Extended time for filing Updated Returns: A Voluntary Compliance
Extended Time Limit for Filing Updated Returns: A Boost to Voluntary Compliance
The government has proposed a significant change to the updated return filing provisions under Section 139(8A) of the Income Tax Act. Currently, taxpayers can file an updated return within 24 months from the end of the relevant assessment year (AY) by paying an additional tax of 25% or 50% based on the timing of the filing.
The proposed amendment extends the filing window to 48 months, introducing new tax slabs (60% and 70%) for filings beyond the current limit. This move aims to further encourage voluntary compliance while ensuring revenue collection for the government.
This blog explores the implications, benefits, and potential challenges of this amendment with practical examples.
Understanding the Current Updated Return Mechanism
An updated return allows taxpayers to rectify errors or omissions in their previously filed returns. This helps individuals and businesses correct income underreporting and avoid harsher penalties later.
Key Changes in Time Limits and Tax Rates
- Extended Time Frame for Filing Updated Returns
• The deadline to file an updated return is being extended from 24 months to 48 months.
• This provides a longer window for taxpayers to voluntarily correct mistakes. - Additional Tax for Late Updated Returns
The government charges an additional tax on updated returns as a penalty for delayed compliance. The new structure is as follows:
Timeframe for Filing Updated Return Additional Tax on Aggregate of Tax + Interest
Up to 12 months from the end of AY 25%
12-24 months from the end of AY 50%
24-36 months from the end of AY 60% (New)
36-48 months from the end of AY 70% (New)
Restrictions on Filing Updated Returns
• If a taxpayer receives a show-cause notice under Section 148A (indicating possible tax evasion) after 36 months, they cannot file an updated return.
• However, if authorities later decide not to issue a reassessment notice, the taxpayer will be allowed to file an updated return within 48 months.
Thus, the later the updated return is filed, the higher the penalty, incentivizing taxpayers to correct errors sooner.
Existing Rules (Before April 2025 Amendment)
• Taxpayers can file an updated return within 24 months of the relevant AY.
• If filed within 12 months, an additional tax of 25% (on total tax and interest payable) applies.
• If filed between 12 to 24 months, the additional tax increases to 50%.
Proposed Changes (Effective April 1, 2025)
• The updated return filing window is extended to 48 months.
• New additional tax rates are introduced:
• 60% for returns filed after 24 months but before 36 months.
• 70% for returns filed after 36 months but before 48 months.
• Restrictions apply if a show-cause notice under Section 148A is issued after 36 months unless later withdrawn.
Practical Scenarios: How the New Rules Affect Taxpayers
Example 1: A Small Business Owner Rectifying Past Omissions
Scenario:
Raj, a small business owner, filed his AY 2022-23 return but later realized he underreported ₹5 lakh in additional income.
Before Amendment:
• He could only update the return until March 31, 2025 (24 months from AY 2022-23).
• If filed before March 31, 2024, he paid 25% additional tax.
• If filed between April 1, 2024 – March 31, 2025, he paid 50% additional tax.
After Amendment:
• Raj now has until March 31, 2027 (48 months) to update his return.
• If filed between April 1, 2025 – March 31, 2026, he pays 60% additional tax.
• If filed between April 1, 2026 – March 31, 2027, he pays 70% additional tax.
Example 2: An Individual Who Missed Declaring Foreign Income
Scenario:
Priya, an NRI, forgot to report ₹10 lakh foreign dividend income in AY 2021-22.
Before Amendment:
• Her last chance to file an updated return was March 31, 2024 (24-month limit).
• If she realized her mistake in April 2024, she had no option to file an updated return.
After Amendment:
• She now has until March 31, 2026 (48-month limit).
• However, if the tax department issues a show-cause notice (Section 148A) after March 31, 2025, she cannot update her return unless the notice is withdrawn.
Key Benefits of Extending the Updated Return Window
- Increased Compliance and Tax Collection
• More taxpayers can voluntarily rectify their returns, reducing tax evasion.
• The government collects more revenue through additional tax without needing aggressive scrutiny. - Flexibility for Taxpayers
• Businesses and individuals who miss the 24-month deadline get additional time to comply.
• Reduces litigation risk as taxpayers can correct past mistakes before facing legal consequences. - Strengthening Tax Administration
• The tax department can now track updated returns over four years, improving assessment accuracy.
• Ensures taxpayers cannot misuse the updated return facility to evade scrutiny after notices are issued.
Challenges and Considerations
- Higher Additional Tax May Discourage Compliance
• The 60% and 70% additional tax may seem excessive, making taxpayers reluctant to file updated returns.
• Compared to voluntary disclosure schemes in other countries, this higher penalty could be seen as a deterrent. - Interaction with Show-Cause Notices (Section 148A)
• If a taxpayer receives a show-cause notice after 36 months, they cannot file an updated return.
• Taxpayers must act before the tax department initiates an inquiry, requiring better tax planning. - Does Not Apply to Taxpayers Already Under Investigation
• If search and seizure actions or income tax proceedings have started, the taxpayer cannot file an updated return.
• This limits the benefit to only compliant or unaware taxpayers, excluding willful defaulters.
Final Thoughts: Is This a Positive Step?
The extension of the updated return window to 48 months is a welcome move for honest taxpayers who missed previous deadlines. It encourages voluntary compliance while ensuring fair tax collection.
However, the higher additional tax rates (up to 70%) might discourage some taxpayers from utilizing this facility. Also, the exclusion of taxpayers under investigation ensures that the updated return mechanism is not misused.
For taxpayers, this change emphasizes the need for:
✅ Timely tax reviews to avoid last-minute penalties.
✅ Proactive disclosure of omitted income before a show-cause notice is issued.
✅ Consulting tax professionals to navigate the complexities of the new system.
With these amendments taking effect from April 1, 2025, taxpayers should review past returns and act accordingly to maximize benefits while minimizing penalties.
What do you think about this change? Will it improve voluntary tax compliance in India? Let us know in the comments!
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