Income Tax Penalties & Interest Under the Income-tax Act, 2025

Last Updated: 15 April 2026  |  Applicable From: Tax Year 2026-27 (1 April 2026 onwards)  |  Reference: Income-tax Act, 2025 (30 of 2025), as amended by Finance Act, 2026

The cost of a tax default under the Income-tax Act, 2025 is rarely limited to the tax itself. An equally important — and often larger — component is the layered structure of interest (compensatory) and penalty (punitive) that the Act imposes on late filing, under-reporting, misreporting, TDS defaults, cash-dealing contraventions, non-maintenance of books and a long list of other failures. For a business that has misclassified a receipt, a professional who missed a TDS obligation or an individual who failed to file on time, the penalty landscape under Chapter XXI can escalate total exposure well above the underlying tax.

The 2025 Act — which received presidential assent on 21 August 2025 and commenced on 1 April 2026 — does not invent new penalties; it consolidates and graduates the 1961 Act regime, cleans up the drafting, and removes some of the strict-liability features that previously led to harsh outcomes in bona fide error cases. This article is a comprehensive, section-by-section walkthrough of every penalty and interest exposure a taxpayer should be aware of for the tax year 2026-27 and beyond.

Table of Contents

1. Chapter XXI framework and transition from 1961 Act
2. Late filing fee
3. Under-reporting and misreporting — 50% and 200%
4. TDS/TCS default penalties and interest
5. Failure to maintain books of account
6. Failure to get accounts audited
7. Cash loan, deposit and receipt penalties
8. Other specific penalties
9. Interest under the 2025 Act equivalents of 234A/B/C and 201(1A)
10. Waiver, reduction and immunity
11. Appeal against penalty orders
12. Worked example — full exposure calculation
13. Expert Insight
14. Key Takeaways
15. Frequently Asked Questions

1. Chapter XXI framework and transition from 1961 Act

Chapter XXI of the Income-tax Act, 2025 (sections 535 onwards) is the home of the penalty regime. The chapter consolidates the equivalents of 1961 Act sections 270A (under-reporting/misreporting), 271A (books), 271B (audit), 271C (TDS), 271CA (TCS), 271D/271E (cash loans and repayments), 271DA (269ST cash receipts), 271AAC, 271AAD, 271K and related provisions into a cleaner, more graduated structure. Interest on tax defaults is dealt with in Chapter XIX (Collection and Recovery of Tax), which contains the 2025 Act equivalents of sections 234A, 234B, 234C and 201(1A).

For the tax year 2026-27 (1 April 2026 to 31 March 2027), the 2025 Act rules apply in full. Transitional provisions in Chapter XXIII preserve the operation of pending penalty proceedings initiated under the 1961 Act — so a penalty initiated on, say, an assessment relating to PY 2024-25 continues under the 1961 Act regime until concluded, but penalties arising out of tax year 2026-27 assessments are governed entirely by Chapter XXI of the 2025 Act.

2. Late filing fee

The late filing fee under the 2025 Act — successor to section 234F of the 1961 Act — is a strict-liability levy on belated returns:

• ₹5,000 where the return is filed after the due date;
• ₹1,000 where the total income of the assessee does not exceed ₹5,00,000.

The fee is payable at the time of filing the belated or revised return and the e-filing portal will not accept the filing until the fee is discharged. The fee is in addition to interest under the 234A equivalent, which runs from the day after the due date to the date of actual filing.

3. Under-reporting and misreporting of income — the 50% and 200% rule

This is the most significant penalty category. The 2025 Act retains the bifurcation introduced by section 270A of the 1961 Act:

Under-reporting — 50% penalty

Under-reporting arises where, among other circumstances:

• The assessed income exceeds the income returned;
• No return was filed but the assessed income exceeds the basic exemption threshold;
• The re-assessed income exceeds the originally assessed income;
• The assessed income under MAT/AMT exceeds the returned MAT/AMT income;
• The income computed under general provisions is reduced due to disallowance.

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

Misreporting — 200% penalty

Misreporting is a sub-set of under-reporting with an additional element of wilful deception. It is triggered in cases of:

• Misrepresentation or suppression of facts;
• Failure to record investments or expenses in books of account;
• Claim of false deductions, expenditure or exemption;
• Recording of false entries in books;
• Failure to report international transactions; or
• Any receipt or expenditure not recorded in books.

Where misreporting is established, the penalty escalates to 200% of the tax payable on the misreported income, and the taxpayer loses the defence of reasonable cause available in simpler under-reporting cases.

4. TDS/TCS default penalties and interest

TDS and TCS defaults have two layers of consequence under the 2025 Act — interest under Chapter XIX and penalty under Chapter XXI.

Default	Interest	Penalty
Failure to deduct TDS	1% per month from the date on which tax was deductible to the date of actual deduction	Equal to tax not deducted
Delay in paying deducted TDS	1.5% per month from the date of deduction to the date of payment	Prosecution exposure under Chapter XXII; penalty in strict cases
Failure to collect TCS	1% per month	Equal to tax not collected
Failure to file TDS/TCS statement (equivalent of Sec 234E)	Late fee of ₹200 per day (capped at TDS amount)	Penalty of ₹10,000 to ₹1,00,000 under equivalent of 271H
Furnishing incorrect information in TDS statement	—	₹10,000 to ₹1,00,000

Additionally, under the 2025 Act equivalent of section 40(a)(ia), 30% of the payment on which TDS was not deducted is disallowed as a business expense in computing business income — though this can be reclaimed in the year the default is subsequently cured.

5. Failure to maintain books of account

The 2025 Act requires specified assessees — professionals, businesses above turnover thresholds, trusts — to maintain such books of account and other documents as may enable the Assessing Officer to compute total income. Failure attracts a penalty of ₹25,000 under Chapter XXI (equivalent of old 271A). For international transaction cases, the penalty can go up to 2% of the value of each international transaction where specified documentation is not maintained.

6. Failure to get accounts audited

Where the 2025 Act equivalent of section 44AB applies — broadly, business turnover above ₹1 crore (₹10 crore if ≤5% cash receipts/payments), or professional gross receipts above ₹50 lakh — the assessee must get the accounts audited by a chartered accountant and file the audit report by the specified due date. Failure attracts a penalty of 0.5% of total sales, turnover or gross receipts, subject to a maximum of ₹1,50,000.

Reasonable cause is a defence — the ITAT has consistently held that genuine illness of the proprietor, death of the accountant, impound of records by an agency, and demonstrably late receipt of books from a branch are all admissible as reasonable cause.

7. Cash loan, deposit and receipt penalties

The 2025 Act carries forward the suite of cash-dealing restrictions and their penalties:

Provision	Threshold	Penalty
Equivalent of 269SS (accepting loans/deposits in cash)	₹20,000 or more	100% of the amount accepted
Equivalent of 269T (repaying loans/deposits in cash)	₹20,000 or more	100% of the amount repaid
Equivalent of 269ST (cash receipt from a person)	₹2,00,000 or more in a day / single transaction / single event	100% of the amount received
Equivalent of 40A(3) (cash expenditure)	₹10,000 (₹35,000 for transporters)	100% disallowance of the expense in PGBP

These provisions are quasi-strict-liability — reasonable cause is admissible but read narrowly, and business urgency alone has rarely been accepted.

8. Other specific penalties

Default	Penalty
Failure to answer questions / sign statements / attend	₹10,000 (equivalent of 272A)
Failure to quote PAN/Aadhaar correctly	₹10,000 per default (equivalent of 272B)
Undisclosed investment / unexplained money (equivalent of 68, 69 etc.)	60% tax under equivalent of 115BBE + 10% additional penalty under equivalent of 271AAC
False entries in books / bogus invoices	100% of sum involved (equivalent of 271AAD)
Failure to furnish statements of financial transactions	₹500 per day of default (equivalent of 271FA)
Undisclosed income found in a search (admitted)	30% of the undisclosed income (equivalent of 271AAB(1A))
Undisclosed income found in a search (not admitted)	60% of the undisclosed income

9. Interest under the 2025 Act — 234A, 234B, 234C and 201(1A) equivalents

Interest under the 2025 Act is charged at simple-interest rates and is non-discretionary. The heads are:

Interest for default in furnishing return (234A equivalent)

Charged at 1% per month or part of month on the unpaid tax (after reducing TDS, advance tax and other pre-paid amounts), from the day immediately following the due date of filing to the date of actual filing — or, if no return is filed, to the date of completion of assessment.

Interest for default in advance tax (234B equivalent)

Charged at 1% per month or part of month from 1 April of the tax year following the relevant tax year to the date of regular assessment, where advance tax paid is less than 90% of the assessed tax. Interest applies on the shortfall.

Interest for deferment of advance tax instalments (234C equivalent)

Charged at 1% per month for the specified period of delay in each of the four instalment due dates — 15 June (15%), 15 September (45%), 15 December (75%) and 15 March (100%). Presumptive scheme taxpayers pay the entire advance tax by 15 March.

Interest on TDS delay (201(1A) equivalent)

Charged at 1% per month from the date on which TDS was deductible to the date of actual deduction, and at 1.5% per month from the date of deduction to the date of payment to the credit of the Central Government.

10. Waiver, reduction and immunity

The 2025 Act retains the power of the Principal Commissioner/Commissioner to reduce or waive penalty in specified circumstances (equivalent of section 273A):

• Voluntary and bona fide disclosure before detection by the Department;
• Cooperation in any inquiry;
• Payment (or satisfactory arrangement for payment) of tax and interest due.

Also, immunity from penalty and prosecution is available under the equivalent of section 270AA, where the assessee accepts the addition, pays the tax and interest within the time allowed, and does not file an appeal against the assessment. Once granted, the immunity is binding and the Department cannot revisit the matter.

11. Appeal against penalty orders

Every penalty order is appealable. The first appeal is before CIT(A)/JCIT(A) in Form 35 within 30 days, followed by appeals to ITAT (Form 36, 60 days), the High Court (120 days, substantial question of law) and the Supreme Court. See our companion guide on Income Tax Appeals Procedure for a detailed walkthrough. Grounds that commonly succeed in penalty appeals include: absence of show-cause notice, vague show-cause notice, non-striking of inapplicable limb, bona fide difference of opinion on a legal issue, and reliance on professional advice.

12. Worked example — full exposure calculation

Related reading across the 214–243 series

For deeper treatment of related topics, see:

• Income Tax Appeals — CIT(A), ITAT, High Court & Supreme Court Procedure
• Income Tax Return Filing Under the 2025 Act
• TDS & TCS Chapter XIX Under the 2025 Act
• Set-Off & Carry Forward of Losses
• Cryptocurrency & VDA Taxation
• Income Tax Assessment & Reassessment

Expert Insight

Key Takeaways

• Chapter XXI of the Income-tax Act, 2025 (assented 21 August 2025, commenced 1 April 2026) is the home of the penalty regime for the tax year 2026-27 onwards.
• Late filing fee is ₹5,000 (or ₹1,000 if income does not exceed ₹5 lakh).
• Under-reporting of income — 50% penalty; misreporting — 200% penalty.
• Failure to deduct TDS or collect TCS — equal-amount penalty plus 1% to 1.5% per month interest.
• Failure to maintain books — ₹25,000; failure to audit — 0.5% of turnover, max ₹1,50,000.
• Accepting/repaying loans in cash above ₹20,000 — 100% penalty; receipt of ₹2 lakh+ in cash — 100% penalty.
• Interest at 1% per month under the 234A, 234B and 234C equivalents; 1.5% per month on delayed TDS remittance.
• Penalties can be reduced or waived on reasonable cause; interest cannot.
• Immunity from penalty and prosecution is available under the 2025 Act equivalent of section 270AA if the addition is accepted, tax and interest are paid, and no appeal is filed.
• Every penalty order is appealable — many cases succeed on procedural grounds such as vague show-cause notices.

Frequently Asked Questions

Facing a penalty or show-cause notice under the Income-tax Act, 2025? Reach out to CA V. Viswanathan at Virtual Auditor — +91 99622 60333 or support@virtualauditor.in.