ITR Filing: What happens if you underreport or misreport your income in ITR? Check legal provisions and penalties

Filing income tax returns is a crucial financial responsibility, where taxpayers are required to declare their actual income accurately. However, some taxpayers may unintentionally underreport or misreport their earnings, which could lead to penalties. Whether due to confusion about what income is taxable or negligence, underreporting or misreporting can have several consequences.

With just a few days for the ITR filing due date, here’s all you need to know about underreporting and misreporting income —

What is underreporting income in ITR?

Underreporting income happens when someone reveals a lower amount than their actual earnings, which essentially means that a taxable part of the income is left out.

What is misreporting income in ITR?

Misreporting income involves providing incorrect or misleading information about the type, source, or level of income. This can include providing incorrect income details, claiming benefits or allowances for ineligible provisions, or providing false information regarding income sources.

Why is accurate income reporting in ITR essential?

“Accurate income reporting is not just a compliance requirement — it’s essential to avoid serious financial, legal, and reputational risks. Under the Indian Income Tax Act, underreporting or misreporting income can lead to multiple consequences, ranging from extra tax and interest to penalties, notices, and even prosecution,” according to CA Shefali Mundra, Tax Expert at ClearTax.

Important legal provisions and penalties

The Income Tax Act has detailed several provisions for underreporting or misreporting income in the ITR —

● Section 270A: This provision governs penalties for underreporting or misreporting. If the Assessing Officer (AO) finds that your income return understates your true income, or misclassifies income or claims ineligible deductions, then a penalty of 50 per cent of the tax due on the underreported part will be levied, Mundra said.

In cases of misreporting, which may include deliberate false reporting, fake invoices, or suppression of facts, the penalty can reach up to 200% of the tax payable on the inaccurately reported income.

● Interest Charges: In addition to penalties, there are interest provisions under Sections 234A, 234B, and 234C for delays in filing or paying tax. If underreporting leads to tax being unpaid or underpaid, interest continues to accrue, the tax expert noted.

● Notices and assessments: If tax authorities detect a mismatch between third-party reporting, AIS, Form 26AS, bank data or any other details, they may initiate an assessment, raise notices, or call for explanations or documents.

Other consequences

Loss of exemptions

“In some cases, misreporting may lead to the denial of legitimate deductions and exemptions,” according to Mundra.

Severe cases

Deliberate evasion of income tax through underreporting or misreporting might even result in prosecution, fines, or imprisonment, she added.

In conclusion, misreporting or underreporting may result in greater financial and reputational damage. Hence, taxpayers must maintain accuracy, transparency, and timely compliance while reporting income in ITR.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Taxpayers are advised to consult a qualified tax professional or refer to the official website of the Income Tax Department for accurate and up-to-date guidance before filing their returns.