Income tax penalties may arise in two situations: when income is not reported correctly and when taxes due are not paid on time. The law provides separate frameworks to deal with these cases, outlining how penalties are determined based on the nature of the lapse.
Section 221 of the Income Tax Act deals with tax payment defaults, whereas Section 270A addresses underreporting and misreporting of income. These provisions define the circumstances under which penalties may be imposed, the rates applicable, and the safeguards available to taxpayers. Here’s a closer look at how each of these works.
What happens when a taxpayer defaults on a payment?
According to experts, when a tax demand arises, such as an addition made by the tax officer or the levy of a penalty, it is formally communicated to the individual through a notice of demand.
If the taxpayer fails to pay the specified amount within 30 days, or within a shorter period in certain cases approved by a Joint Commissioner, they are treated as an “assessee in default”, says Gaurav Makhijani, Managing Partner at MGA. After that stage, interest and penalty are imposed.
However, if the individual continues to default even after interest and penalty are levied, the tax authorities can initiate recovery proceedings. “These proceedings grant wide powers to the authorities, including attachment of bank accounts, recovery directly from banks, and attachment and sale of movable or immovable property. Although there are prescribed procedures that must be followed, such measures are commonly taken in cases of persistent non-payment, making continued default a serious matter.”
How much penalty is imposed for defaulting on the payment?
According to Suraj Singh, Founder of SD Singh & Associates, Chartered Accountants, the penalty for defaulting on tax payment is levied under Section 220(2) and 221 of the Income Tax Act, 1961.
- Interest liability: Charged at 1% per month or part thereof on the outstanding tax demand from the due date until the amount is fully paid.
- Penalty by assessing officer: A levy under Section 221 may be imposed, which can go up to 100% of the tax arrears, depending on the facts.
- Nature of penalty: Unlike interest, this penalty is not automatic and depends on the facts and circumstances of the case.
Under the Income Tax Act, 2025, which replaced the Income Tax Act, 1961, the overall rules and law remain the same. Sections 220(2) and 221 now become sections 411 and 412 under the new law. “There are no significant changes in interest and penalty provisions on unpaid tax demands,” Makhijani said.
Difference between under-reporting and misreporting of income
Under-reporting of income refers to situations in which a taxpayer declares a lower income than what is assessed by the tax authorities, often due to omissions, incorrect claims or computational errors.
On the other hand, misreporting of income involves deliberate concealment or falsification of facts. This includes instances such as suppressing income, claiming bogus expenses, or failing to record transactions.
Some examples include suppression of facts, recording false entries in books of account, claiming bogus expenses, failure to record income or receipts, and failure to report international or specified transactions, such as those covered under transfer pricing regulations. “Because misreporting involves a deliberate attempt to avoid tax, it attracts a significantly higher penalty compared to under-reporting,” Makhijani said.
What is the penalty for such cases?
According to Singh, under-reporting and misreporting income can lead to substantial penalties. These provisions are contained in section 439 of the new Income Tax Act. Here’s how much penalty will be imposed in each case:
- Under-reporting of income: Such a lapse attracts a penalty of 50% of the tax payable on such income.
- Misreporting of income: If a taxpayer misreports their income, then a higher penalty of 200% of the tax payable will be levied.
These provisions have been introduced by the Income Tax Department to penalise taxpayers evading taxes, Singh explained.
Can the penalty be waived?
However, such a penalty can be avoided in certain situations. The law provides taxpayers with the option to seek immunity from penalties for underreported income. “To avail this, the taxpayer must pay the tax and applicable interest in full and should not file an appeal against the assessment order,” Makhijani said.
He further explained that an application for immunity must be filed within one month from the end of the month in which the assessment order is received as this helps in avoiding additional penalty exposure.
“ Section 270AA of the old tax law/ Section 440 of the new tax law covers this option. With the finance budget 2026, an option of taking immunity from misreporting cases has also been introduced, for which taxpayers will have to make 100% additional tax payment,” he said.
For instance, if the tax due is ₹10 lakh, on which penalty of 200% ( ₹20 lakh) is levied. In such a case, taxpayer can pay ₹10 lakh as tax and an additional ₹10 lakh to get immunity and save themselves litigation and ₹10 lakh, Makhijani advised.
