The Cost of Non-Compliance: A Guide to Income Tax Penalties in India (FY 2025-26)

One of the most common misconceptions among taxpayers is that paying tax late only attracts a small interest charge. While interest is certainly applicable, the Income Tax Act contains stringent penalty provisions—specifically for TDS defaults, concealment, and under-reporting—that can go as high as 200% or even 300% of the tax due.

In this guide, we decode the critical sections of the Income Tax Act—271(1)(c), 271C, 234B/C, and 270A—to help you understand the true financial risks of non-compliance.

1. The "Concealment" Trap (Section 271(1)(c) vs. 270A)

Many taxpayers still fear the term "Concealment of Income." It is important to know which rule applies to you, as the department is currently transitioning between two eras of penalty laws depending on the year being assessed.

The Old Regime: Concealment (Section 271(1)(c))

* When it applies: Typically for cases involving Assessment Years prior to 2017-18.

* Relevance Now: If the department reopens an old case (under Section 148) from 7-10 years ago, this penalty still applies.

* The Penalty: It is severe and discretionary, ranging from 100% to 300% of the tax evaded.

The New Regime: Misreporting (Section 270A)

* When it applies: For all current assessments (AY 2017-18 onwards), "Concealment" has been replaced by "Misreporting."

* The Penalty: A flat 200% of the tax payable (no discretion).

* Key Takeaway: The law has become stricter. Under the new rules, there is no range (100-300%); if you are caught misreporting, the penalty is a flat 200%.

2. The TDS Penalty: Failure to Deduct (Section 271C)

This is often the most expensive penalty for businesses and professionals. If you are liable to deduct TDS (Tax Deducted at Source) on payments like salary, rent, professional fees, or contracts and fail to do so, the penalty is severe.

* The Default: Failure to deduct TDS, or failure to pay the deducted tax to the government.

* The Penalty: 100% of the tax amount.

* Example: If you forgot to deduct TDS of ₹50,000 on a professional payment, the penalty levied will be an additional ₹50,000. This is over and above the interest you pay on the late deposit.

* 2025 Update: Recent amendments propose empowering the Assessing Officer (AO) to levy this penalty directly, making the process faster and more frequent during assessments.

3. The Heavy Hitters: Under-reporting & Misreporting (Section 270A)

This is the most critical section for current taxpayers. The department categorizes discrepancies into two buckets with fixed penalties:

A. Under-reporting of Income (50% Penalty)

This typically happens due to errors, negligence, or legitimate differences in opinion (e.g., a disallowed expense).

* Penalty: 50% of the tax payable on the under-reported income.

B. Misreporting of Income (200% Penalty)

This is the modern equivalent of "Concealment." It applies to deliberate attempts to evade tax.

* Triggers: Misrepresentation of facts, failure to record investments in books, false entries, or claiming expenditure without evidence.

* Penalty: 200% of the tax payable on the misreported income.

4. Advance Tax Defaults (Interest vs. Penalty)

Many taxpayers confuse "Interest" with "Penalty." Sections 234B and 234C levy interest, which is compensatory.

* Section 234C (Deferment): If you fail to pay the required percentage of Advance Tax by the quarterly due dates, you are charged interest at 1% per month for the deferment period.

* Section 234B (Shortfall): If your total Advance Tax paid by March 31st is less than 90% of your assessed tax, you will be charged simple interest at 1% per month starting from April 1st.

Conclusion

The gap between "tax planning" and "tax evasion" is defined by disclosure. With the Annual Information Statement (AIS) now capturing high-value transactions, hiding income is nearly impossible.

If you have received a notice regarding an old year (Concealment) or a current scrutiny (Misreporting), consult a professional immediately. The cost of compliance is always lower than the cost of penalties.

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