Penalty for Under-Reporting and Misreporting of Income

When an assessment adds to the income you reported, the tax and interest are only part of the cost. The department can also levy a penalty: 50% of the tax on under-reported income, rising to 200% where the income was misreported. The good news is that the law gives you a way to seek immunity in many cases, and most penalties can be avoided by acting at the right time.

Which law applies?

For AY 2026-27 and earlier, penalties are levied under the Income-tax Act, 1961: section 270A for the penalty and section 270AA for immunity. The new Act’s transitional provisions keep penalties for earlier years under the old law.
For tax year 2026-27 onward, the Income-tax Act, 2025 carries these into section 439 (penalty) and section 440 (immunity), with the same core rates.

Under-reporting: 50% of the tax

You are treated as having under-reported income when, for example:

the income assessed is higher than the income in your return
you didn’t file a return and the income assessed is above the basic exemption limit
income reassessed is higher than the income previously assessed
a loss you claimed is reduced, or converted into income

The penalty is 50% of the tax payable on the under-reported income.

What is not under-reported income (no penalty) includes:

an amount for which you give an explanation that is bona fide and you have disclosed all material facts
an amount determined on an estimate, where your accounts are correct and complete but the method used doesn’t let income be properly worked out
an addition based on an estimate where you had already estimated a lower amount on the same issue and disclosed all facts
some transfer pricing and section 92CE adjustments, where the conditions are met

Misreporting: 200% of the tax

Misreporting means something more deliberate. It covers:

misrepresentation or suppression of facts
failure to record investments in the books of account
a claim of expenditure not substantiated by evidence
recording a false entry in the books
failure to record a receipt in the books that has a bearing on total income
failure to report an international transaction (or a deemed or specified domestic transaction) under the transfer pricing rules

The penalty is 200% of the tax payable on the misreported income. The 2025 Act is reported to add a further misreporting category in section 439(11)(g).

Immunity from penalty (section 270AA)

If the addition is only under-reporting (not misreporting), you can apply for immunity from both penalty and prosecution if:

you pay the tax and interest shown in the demand notice within the time allowed in it, and
you don’t file an appeal against the assessment order, and
you apply in the prescribed form within one month from the end of the month in which the order is received.

The AO must decide the application within one month from the end of the month in which it is received, after giving you a hearing before any rejection. Once immunity is granted, no appeal is allowed on that order.

When it makes sense: if the addition is small or hard to win on appeal, immunity gives you certainty at the cost of the tax plus interest. It is not available where penalty is initiated for misreporting, which is why the AO’s choice between the two categories in the order matters. Commentators report that under section 440 of the 2025 Act immunity in some cases also requires paying additional tax, so check the current position before applying.

Other common penalties and fees

Default	Consequence (1961 Act)
Late ITR (filed after the due date)	Late fee ₹5,000 (section 234F). ₹1,000 if total income is up to ₹5 lakh. Carried into section 428 of the 2025 Act
Not complying with a notice under 142(1), 143(2) or a summons	Penalty ₹10,000 per failure (section 272A). Can also lead to a best-judgment assessment
Tax audit not done or report not filed on time	0.5% of turnover, up to ₹1,50,000 (section 271B)
Unexplained cash credits, investments or expenditure (sections 68–69D)	Taxed at a flat 60% + 25% surcharge + cess (section 115BBE), plus penalty in some cases
Undisclosed foreign assets or income (Black Money Act)	Penalty of ₹10 lakh for non-disclosure in the ITR. This does not apply where the total balance of the foreign bank accounts is up to ₹20 lakh
Wilful failure to file a return or wilful tax evasion	Prosecution may be launched in serious cases (sections 276C, 276CC)

Reasonable cause: a key defence

For many penalties (late audit, non-compliance with notices, failure to get accounts audited), no penalty is imposed if you prove there was a reasonable cause for the failure (section 273B, section 470 of the 2025 Act). Examples include serious illness, a natural disaster, a portal glitch with evidence, or the death of the person responsible. Keep evidence at the time it happens: screenshots, medical certificates, emails.

How penalty proceedings work

The penalty is usually initiated in the assessment order (“penalty proceedings under section 270A are initiated separately”).
You receive a show-cause notice (section 274) asking why the penalty should not be levied. Always reply. Point out whether the AO has specified under-reporting or misreporting, and which limb of the section applies. Vague notices have been criticised by courts.
A penalty order follows. It can be appealed before the CIT(A) within 30 days.
If you have appealed against the assessment itself, request that the penalty proceedings be kept in abeyance until the appeal is decided.

How to avoid penalties in the first place

Report everything in AIS (interest, dividends, capital gains), even if it seems small.
Correct mistakes early. A revised return (up to 31 March after the assessment year) or an updated return (ITR-U) voluntarily discloses income before the department finds it. An ITR-U carries additional tax, but income disclosed in it generally does not attract the under-reporting penalty.
Keep evidence for every claim: deductions, loans, gifts, cash deposits.
Reply to every notice on time, and seek adjournments rather than going silent.
Disclose foreign assets fully in Schedule FA if you are a resident (including returning NRIs).

Frequently asked questions

Is the penalty automatic when there is an addition?
No. The AO must initiate proceedings, issue a show-cause notice and pass a reasoned order. Many additions don’t result in penalty, particularly where you made full disclosure and gave a bona fide explanation.

Should I go for immunity or appeal?
It depends on how strong your case on the addition is. If the appeal is likely to succeed, appeal. If it is a small or weak issue, immunity can save the 50% penalty and the cost of litigation.

I filed my return late. Will I pay a penalty as well as the late fee?
A late return attracts the late fee and interest on unpaid tax. A penalty arises only if income is later found to be under-reported. Filing late also means you lose the right to carry forward certain losses.

Does misreporting always mean 200%?
The rate is 200% of the tax on the misreported income, but the AO must clearly show which category of misreporting applies. You can contest this both in reply to the show-cause notice and in appeal.

Facing penalty proceedings or weighing immunity against an appeal? Garvita Jain & Co. reviews the assessment, replies to show-cause notices, files immunity applications and represents you in penalty appeals. Contact us here, or at contact@garvitajainandco.com or +91 98678 16597.

This article is general information based on the law as of October 2026 and is not professional advice.

Sources

Official

Professional / CA publications

Penalty for Under-Reporting and Misreporting of Income: What You Need to Know