Misreporting Income in ITR? Why It Can Cost You 200% More in Taxes Under the Old Tax Regime
Misreporting Income in ITR? Why It Can Cost You 200% More in Taxes Under the Old Tax Regime
What You Must Know
Introduction: Why the Old Tax Regime Requires Caution
The old tax regime continues to be the preferred choice for many taxpayers in India due to the flexibility it offers in claiming deductions and exemptions. But this flexibility also creates temptation. Many individuals overclaim deductions or hide income to inflate their refund — and this is where things can go dangerously wrong.
With new tech-driven scrutiny by the Income Tax Department, including AI-driven flagging of suspicious returns, misreporting even by mistake can lead to penalties up to 200% and, in some cases, even imprisonment. If you're planning to file ITR under the old regime, this article will walk you through everything you need to know to avoid costly errors.
Understanding the Temptation: Higher Refunds Through Misreporting
Filing under the old tax regime allows claims like:
- House Rent Allowance (HRA)
- Section 80C deductions (LIC, PPF, ELSS)
- Interest on Home Loan (Section 24)
- Medical Insurance (Section 80D)
- Education Loans (Section 80E)
Unfortunately, some taxpayers falsely inflate these claims or hide income to increase their tax refund. A common example is showing fake HRA payments to parents without actual rental transactions.
But here's the catch: The IT Department cross-verifies all this via:
- Form 26AS
- Annual Information Statement (AIS)
- PAN-linked TDS and SFT data
This means even the smallest inconsistency can trigger a tax notice, leading to interest, penalty, and prosecution.
What Counts as Misreporting?
According to Section 270A of the Income Tax Act, misreporting includes:
- Claiming false deductions or exemptions
- Not reporting bank interest, capital gains, or rental income
- Using incorrect ITR forms
- Understating income or inflating losses
- Faking rent paid or not declaring real owner’s rental income
Such misreporting is not just a mistake, it's considered intentional misrepresentation and attracts the harshest penalties.
Penalty for Misreporting: Up to 200% of Tax Payable
If you're caught misreporting:
- You’ll be penalized 200% of the tax amount evaded
- Refunds claimed fraudulently will be cancelled
- Additional interest under Section 234A, 234B, 234C
- Repeated offenders may face prosecution under Section 276C
Example:
If you claim a fake HRA and get a refund of ₹30,000, you may have to repay:
- ₹30,000 refund
- ₹60,000 (200% penalty on tax saved)
- Interest & late fees
Total cost: ₹90,000+
The Rise of Tech-Driven Tax Scrutiny
The tax department uses AI-powered systems to:
- Detect mismatches between reported income vs AIS data
- Verify HRA claims through PAN of landlord
- Analyze patterns of suspicious refund claims
- Send automated notices for inconsistencies
In 2023-24 alone, thousands of refund claims were held for scrutiny due to:
- Unverifiable deductions
- Mismatched interest income
- Capital gains not reported from stock trading
Expect even stricter monitoring for AY 2024–25 and beyond.
Real-World Example: HRA Claims Gone Wrong
Consider Raj, a salaried employee earning ₹12 lakh annually. He claimed:
- ₹1.8 lakh as HRA exemption
- ₹1.5 lakh under Section 80C
- ₹50,000 under 80D
However, his HRA claim was flagged because:
- The "rent paid" was to his father, who did not report any rental income
- No rent receipts or bank transactions existed
As a result:
- His refund of ₹18,000 was denied
- He had to pay a penalty of ₹36,000 (200% of tax avoided)
- Got a Section 143(1)(a) notice for mismatch
Can Misreporting Land You in Jail?
Yes. As per Section 276C, if the tax evasion:
- Is deliberate, and
- Exceeds ₹25 lakh,
then prosecution can follow.
The punishment?
- 3 months to 2 years of imprisonment (up to 7 years for larger frauds)
- Plus, fine and penalty
Even if it’s your first time, serious fraud can put your career and freedom at risk.
Common Income Misreporting Traps to Avoid
- Fake HRA Claims: No rent agreement or payment proof
- Not reporting FD or savings bank interest
- Hiding capital gains from shares or mutual funds
- Incorrect ITR form usage (e.g., using ITR-1 when you have capital gains)
- Inflated deductions under Section 80C without receipts
- Not reporting foreign income or assets
How to File ITR the Right Way in the Old Tax Regime
1. Report All Income Sources
Include:
- Salary from all employers
- Bank interest, FD, dividends
- Capital gains (even if loss is declared)
- Freelance or side hustle income
2. Use the Right ITR Form
Wrong ITR form = defective return, leading to refund denial or notice.
3. Match Data with AIS & Form 26AS
These statements list:
- All TDS deducted
- Interest income
- High-value transactions
4. Keep Proofs for Every Deduction
Maintain:
- Insurance premium receipts
- Tuition fee bills
- Rent agreements & rent receipts
- Health insurance statements
- Loan interest certificates
5. File Before the Due Date
Avoid:
- Interest under Sections 234A/B/C
- Late filing fees under Section 234F
When Should You Choose the New Tax Regime Instead?
Choose the new regime if:
- You don’t have many deductions to claim
- Your income is straightforward
- You want fewer documentation hassles
- You're salaried and don’t own property or have loans
It avoids the complexity and risk of misreporting — ideal for taxpayers seeking simplicity.
Misreporting Income – At What Cost?
Misreporting Income in ITR? It Could Cost You 200% More in Taxes
Key Highlights:
- 200% Penalty for false deduction or hiding income
- AI Scrutiny flags refund mismatches
- Jail Term up to 7 years for serious tax fraud
- Common Errors: Fake HRA, missing interest income, wrong ITR forms
- Best Practices: Match AIS, use right forms, file on time, keep proofs
FAQs: Filing ITR Under the Old Tax Regime & Misreporting
1. Can I claim HRA paid to parents?
Yes, only if:
- You actually pay rent (via bank transfer preferred)
- There's a rent agreement
- Your parents report the rent as income
2. What if I forgot to report FD interest?
If caught:
- You may get a notice
- You’ll need to pay tax + interest
Better to file a revised return if within deadline.
3. What happens if I file ITR with false deductions?
- Refund denied
- Penalty up to 200% of tax avoided
- Possible jail if it's repeated or serious fraud
4. Can I correct a mistake in my ITR later?
Yes, you can:
- File a revised return before deadline
- Disclose all real income & claims It’s better to correct voluntarily than wait for a notice.
5. Should I take help from a CMA or tax professional?
Yes. They can:
- Ensure proper ITR form selection
- Validate deductions
- Avoid mismatches
- Protect you from penalties
Hiring a professional = Peace of mind
Conclusion: Transparency Is the Best Tax Strategy
The old tax regime may offer flexibility, but it's not a license to overclaim. With intelligent systems tracking every rupee, taxpayers must prioritize accuracy and honesty. One false claim can snowball into penalties, interest, refund delays — or even legal action.
At CMAknowledge.in, we recommend always cross-verifying your data and filing returns with clarity and caution. When in doubt, seek help from a CMA, CA, or tax expert.
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