How a wrong ₹20,000 income tax refund can cost you ₹1 lakh: Explained

Claiming an income tax refund without actually being eligible for it can put you in serious trouble. You may not only end up paying up to five times, or more, the amount you tried to save by claiming a wrong deduction, but also face legal hassles.

For example, suppose you are in the 20% tax bracket and you make a wrongful deduction of ₹1 lakh. Such an incorrect claim could help you save ₹20,000 in tax. However, if the income tax department detects the wrongful claim, you could end up paying up to five times the amount you tried to save. Wondering, how? Here's the breakdown:

a)If the wrongful claim is detected, then you will pay ₹24,000 as tax and interest

b)There is up to 200% penalty on illegal claims in ITR. This means you may pay up to ₹40,000 as a penalty.

c) Further, the cost of hiring a CA or a lawyer and a compounding fee of 125% may make you pay another ₹30,000-₹35,000.

Thus, the total cost of making an illegal tax-saving claim of ₹20,000 may go up to ₹1 lakh, or 5 times the cost, or even more.

The income tax department shared the above example in an awareness brochure titled "The Taxpayers Guide to Claim Exemptions/Deductions" released this year.

Consequences of wrongful claims in ITR

There are multiple consequences of making wrong claims in the ITR, such as:

• The tax department can issue notices for verification using information technology and artificial intelligence to verify claims.

• If a wrongful claim is detected, then the case may be taken up for detailed scrutiny. In case the taxpayer fails to justify the deduction/exemptions, then a tax demand notice can be raised against him/her.

• Penalty under section 270A may be levied up to 200% of the misreported income.

• Prosecution under sections 276C & 277:

If tax evaded>₹25 lakh: Six months to seven years. Imprisonment + fine.

Otherwise: Three months to two years imprisonment + fine.

The tax department has been witnessing an increasing number of cases of wrongful deductions in income tax returns (ITRs). But the department is actively tracking such cases using artificial intelligence and data analytics.

What should you do?

If you have claimed any wrongful deduction in your ITR, then you may correct it by filing a revised ITR. You can file a revised ITR for FY 2024-25 till December 31, 2025.

In case you claimed a wrong deduction in previous years, then you can file an updated return (ITR-U).

ITR-U can be filed within four years from the end of the relevant AY (w.e.f. April 1, 2025 onwards). Earlier it was two years.