Penalty is the most feared outcome of a tax assessment — and the most misunderstood. The Income-tax Act 2025 consolidates and renumbers penalty provisions originally scattered across Sections 271 to 275B of the old Act. The rates are unchanged, but the section numbers are new, the immunity routes have been clarified, and the faceless penalty framework is now formally codified. This guide maps every key penalty section, explains what triggers each, and shows how to respond or seek immunity.
Use the Income Tax CalculatorModel the tax impact alongside this guide.
30%–60% of undisclosed income depending on cooperation
Concealment in updated return
Section 271AAC
Section 415
50% of tax on income — plus surcharge
Failure to comply with Section 133(6)
Section 272A
Section 420
₹500/day of default, minimum ₹10,000
Under-Reporting vs Misreporting — Critical Distinction
The distinction between under-reporting and misreporting determines whether the penalty is 50% or 200% of tax. This is the single most important distinction in the penalty chapter:
Under-Reporting (50% Penalty) — Triggers
Income assessed by AO is more than income returned by taxpayer (even without any deliberate concealment)
Any deemed income is included in assessment
Additions based on estimation or best judgement
Cases where the difference arises from bona fide errors or differing interpretations
Misreporting (200% Penalty) — Triggers
Misrepresentation or suppression of facts in the return or during assessment
Failure to record any receipt in the books of account
Claim of expenditure not substantiated by evidence
False entry in books of account
Failure to report any international transaction or specified domestic transaction
Claiming deductions under specific head without substantiation
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200% Penalty Is Not Negotiable Downward: If the AO classifies an addition as "misreporting," the penalty is mandatorily 200% — there is no discretion to impose a lower rate. This is why taxpayer responses to assessment must never admit to suppression or fraud — distinguish the case clearly as a bona fide interpretation difference (under-reporting) if that is the true characterisation.
Case Study: How One Word Cost ₹18 Lakh in Penalty
Textile Trader, Surat — AY 2023-24
Harish, a fabric trader, made a cash purchase of ₹9 lakh that he couldn't explain to the AO's satisfaction. During the assessment, his accountant, trying to cooperate, said in a written submission: "the entry was made in the books but the purchase was bogus." The AO used this to classify the addition as "misreporting" under Section 270A(9) (old Act), triggering 200% penalty.
Tax on ₹9L Addition
₹3.15 lakh (35% slab + cess)
Penalty at 200%
₹6.30 lakh
Total outgo: ₹9.45 lakh — more than the original unexplained amount itself. Had the accountant characterised the matter as an unsubstantiated purchase (under-reporting), the 50% penalty would have been ₹1.575 lakh — saving ₹4.73 lakh in penalty alone.
Lesson: Every word in a written response to the AO matters. Never admit to false entries, bogus claims, or suppression — always characterise additions as bona fide interpretation differences or lack of evidence.
Immunity from Penalty — When You Can Escape
Under Section 404 of the new Act (old Section 270A), penalty is not leviable in the following cases:
Income returned: The under-reported income was actually offered in the return — but disagreement is on classification or head of income, not quantum
Bona fide estimation: The income was estimated under a specific provision and tax was paid on the estimation
No fresh facts: The addition is based solely on reassessment of already-disclosed facts without any new information
Accepted without appeal: Under Section 404(7), if the taxpayer accepts the assessment without contesting and pays tax, immunity from under-reporting penalty can be claimed by filing an application within 1 month
Faceless Penalty Proceedings — How They Work
The Faceless Penalty Scheme (FPS) was launched under the old Act and is now formally part of the new Act under Section 403. Key features:
All penalty proceedings initiated after 1 April 2026 go through the National Faceless Penalty Centre
Taxpayer receives a notice (show-cause notice) digitally on the income tax portal
Response must be filed online — no physical visit to the AO's office
The penalty order is passed by a faceless penalty unit — not the original Assessing Officer
Penalty order can be contested through appeal to JCIT(A)/CIT(A) under Section 356/357
Penalty for TDS Non-compliance
TDS-related penalties remain one of the most common penalty triggers for businesses:
TDS Default
Old Section
New Section
Penalty
TDS not deducted
271C
407
100% of TDS amount not deducted
TDS deducted but not deposited
271C
407
100% of TDS amount not deposited
Late filing of TDS return (26Q/24Q)
271H
412
₹10,000 to ₹1 lakh
Incorrect PAN in TDS return
272B
421
₹10,000 per incorrect PAN
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TDS Penalty Has No Immunity Route: Unlike the under-reporting penalty (which has immunity if the taxpayer accepts and pays), TDS non-deduction penalty under Section 407 has very limited escape routes. The only defence is that the payment was not chargeable to TDS under the law, or that deduction was made and deposited with a bona fide reasonable belief.
Penalty Response Checklist
Read the penalty notice carefully — identify which section and which addition is the basis
Never admit suppression, false entry, or bogus claim in written response
Characterise any addition as: bona fide interpretation difference or lack of evidence (never fraud)
If considering accepting assessment, file immunity application within 1 month under Section 404(7)
For TDS penalty: check if the transaction genuinely attracted TDS obligation before conceding
Respond within the time given in the show-cause notice — penalty is automatic if no response
Appeal against penalty order within 30 days if immune application is rejected
Under Section 404 of the Income-tax Act 2025 (old Section 270A), the penalty for under-reporting of income is 50% of the tax payable on the under-reported income. For misreporting — which involves false entries, suppression of facts, or fraudulent claims — the penalty is 200% of the tax. The AO must pass a separate penalty order and give the taxpayer an opportunity to respond before the penalty is levied.
Under Section 404(7) of the Income-tax Act 2025, if you accept the assessment order (without filing an appeal) and pay the entire tax and interest within the prescribed time, you can file an immunity application within 1 month. If immunity is granted, the 50% under-reporting penalty is waived. For 200% misreporting penalty, immunity is not available through this route — it requires either the Vivad Se Vishwas scheme or a successful appeal proving there was no misrepresentation.
No. A penalty is not automatic. The Assessing Officer must separately initiate penalty proceedings, issue a show-cause notice (SCN) to the taxpayer, and pass a penalty order after considering the taxpayer's response. The SCN gives you an opportunity to explain why penalty should not be levied — a bona fide reason (like a genuine interpretation dispute or documentation gap) can result in penalty being waived.