How to avoid tax penalties
How to Avoid Tax Penalty: Key Rules Every Taxpayer Should Know
In this post, we’ll look at some common tax penalties that individuals and businesses in India should know. These penalties can be costly, but they’re easy to avoid with the proper knowledge.
Let’s look at these sections in detail:
Introduction
A penalty is a punishment for breaking the law. Under the Income Tax Act of 1961, if someone doesn’t follow the rules, they may have to pay a penalty. This amount can be fixed or based on a percentage of a specific sum. Let’s look at the most common penalties we should be aware of.
Common Tax Penalties in India
In this section, let’s go over some of the most common tax penalties that individuals and businesses in India may face. These include penalties for cash dealings, not keeping proper records, missing audit deadlines, hiding income, or not submitting important financial information.
1. Penalty for Accepting or Repaying Loans in Cash
If you take or repay a loan or deposit of ₹20,000 or more in cash, you could be penalised under sections 269SS and 269T of the Income Tax Act. The penalty is equal to the full amount of the loan or deposit.
For example, taking a ₹50,000 cash loan from a friend can lead to a ₹50,000 penalty. Likewise, repaying an EMI of ₹30,000 in cash may result in a ₹30,000 penalty. Even receiving large sums of money in one day from a single person can cause trouble. These rules aim to prevent unaccounted cash dealings.
2. Penalty for Not Maintaining Proper Books
According to section 271A, failing to keep proper books of accounts or relevant records can cost you a fine of ₹25,000.
If your business is involved in international transactions, the penalty can go up to 2% of the total value of the transaction if records are not maintained properly. Staying organised and keeping your documents is essential to avoid unnecessary penalties.
3. Penalty for Missing Audit Deadlines
A tax audit is mandatory if your business turnover exceeds ₹1 crore or you are a professional earning more than ₹50 lakhs a year.
This audit must be completed by 30th September each year. Missing this deadline can lead to a penalty under section 271B either 0.5% of your turnover or ₹1.5 lakh, whichever is less. For professionals, the penalty is fixed at ₹1.5 lakh. Timely audits are essential to stay compliant and avoid fines.
4. Penalty for Hiding or Underreporting Income
Section 270A deals with the underreporting of income. If you report less income than what you earned, you may be fined 50% of the tax that was avoided.
In cases where the underreported amount is less than ₹50,000, a smaller penalty of 10% may apply. This can include things like showing inflated expenses or not reporting all your income. The goal is to discourage tax evasion.
5. Penalty for Not Reporting Key Transactions
From 2016-17 onwards, you must disclose certain high-value financial transactions such as large cash deposits, big investments in shares or mutual funds, etc.
If you fail to do so, section 271FA allows the tax department to levy a penalty of ₹500 per day until the information is submitted. If you ignore the notice, the fine can go up to ₹1,000 per day. Incorrect reporting may also lead to a penalty of ₹2.5 lakh.
Conclusion
Not understanding tax penalties might cost you a lot of money, especially if it is your hard-earned money. These five penalties were created to encourage honest and timely tax compliance. Keep your records in order to stay safe, file audits on time, report your transactions properly, and avoid giving or taking loans in cash.
With that, we finish this post. Please leave any questions or comments in the below-mentioned area, and we will gladly address them.
