5 Important Tax Penalties Every Taxpayer Needs to Know

Navigating India’s complex tax laws and ever-changing rules can be challenging even for the most diligent of taxpayers. Despite one’s best efforts, it is easy to miss filings or make inadvertent errors that could result in hefty penalties. A lack of knowledge of tax penalties can drain substantial sums of hard-earned money if a business or an individual fails to comply with tax regulations.

This article aims to create awareness among taxpayers on five important tax penalties levied by the Income Tax Department. We will cover the penalty on income tax applicable for cash transactions, non-maintenance of account books, delayed audit reports, concealed income and failure to furnish required statements/information.

1. Penalty for Accepting/Repaying Loans in Cash

Accepting or repaying any loan or deposit of ₹20,000 or above in physical cash will make you liable for a penalty on income tax under sections 269SS and 269T of the Income Tax Act. The penalty amount will match the full value of the loan or deposit involved.

For instance, if you take a personal loan of ₹50,000 in cash from a moneylender, you would need to pay a penalty of ₹50,000. Similarly, repaying a home loan EMI of ₹30,000 in cash would attract a penalty of ₹30,000.

You may also face this penalty if you receive ₹2 lakhs or above in a single day from one person in the form of cash. This provision aims to deter dealing with unaccounted money.

2. Penalty for Not Maintaining Account Books

As per section 271A, not maintaining proper books of accounts and relevant documentation as mandated under the Income Tax Act can lead to a steep penalty on income tax of ₹25,000. For those engaged in international transactions, the penalty will be higher at 2% of the transaction value if accounting documents are not adequately maintained.

To avoid this penalty, it is prudent to maintain honest accounts and ensure your paperwork is complete and in order.

3. Penalty for Not Getting Accounts Audited

If your business has an annual turnover exceeding ₹1 crore, you need to get a tax audit completed by September 30 every year as per the law. Failure to do this statutory audit on time can attract a penalty under section 271B of 0.5% of the turnover or ₹1.5 lakhs, whichever is lower.

For professionals with gross receipts over ₹50 lakhs, the fixed penalty amount is ₹1.5 lakhs. When researching tax penalties, referring to an income tax penalty chart can provide a quick overview of the fines applicable for different compliance violations. Timely audits are crucial for tax compliance and to avoid steep penalties.

4. Penalty for Underreporting Income

As per section 270A, underreporting of income can lead to a high penalty on income tax of 50% of the underpaid tax amount. For small underreporting up to ₹50,000, a lower 10% penalty applies. Underreporting could happen via inflating expenses, suppressing sales, misreporting income, etc.

The objective of this provision is to deter dishonest reporting.

5. Penalty for Not Furnishing Information on Transactions

From the financial year 2016-17 onwards, it is mandatory to report high-value financial transactions like large cash deposits, share/mutual fund purchases, etc., over a threshold limit in your income tax returns. Under section 271FA, not furnishing such transaction details can attract a penalty on income tax of ₹500 daily until you submit the information. Continued failure to report even after a notice could mean a daily penalty of ₹1,000.

Inaccurate reporting of transactions also invites a penalty of ₹50,000.

Conclusion

Ignorance of tax penalties is not bliss when it comes to your hard-earned money. These five penalties aim to ensure tax compliance and honesty in financial reporting. Ensure you remain on the right side of tax laws by maintaining your paperwork, doing timely audits, reporting transactions and avoiding cash dealings for loans. Awareness and prudence are your best tools to avoid tax penalties. Consult a chartered accountant if you receive any tax penalty notice.

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FAQs

Will multiple penalties be charged from the same taxpayer?

Yes, it is possible for a taxpayer to receive multiple penalties in the same assessment year if different provisions are violated. For instance, a taxpayer can face penalties for cash transactions and not getting a timely tax audit. The penalties are levied under different sections and will apply concurrently.

Can the penalty for misreporting or underreporting of income be waived?

The underreporting penalty under section 270A cannot be waived unless the taxpayer can prove that he/she had a reasonable cause for the underreporting. In genuine cases where the underreporting was unintentional, the tax officer may waive the penalty after considering the circumstances. However, the onus is on the taxpayer to convince the officer.

What is the penalty for income tax scrutiny?

There is no specific penalty for a scrutiny case. However, during scrutiny assessments, if the assessing officer discovers any violations, such as underreporting income, late filing, taxation issues, etc., relevant penalties will be levied based on the nature and gravity of the non-compliance. Scrutiny can also lead to demands for previous unpaid taxes along with applicable interest and penalties.