Income Tax Penalty and Interest in India

Income tax is a sort of tax that the federal government levies on the money that people and businesses make over the course of a fiscal year. The government receives funding via taxes. The government uses these funds for various social programmes, infrastructure improvements, healthcare and education services, and subsidies for farmers and the agricultural industry. Direct taxes and indirect taxes are the two primary categories of taxes. Direct tax, for instance, is a type of tax that is imposed directly on income earned. A direct tax is an income tax. Based on the income slab rates in effect for that fiscal year, taxes are computed.

This is the tax that a person, a Hindu Undivided Family, or any other taxpayer—aside from businesses—pays on their income. The legislation specifies the tax rate that should be applied to such income.

Who are the Income Tax Payers?

To apply different tax rates for various taxpayer kinds, the Income Tax Act divided the types of taxpayers into groups.

The categories of taxpayers are as follows:

• Individuals
• HUF or Hindu Undivided Family
• AOP or Association of Persons
• BOI or Body of Individuals
• Companies
• Firms

Individuals are further divided into residents and non-residents in a broad sense. Individuals who are residents of India must pay taxes on their worldwide income, which includes money generated both domestically and internationally. The only income that must be taxed for people who qualify as non-residents is that which is earned or acquired in India. For tax reasons, each financial year’s residence status must be established independently based on the individual length of stay in India. For tax reasons, resident individuals are further divided into the following segments:

• Individuals who belong to an age group below 60 years
• Individuals within the age group of 60 years to 80 years
• Individuals who belong to age group above 80 years.

Types of Income Tax Payers

In India, income tax is owed by everyone who receives a salary or other form of income. (Yes, whether they are Indian citizens or not.) The Income Tax Department divides income into five primary headings for easier classification:

1. Income from Salary:

The first category under Income Tax is Salary Income, which broadly assimilates all compensation received by an individual in exchange for services rendered in accordance with an employment contract. Only if there is an employer-employee relationship between the payer and the payee, respectively, does this sum qualify to be taken into account for income tax. The term “salary” should also refer to the base pay, advance pay, pension, commission, gratuity, perquisites, and annual bonus.

• Allowances: 

An allowance is a set sum of money that the company pays the employee to cover office-related expenditures. Unless there are exemptions available, allowances are typically included in the pay and subject to taxation.

Employers may include some tax exemptions as part of a worker’s pay. Of them, some are.

• Conveyance Allowance:

Tax-free up to Rs. 800 per month.

• House Rent Allowance (HRA):

Salaried people who reside in rented homes can apply for HRA to reduce their taxes. Taxes may not apply to this at all or partially.

The lowest of the following sums is the minimum deduction that is allowable:

1. Actual HRA which was received by the employee
2. 50% of [Basic salary + Dearness Allowance] for those living in metro cities while, 40% for those living in non-metros
3. Actual rent paid less 10% of salary

• LTA (Leave Travel Allowance):

LTA covers travel costs when you and your family take a leave of absence. You will get this twice over the course of four years, both of which are tax-free.

• Medical Allowance:

Medical costs up to Rs 15,000 are tax-free annually. You or your family may be responsible for paying the debts.

• Perquisites:

The Income Tax Act’s Section 17 addresses perquisites, which are essentially perks in addition to regular pay that an employee is entitled to as a result of his job. Examples of this are auto loans or rent-free housing. There are certain perks that are taxed for all employee categories, others that are chargeable if the employee falls into a certain category, and some that are tax-free.

2. Income from House property

According to the Income Tax Act of 1961, Sections 22 to 27 are devoted to the regulations for the computation of a person’s total standard income from the house property or land that they possess. This is the second head of Income Tax. The fact that the fee is based on the property or land and not the volume of rent paid is an intriguing feature. However, the rental revenue will be taken into account if the property is used for renting out as part of regular company operations.

3. Income from Business and Profession

The computation of the total income will be ascribed from the income obtained from the profits of business or profession under the third Income from Profits of Business head of Income Tax. There will be a fee for the gap between costs and revenue. The income that is taxable under each category is listed below:

• Profits which are earned during the assessment year by the tax paying assessee

• Profits from an organization’s revenue

• Gains from the sale of a specific licence

• Cash received by a person on export as part of a government programme

• Gain, pay, or bonus resulting from a partnership in a business

• advantages acquired in a business

4. Income from Capital Gains

Gains from the sale or transfer of a capital asset that was kept as an investment are referred to as capital gains and are earned by the assessee. Capital gains refer to any property that is owned by an assessee for their trade or profession.

5. Income from Other Sources

This category can be used to group any other sources of income that are not included in the aforementioned exclusions. This category includes interest income from bank deposits, prizes from lotteries, card games, gambling, and other sports rewards. According to Section 56(2) of the Income Tax Act, this income is attributable, and tax is due on it.

Income Tax Penalty

Assessee who violates the Income Tax Act are subject to an income tax penalty, which is a punitive measure. The Act has established a number of sanctions for violations by taxpayers. A tax authority may decide to make the penalty specified by the Income Tax Act obligatory or not levy it. The different income tax penalties are addressed in this article.

Penalty for Default in Self-Assessment Tax

The amount of income tax due should be determined after giving advance tax credit, as required by the Income Tax Act. Self-assessment tax and Tax Deducted at Source (TDS) should also be considered. Before submitting a tax return, the tax should be paid. In India, tax paid in this way is known as self-assessment tax. When a taxpayer fails to pay self-assessment tax or interest, they are deemed to be in default. However, an Assessing Officer has the authority to impose any consequence up to the outstanding tax balance. For failing to pay self-assessment tax, a penalty may be levied under the income tax legislation. The penalty shouldn’t be more than the outstanding tax balance.

Penalty for Late Filing of TDS Return with Income Tax

A TDS return must be filed by taxpayers with a Tax Deduction and Collection Account Number [TAN] once every three months. A punishment of 200 rupees is imposed until the error is corrected if a taxpayer fails to file their TDS return by the deadline or earlier. Each day that the assessee continues the default should be used to determine the fine. The penalty for filing a TDS return late should not be more than the amount of TDS that is owed.

Penalty for Non-Compliance with Notice Issued

An Income Tax Assessing Officer is authorised by the Income Tax Act to issue a notice requiring the taxpayer to submit an income tax return. The assessee may be asked to provide documentation related to an income tax assessment by the officer. If a taxpayer disregards a warning from an income tax officer. A penalty of Rs. 10,000 will be imposed on the taxpayer in certain circumstances for each incident of noncompliance. The officer may also demand that the taxpayer provide any information in writing. A Chartered Accountant should audit or re-audit the taxpayer’s finances.

Penalty for Concealing of Income and Undisclosed Income

The taxpayer may try to lower his tax obligation by hiding his income or by providing false information about it. The Assessing Officer may impose a fine in certain situations. The fine for such a violation is from 100 to 300 percent of the tax that was avoided.

Taxpayer’s premises may be searched by income tax officials. The search’s goal is to turn up unreported revenue. The income tax division may start the search in accordance with the legislation. A fine should be applied if the search turns up any unreported income. Regarding unreported income, the following penalties are leviable: 

1. If the taxpayer acknowledges the unreported income from the prior year, the penalty is 10% of that amount. In these situations, the assessee must justify how the income was obtained. Additionally, the tax and interest must be paid on or before the deadline.
2. The assessee must submit their income tax return for the relevant year, which must include a declaration of any unreported income.
3. The penalty is imposed at a rate of 20% of the unreported income for the relevant prior year. The taxpayer could be reluctant to acknowledge the unreported income in some circumstances. However, the assessee must disclose the income in the return of income provided for the prior year on or before the deadline.
4. A minimum of 30% must be charged. Additionally, a 90 percent ceiling restriction is required. If the assessment does not fit under one of the aforementioned scenarios, the percentage shall be calculated for the unreported income of the indicated prior year.

Penalty for Not Maintaining Books of Accounts

According to the Income-tax Act, a taxpayer is required to keep books of accounts. The taxpayer can neglect to keep up with bookkeeping. A fine of up to Rs. 25000 is payable in certain circumstances.

Penalty for Non-Maintenance of Records Specified Transactions

For a period of eight years, a taxpayer is required to keep records and information related to an overseas transaction or a specific domestic transaction. A penalty equivalent to 2% of each transaction’s worth that the taxpayer engages in is applied if they fail to retain the necessary information or records.

Penalty for not getting the Books of Accounts Audited

A taxpayer could neglect to request an audit of the accounts or to provide an audit report. As a result, a fine is possible. In such circumstances, the fine is equal to 1.5 percent of the entire sales amount or Rs. 1,50,000, whichever is lower.

Penalty for Non-Furnishing of Report from CA

Taxpayers are required to get a report from a CA in the prescribed form before engaging in a specified domestic transaction. The income tax division should get the report. One lakh rupee will be due as a fine if a taxpayer doesn’t comply.

Penalty for Non deducting of TDS

A person who is obligated to deduct TDS may not do so. In such circumstances, the taxpayer may be required to pay the fine. The TDS amount should be used as the penalty for failing to withhold tax at source.

Penalty for Non-Payment of Tax on Casual Income

An individual could be required to compensate someone who receives sporadic income. Winning the lottery, a crossword puzzle, a card game, or any other game is considered casual income. The award might be worth more than Rs. 10,000. In such circumstances, it is the establishment manager’s responsibility to withhold income tax while awarding the reward. If the assessee fails to pay their tax obligations, a penalty will be imposed that is equivalent to the amount of unpaid taxes.

Penalty for Non-Collection of Tax at Source

According to the income tax laws, the tax must be paid at source by the individual who is receiving money for the listed products. The individual could neglect to deduct tax at source. In certain situations, a fine equivalent to the amount of unpaid taxes is applied.

Penalty for Delayed filing of ITR

The assessee may neglect to submit the income tax return by the applicable due date or later. The Assessing Officer may impose a fine in certain circumstances. The fine might be as much as Rs. 5000. A taxpayer may neglect to submit the annual information return or the statement of financial transactions (AIR). In certain situations, a fine of Rs. 100 per day of noncompliance is payable. Until the default is resolved, the penalty should remain in effect. The taxpayer may get a show-cause notice from the income tax authorities. The notification must provide a 30-day deadline for the taxpayer to submit their return. With reference to the day the notification was sent, the 30 days shall be determined.

Penalty for Accepting Deposits and also Loans in Cash

A person could want to borrow money from a public financial institution or from another person. More than Rs. 20,000 may be borrowed or deposited. In these situations, accepting the money in any other way than a demand draught or check made payable to the account payee will result in a fine. A penalty in the amount of the loan or deposit may be assessed for violating this provision.

Penalty for Non-Compliance with the Requirement of Having PAN

If PAN regulations are not followed or an inaccurate PAN is deliberately provided, there is a penalty specified in the Income Tax Act. A violation that has the effect of disobeying the requirement that PAN be stated by the taxpayer in certain regulated financial transactions might result in a fine of up to Rs. 10,000.

Conclusion

Penalties when levied becomes a mandatory liability making it difficult for assessee to handle. Hence, it is always advisable to pay taxes on time and comply with all the Income Tax provisions as applicable such that the credibility of the assessee shall also be maintained along with keeping the law and the problems associated with the same at bay.