100% Income Tax Penalty on Misreported Income Explained with Example

The government already allows taxpayers to get immunity from penalty and prosecution in cases of underreporting of income. Now, a proposal aims to extend this benefit to misreporting cases as well, but with a strong deterrent. In misreporting cases, the taxpayer will have to pay an additional income tax equal to 100 percent of the tax on the misreported income.

This change is important, especially for people earning from freelance work, side income, or multiple sources. Let us understand the current law, what misreporting means, and how this proposed rule changes the flow.

How Immunity from Penalty Works Today

Under the current Income Tax Act, Section 270AA allows taxpayers to apply for immunity from penalty and prosecution. This is available only in cases of underreporting of income.

To get this immunity, the taxpayer must pay the full tax and interest demanded by the tax department. The taxpayer should not file an appeal against the assessment order and must apply for immunity within the prescribed time.

If these conditions are met, the tax officer may grant immunity. This framework does not apply to misreporting cases today.

Underreporting vs Misreporting of Income

Underreporting usually happens due to mistakes or omissions without intention to hide income. For example, a calculation error or missing a small income source. In such cases, the penalty is 50 percent of the tax on underreported income, and immunity can be requested.

Misreporting is more serious. It involves deliberately hiding income or providing wrong details. Examples include not reporting freelance income, hiding interest income, or claiming fake expenses. In these cases, the penalty can go up to 200 percent of the tax, and immunity is currently not allowed.

A Simple Example of Misreporting with Freelance Income

Let us take an example to understand this clearly. Aman has a salaried job and also earns from freelance projects.

Aman deliberately did not report his freelance income while filing his tax return. Since the income was intentionally hidden, this is treated as misreporting of income under the Income Tax Act.

This is a clear case of misreporting because the freelance income was deliberately not disclosed.

Tax Impact Under the Proposed Rule

Assume Aman falls in the 30 percent tax slab. The table below shows how much Aman will need to pay to get immunity from penalty and prosecution under the proposed rule.

In simple terms, Aman first pays the normal tax on the hidden income. Then he pays interest for late payment. On top of this, he pays an extra tax equal to the tax amount to avoid penalty and prosecution.

What Happens Under the Current Law

Under the current law, since this is a misreporting case, Aman cannot apply for immunity under Section 270AA.

The tax department can levy a penalty of 200 percent of the tax on misreported income, along with tax and interest. Prosecution proceedings may also be initiated.

Why the Government Is Taking This Approach

This proposal shifts the focus from lengthy legal action to faster settlement. Instead of dragging cases through appeals and courts, the government offers a clear exit option.

At the same time, paying double tax on misreported income makes deliberate income hiding very costly. This sends a strong message to taxpayers, especially freelancers and gig workers, to report income honestly.

Key Takeaway

At present, immunity from penalty and prosecution applies only to underreporting cases. Misreporting attracts heavy penalties and legal action.

If the proposed rule is implemented, even misreporting cases can get immunity, but only after paying tax, interest, and an additional income tax equal to 100 percent of the tax on misreported income. This balances ease of compliance with strict consequences for deliberate tax evasion.

Disclaimer

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