returns (ITR) accurately is crucial for compliance with the tax laws. However, taxpayers sometimes make errors in their filings, either due to misunderstandings or oversight. Underreporting and misreporting of income are among the most common mistakes made when filing ITRs. These errors can lead to serious consequences, including penalties and the possibility of increased scrutiny from the tax authorities. To address such mistakes, taxpayers can file an updated return (ITR-U) to rectify any discrepancies. Let’s explore the concepts of underreporting and misreporting of income, the penalties associated with them, how to fix these errors through an updated return, and recent updates from Budget 2025 that impact these provisions.

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Table of Contents:

• What is Underreporting and Misreporting of Income?

• Penalties Under Section 270A for Underreporting and Misreporting

• Other Related Penalties for Incorrect ITR

• How to Fix Errors with ITR-U (Updated Return)

• Recent Updates in Budget 2025

• Conclusion

• FAQs

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What is Underreporting and Misreporting of Income?

Underreporting and misreporting of income refer to the failure to report the correct amount of income in a tax return. While underreporting involves not reporting a part of the income that should have been included, misreporting refers to incorrectly reporting income, such as underestimating or overstating income or providing false information regarding the nature or amount of income.

Underreporting occurs when taxpayers either unintentionally or intentionally omit certain income sources from their tax filings, such as unreported earnings, income from side jobs, interest, or capital gains. Underreporting typically arises from negligence or lack of awareness about the income being taxable.

Misreporting, on the other hand, occurs when the reported income does not match the actual income due to incorrect classification or calculation. This can happen if an individual reports the wrong figures on their tax return, such as overstating deductions, miscalculating income, or misclassifying income types (e.g., misclassifying capital gains as business income).

Both underreporting and misreporting of income are serious offenses under the Income Tax Act, and taxpayers may face penalties for not filing a correct return.

Penalties Under Section 270A for Underreporting and Misreporting

Section 270A of the Income Tax Act imposes penalties on taxpayers for underreporting and misreporting of income. The penalty for underreporting income is significant, as it can be as high as 50% of the tax payable on the underreported income. In cases where the misreporting is deemed to be “misreporting of facts,” the penalty can rise to 200% of the tax payable on the misreported income.

Here’s a breakdown of the penalties:

• Underreporting of Income: If the taxpayer fails to report certain income sources, the tax authorities may levy a penalty of up to 50% of the additional tax payable due to underreporting.
  

• Misreporting of Income: In more severe cases, where there is a deliberate attempt to provide incorrect information, the penalty for misreporting can go up to 200% of the tax payable on the misreported income.

Additionally, if underreporting or misreporting is identified, interest under Sections 234A, 234B, and 234C may be charged for any unpaid taxes. These sections impose interest for delayed filing and payment of taxes, further increasing the financial burden on the taxpayer.

Other Related Penalties for Incorrect ITR

Apart from the penalties under Section 270A, there are other penalties for incorrect ITR filings, such as:

• Penalty for Failure to File ITR (Section 271F): If a taxpayer fails to file an ITR by the due date, they may face a penalty of ₹5,000. This penalty applies to individuals who miss the deadline and don’t file a return within the extended period.
  

• Penalty for Concealment of Income (Section 271(1)(c)): If the tax authorities find that a taxpayer has concealed income or furnished inaccurate details, they may levy a penalty ranging from 100% to 300% of the tax evaded.
  

• Penalty for Late Filing (Section 234F): If you file your return after the due date, a penalty is applicable based on the delay. For delays between 1 to 3 months, the penalty is ₹5,000. For delays exceeding 3 months, the penalty increases to ₹10,000.
  

• Prosecution for Fraudulent Return (Section 276C): In extreme cases where a taxpayer is found guilty of willful evasion of tax, criminal prosecution may be initiated. This can result in a fine and/or imprisonment for up to 7 years, depending on the severity of the offense.

How to Fix Errors with ITR-U (Updated Return)

The Income Tax Department of India provides taxpayers with an opportunity to rectify errors in their filed Income Tax Returns (ITR) through a provision called ITR-U or the Updated Return under Section 139(8A). This provision allows taxpayers to correct mistakes or omissions in their tax filings even after the original return has been submitted. The purpose of this mechanism is to encourage voluntary compliance by taxpayers and ensure the accuracy of the returns. Here's a step-by-step guide on how to fix errors using ITR-U, along with essential information that will help taxpayers file the updated return smoothly.

1. Understanding the ITR-U Provision

The ITR-U provision was introduced as a measure to give taxpayers the chance to correct any errors in their tax returns after submission. It serves as a mechanism for filing an updated return when there are mistakes in the original tax return. Taxpayers may realize that certain income was underreported or misreported, deductions were incorrectly claimed, or TDS credits were not accurately reflected. The ITR-U facility helps rectify these discrepancies, provided the updated return is filed within the prescribed timeline.

2. Time Frame for Filing an Updated Return

As per Section 139(8A), taxpayers are allowed to file an updated return within 24 months from the end of the relevant assessment year. For instance, if you are filing for FY 2024-25 (Assessment Year 2025-26), you can submit the updated return until March 31, 2027.

This extended time frame ensures that you have ample time to review your original return and make necessary corrections if any mistakes are identified. However, it's essential to note that the window for filing an updated return is limited to this 24-month period, after which no further corrections can be made.

3. Identifying Mistakes in the Original Return

Before proceeding with the updated return, the first step is to identify the mistakes in your original filing. Errors could range from minor discrepancies to significant omissions. Some common issues that may warrant the filing of an updated return include:

• Underreporting of Income: Sometimes, income from a source might be missed in the original return, such as rental income, business income, or income from investments.
  

• Incorrect Deductions: If you have claimed deductions that you are not eligible for, or have failed to claim eligible deductions such as under Sections 80C, 80D, or 80G, it can lead to errors.
  

• Incorrect TDS Reporting: If you have missed reporting TDS (Tax Deducted at Source) credits, or the wrong TDS amount was reported, this may require correction.
  

• Wrong Classification of Income: Income might have been classified incorrectly under the wrong heads, such as capital gains being declared under "other income," or salary income under business income.
  

• Mistakes in Other Information: Errors could also arise from misreporting other details, such as bank account numbers, PAN details, or address details.

It is important to carefully review all the fields in your original return, and compare them with the relevant supporting documents such as Form 16, bank statements, investment proofs, and TDS certificates to identify discrepancies.

4. Correcting the Information in the Updated Return

Once the errors are identified, the next step is to correct the information in the updated return. You can do this by filing the updated return with the correct details. Here are the steps to correct the information:

• Choose the Correct ITR Form: Ensure that you are using the same ITR form (ITR 1, ITR 2, ITR 3, etc.) that was used for the original return. In case the error relates to income that requires a different form, choose the appropriate form accordingly.
  

• Correct the Income Details: Report all sources of income accurately, including any missed income, revised income figures, or updated TDS details.
  

• Revise Deductions: If you missed claiming deductions earlier or claimed incorrect ones, make sure to correct them in the updated return. For instance, if you didn't claim deductions under Section 80C for life insurance premiums or NPS contributions, now is the time to add them.
  

• Update TDS and Tax Paid: Ensure that the updated TDS credits are correctly reflected in the new return, and include any additional tax payments made or refunds due.
  

• Submit Supporting Documents: Depending on the nature of the error, you may need to submit additional documents or proof to validate the corrections being made, especially if the return is being filed under expert assistance.

Ensure all the information is entered correctly, as the tax authorities will validate these changes. Avoid errors in the corrected filing to ensure smooth processing.

5. Paying Additional Tax or Penalties (If Applicable)

If the updated return results in additional tax payable due to underreporting of income, you will need to pay the outstanding taxes along with any applicable interest. The interest is levied under Section 234A, Section 234B, and Section 234C, depending on the nature of the delay and the specific circumstances.

• Pay Additional Tax: Once the updated return is filed, the tax computation will show if any additional tax is due. It is essential to make the payment of the due tax before filing the updated return.
  

• Pay Interest: Interest may be levied on the unpaid taxes as per the provisions of the Income Tax Act. Ensure that the interest is paid along with the principal tax to avoid further penalties.

You can pay the outstanding tax through online payment portals provided by the Income Tax Department. Make sure to obtain the Challan and reference number after the payment, which will need to be mentioned in the updated return.

6. No Penalties for Filing an ITR-U

Filing an updated return under Section 139(8A) provides a chance for taxpayers to avoid penalties under Section 270A for underreporting of income. However, the Income Tax Department may still impose penalties if the discrepancies are related to false declarations or incorrect claims in the updated return. Therefore, it's critical to ensure that the updated return is filed with accurate and truthful information.

If you file the updated return within the 24-month window and correct all mistakes, the penalties related to underreporting can be avoided. It's also important to keep records and supporting documents in case the tax authorities request them for verification.

Recent Updates in Budget 2025

The Budget 2025 brought in several key updates impacting the filing of ITRs and the penalties for underreporting and misreporting. Some of the major updates include:

• Enhanced Disclosure Requirements: The government has introduced more stringent disclosure norms for high-income taxpayers and individuals with complex financial portfolios. Taxpayers are now required to disclose detailed information about their foreign assets, investments, and income sources.
  

• Increased Penalties: The penalties for underreporting income have been increased in cases of willful evasion or misreporting. The Budget has also proposed stricter penalties for habitual offenders, which means that taxpayers who repeatedly make mistakes or fail to comply with tax laws may face harsher consequences.
  

• Facilitating Taxpayer Assistance: The Budget includes provisions for more taxpayer-friendly services, including improved online tools and assistance for filing updated returns, thereby encouraging accurate and timely filings.

Conclusion

Underreporting and misreporting of income can lead to severe penalties, including substantial fines and interest, along with possible legal consequences. However, taxpayers are given an opportunity to rectify these errors by filing an updated return under Section 139(8A). The recent changes in the tax laws, particularly the increased penalties for non-compliance, make it essential for taxpayers to file accurate returns. For those who want to ensure that their tax filings are correct, platforms like TaxBuddy provide expert assistance, helping you avoid errors and penalties while ensuring timely and accurate submissions.

FAQs

Q1: What are ITR utilities and why are they important? ITR utilities are software tools provided by the Income Tax Department to help taxpayers file their Income Tax Returns (ITR) electronically. These utilities help ensure that the data is correctly entered into the appropriate fields and the return is submitted in the correct format. They are vital for simplifying the filing process and ensuring compliance with tax regulations.

Q2: How do I download the ITR utility for the latest assessment year?

To download the ITR utility for FY 2024-25 (AY 2025-26), visit the official Income Tax Department website. You can select the appropriate ITR form for your filing status (e.g., ITR-1, ITR-2, ITR-3, etc.) and download the utility. The utility is available in Excel and Java formats, making it easier to fill in your tax details.

Q3: What is the role of JSON files in ITR filing?

JSON files are used to submit data in a structured format for tax filings. After completing the ITR form, the data can be exported as a JSON file, which is then uploaded to the Income Tax Department’s portal. This ensures that the filing is processed electronically and that all information is accurately captured.

Q4: How do I generate a JSON file after filling out the ITR form?

Once you have filled in the ITR form using the utility, you can generate a JSON file by selecting the "Generate JSON" option in the utility. This will create a file containing all the data you entered in the return. You can then upload this file directly to the Income Tax Department's portal.

Q5: Why are JSON files important for ITR filing?

JSON files are essential because they allow for seamless data transfer between the taxpayer's system and the Income Tax Department’s portal. They provide a structured and standardized format that ensures the tax return is filed correctly and can be processed efficiently by the department.

Q6: Can I file ITR without using the ITR utility and JSON files?

No, for electronic filing of ITR, using the ITR utility and generating a JSON file is mandatory. These tools ensure that your return is filed in the correct format and is compatible with the Income Tax Department’s system for processing and validation.

Q7: What should I do if I encounter errors while generating a JSON file?

If you encounter errors while generating a JSON file, check for common issues such as incomplete or incorrect entries in the ITR form. Ensure all required fields are filled out and validate your information. If errors persist, use the "Validate" feature within the ITR utility to detect and correct any mistakes.

Q8: Can I modify a JSON file after generating it?

It is not recommended to manually modify a JSON file after it has been generated, as it could lead to inconsistencies or errors in the data. If you need to make changes, it is best to go back to the ITR utility, make the necessary corrections, and regenerate the JSON file.

Q9: What happens if I upload an incorrect JSON file?

If you upload an incorrect JSON file, the Income Tax Department may reject your return or ask for clarification. It is essential to double-check the file for accuracy before uploading it. If your return is rejected, you will need to correct the errors and upload the file again.

Q10: Can I file an updated return using a JSON file?

Yes, you can file an updated return using a new JSON file. If you need to correct errors in a previously filed return, generate a new JSON file with the correct information and upload it to the Income Tax Department’s portal to file the updated return.

Q11: How long does it take for the ITR to be processed after uploading the JSON file?

The processing time for ITR varies, but generally, it can take up to a few weeks. The Income Tax Department will validate the uploaded JSON file, and once the validation is complete, your return will be processed, and any applicable refund will be issued.

Q12: Do I need to upload a JSON file every time I file an ITR?

Yes, every time you file an ITR electronically, you must generate and upload a JSON file. This ensures that the data is submitted in a standardized format, and the filing process is smooth and error-free.