Faked Tax Deductions? You Could Face A 200% Penalty Under Income Tax Rules

Timely and accurate tax payment is crucial for ensuring the government has the funds to support public welfare initiatives. To enforce compliance, the Income Tax Act prescribes penalties for failure to pay taxes or for providing inaccurate information in income tax returns.

According to a PTI report citing government sources, as many as 90,000 salaried individuals-employed across both public sector undertakings (PSUs) and private companies-have withdrawn wrongful tax deduction claims amounting to Rs 1,070 crore as of December 31, 2024.

The Income Tax Department uncovered the issue during search, seizure, and survey operations. It found that several individuals had falsely claimed deductions under various sections such as 80C, 80D, 80E, 80G, 80GGB, and 80GGC, effectively reducing their tax liability. Sources revealed that most of these individuals worked in the same companies, spanning sectors including MNCs, LLPs, private limited firms, and PSUs.

The income department has updated ITR-1 and ITR-4 forms to prevent false declarations. Now, taxpayers must provide specific proof for deductions, including document IDs, policy numbers, and other details. For example:

• Section 80C claims require document IDs or policy numbers for investments like PPF, ELSS, or insurance premiums.
• Section 80D claims require the insurer's name and policy number for health insurance.
• Home loan or education loan deductions require lender details, loan account numbers, and sanction dates.
• Claiming deductions for electric vehicles under Section 80EEB requires the vehicle's registration number.

This aims to increase transparency and authenticity in tax filings.

Concealing income to evade tax

Section 270A of the Income Tax Act empowers the Assessing Officer (AO), Commissioner (Appeals), Principal Commissioner, or Commissioner to impose a penalty on individuals who underreport or misreport their income. Introduced by the Finance Act of 2016 and effective from the financial year 2016-17, this provision aims to curb tax evasion and promote accurate income reporting in Income Tax Returns (ITR). The penalty under this section ranges from 50% of the tax payable on under-reported income to 200% in cases of misreporting.