Timely and accurate tax payments, along with consistent filing of returns, are essential to ensure the government has sufficient funds for public welfare initiatives. To discourage taxpayers from delaying payments or omitting required information in returns or statements, the Income Tax Act outlines several penalties. These penalties serve as consequences for non-compliance. Let’s review some of the key and commonly applicable penalties:

Default in Payment of Tax

When a taxpayer does not pay the tax, TDS, or TCS, the tax authorities may impose a penalty. However, the penalty amount cannot exceed the unpaid tax amount.

Failure to Maintain Books of Accounts and Other Records

If a taxpayer neglects to maintain or retain the prescribed books of accounts or documents as mandated by the Act, a penalty of ₹25,000 may be imposed.
For taxpayers engaged in international transactions, the penalty is 2% of the value of such transactions.

Audit and Audit Report Compliance

If a taxpayer fails to get their accounts audited, obtain the audit report, or submit the auditor’s report as required, a penalty will be levied. The penalty amount will be the lower of ₹1,50,000 or 0.5% of the total turnover.
In cases where the taxpayer fails to furnish an audit report related to international transactions, a penalty of ₹1,00,000 will be applicable.

TDS/TCS Compliance Penalties

If an individual fails to deduct tax at source as required, they will be liable to a penalty equivalent to the amount of tax that was not deducted or paid.
Similarly, if an individual fails to collect tax at source, they must pay a penalty equal to the amount of tax that was not collected.

In case of failure to furnish TDS/TCS statements or for furnishing incorrect statements, a penalty ranging from ₹10,000 to ₹1,00,000 can be imposed.
Moreover, if a person fails to provide accurate information or furnishes incorrect details regarding TDS deductions related to non-residents, a penalty of ₹1,00,000 will be applicable.

Penalty for Accepting or Repaying Loans Through Improper Modes

If a person accepts or takes a loan or deposit otherwise than by an account payee cheque, account payee draft, or electronic clearing system (ECS), and the total amount exceeds ₹20,000, they will be subject to a penalty equal to the loan or deposit amount.

Similarly, if a person receives ₹2,00,000 or more in aggregate from a single person in a day, through a single transaction, or related to one event, and not through acceptable banking channels, a penalty equal to the amount received will be levied.

Further, if a loan or deposit exceeding ₹20,000 is repaid other than through an account payee cheque, account payee draft, or ECS, the person will have to pay a penalty equivalent to the amount of such loan or deposit.

Penalties for Under-reporting, Misreporting, False Entries, and Undisclosed Income

Under-reporting or Misreporting of Income

When the assessed or reassessed income exceeds the income declared by the taxpayer, or when no return is filed but the income surpasses the basic exemption limit, a penalty amounting to 50% of the tax payable on the under-reported income will be imposed.
In cases where under-reporting results from misreporting of income, a penalty of 200% of the tax payable will apply.

Penalty for False Entries, Including Fake Invoices

If during proceedings, the tax officer discovers that the taxpayer’s books of accounts include any of the following:

• Forged or falsified documents such as fake invoices or false evidence,
  
• An invoice related to the supply of goods or services that were never actually supplied,
  
• An invoice issued by a non-existent entity,
  
• Omission of any entry crucial for determining total income,
  

then the taxpayer may face a penalty equal to the value of such false or omitted entries.

Undisclosed Income

If the income assessed includes any undisclosed income, a penalty at the rate of 10% of such undisclosed income will be charged.
However, if the income is already disclosed in the return and the applicable tax is paid before the end of the relevant financial year, no penalty will be levied.

For cases involving a search initiated on or after December 15, 2016:

• If the taxpayer admits to the undisclosed income during the search, pays the due tax and interest, and files a return, a penalty of 30% of the undisclosed income will apply.
  
• In all other situations, a penalty at the rate of 60% of the undisclosed income will be levied.

Penalties for Failure to Furnish Statements or Information

Failure to Furnish Statement of Financial Transaction or Reportable Account

If a person fails to submit a statement of financial transaction or reportable account, a penalty of ₹500 per day of default will be imposed until the end of the period mentioned in the notice.
If the default continues even after the notice period, the penalty increases to ₹1,000 for each day of continued failure.

Providing inaccurate statements of a financial transaction or reportable account attracts a penalty of ₹50,000. Additionally, a penalty of ₹5,000 will apply for each inaccurate reportable account.

Penalty for Investment Funds

If an eligible investment fund fails to furnish required statements, information, or documents within the prescribed timeline, a penalty of ₹5,00,000 will be levied.

Penalty Relating to International Transactions

Failure to submit information or documents related to an international transaction results in a penalty amounting to 2% of the value of the transaction.

If a report or certificate prepared by an Accountant, Merchant Banker, or Registered Valuer contains incorrect information, a penalty of ₹10,000 will be charged for each incorrect report or certificate.

Penalty for Non-Cooperation During Information Gathering

If a person who is attending or assisting in the business or profession at premises entered by the Income Tax Authority for information gathering fails to provide necessary information, a penalty of up to ₹1,000 can be imposed.

Penalty for Non-Furnishing of Country-by-Country Report

If a reporting entity obligated to submit a Country-by-Country report fails to do so, the penalties are as follows:

Period of Delay	Penalty
Delay up to 1 month	₹5,000 per day
Continuing delay after 1 month	₹15,000 per day
Submission of inaccurate information	₹5,00,000

Other Penalties

Failure to apply for, quote, or intimate a Permanent Account Number (PAN), or quoting an incorrect PAN, will result in a penalty of ₹10,000.
Similarly, failure to apply for, quote, or providing a false Tax Deduction and Collection Account Number (TAN) will also attract a penalty of ₹10,000.

A penalty of ₹10,000 will be levied for each of the following defaults:

• Refusing to answer questions raised by the income tax authorities,
  
• Refusing to sign statements made during income tax proceedings,
  
• Non-compliance with a summons to provide evidence or produce books of accounts,
  
• Failure to respond to a notice issued under the Income Tax Act. For more information, contact us!

FAQs on Penalties Under the Income Tax Act

1. What happens if I fail to pay my taxes on time?

If you fail to pay taxes, TDS, or TCS on time, a penalty up to the amount of unpaid tax can be imposed by the tax officer.

2. Is there a penalty for not maintaining proper books of accounts?

Yes, failure to maintain books of accounts as required can result in a penalty of ₹25,000. For international transactions, the penalty is 2% of the value of the transaction.

3. What is the penalty for not deducting TDS?

If you fail to deduct TDS, you will be liable to pay a penalty equal to the amount of tax that was not deducted.

4. What penalty applies for submitting false invoices?

If false entries such as fake invoices are found, the taxpayer may face a penalty equal to the value of the false or omitted entries.

5. Is there a penalty for under-reporting or misreporting income?

Yes, under-reporting attracts a penalty of 50% of the tax payable, while misreporting leads to a penalty of 200% of the tax.

6. What is the penalty for failing to furnish a TDS/TCS statement?

Failure to submit a TDS/TCS statement or furnishing incorrect details can attract a penalty ranging from ₹10,000 to ₹1,00,000.

7. What happens if a person does not comply with an income tax summons?

Non-compliance with summons to give evidence or produce documents will lead to a penalty of ₹10,000.

8. Is there any penalty for accepting loans in cash?

Yes, accepting or repaying loans above ₹20,000 in cash (instead of by account payee cheque/draft or ECS) can result in a penalty equal to the amount of the loan or deposit.

9. What is the penalty for failing to furnish a financial transaction statement?

Failure to furnish a statement of financial transaction or reportable account may lead to a penalty of ₹500 per day, increasing to ₹1,000 per day after the notice period.

10. Is there a penalty for not quoting PAN or quoting a wrong PAN?

Yes, not applying for PAN, quoting an incorrect PAN, or failing to intimate PAN attracts a penalty of ₹10,000.