ITR Filing 2025: What Happens If You Underreport or Misreport Income? Penalties Explained

As the deadline for filing income tax returns (ITRs) for assessment year 2025–26 approaches, tax experts are urging individuals to be cautious while declaring their income. The Income Tax Department has tightened scrutiny measures, and any discrepancies—whether due to “underreporting” or “deliberate misreporting”—can invite heavy penalties.

What qualifies as underreporting?

Underreporting occurs when the income you disclose is lower than what actually accrues to you. Common cases include not showing interest from fixed deposits, ignoring rental income, or claiming excessive deductions. Even inadvertent errors, such as not accounting for income reflected in Form 26AS or Annual Information Statement (AIS), may fall under this category.

What is misreporting of income?

Misreporting is considered a more serious offence. It includes falsifying books of accounts, fabricating invoices, or intentionally concealing income sources. Claiming bogus expenses or inflating losses to evade tax also comes under misreporting.

Penalties involved

The Income Tax Act lays down strict consequences for both underreporting and misreporting. If income is underreported, the penalty amounts to 50% of the tax payable on the undisclosed portion.

However, in cases of misreporting, the penalty is much harsher—200% of the tax liability arising from the misreported amount. For instance, if undisclosed income results in an additional tax liability of Rs 50,000, the penalty would be Rs 25,000 in case of underreporting, while it could shoot up to Rs 1 lakh if proven to be misreporting.

Also Read: ITR Filing Due Date FY 2024-25: Know Last Date, Penalty, and Filing Guide | Republic World

Why taxpayers need to be careful

With advanced data analytics, the tax department can now cross-verify income sources through bank transactions, securities holdings, property registrations, and GST filings. Any mismatch is likely to be flagged. Experts caution that even unintentional mistakes may attract penalties, though taxpayers can contest genuine errors during assessment.

The bottom line

Taxpayers should carefully review AIS, TIS (Taxpayer Information Summary), and Form 26AS before filing returns. Consulting a tax professional and disclosing all income sources is the safest way to avoid penalties and scrutiny. By ensuring accurate reporting, individuals not only stay compliant but also safeguard themselves from unnecessary financial and legal trouble.