Budget 2025 provides relief to taxpayers in filing updated returns but with a penalty of up to 70%

Are you worried that the income tax department will come after you for not reporting your rental income or not including interest from your fixed deposit investment in your income tax returns? Budget 2025 provides a breather to you with a catch. The deadline for filing an updated return has been extended from two years currently to four years. However, it comes with steep additional taxes of up to 70% of the incremental tax liability.

Budget 2022 introduced the facility to enable taxpayers to file an updated return. Referring to this in the Budget 2025 speech, Finance Minister Nirmala Sitharaman said, "Our trust in taxpayers was proved right. Nearly 90 lakh taxpayers voluntarily updated their incomes by paying additional taxes. Taking this trust further, I now propose to extend the time limit to file updated returns for any assessment year from the current limit of two years to four years."

Also Read: Latest income tax slabs

A salaried employee who must file an income tax return by July 31 can file a revised return by December 31. A revised return corrects mistakes made in the original. Thus, the updated return facility is handy for taxpayers, as it enables them to avoid scrutiny, penalties, and severe legal consequences for what would otherwise be held as undisclosed income.

Gautam Nayak, Tax partner at CNK & Associates told The Times of India, states, "Updated tax returns can be filed to correct mistakes where lower income was disclosed in the tax return or where the taxpayer failed to file an income tax return. The time limit is now being extended to four years from the end of the assessment year, with effect from April 1, 2025. Therefore, during FY26, a taxpayer can file an updated return for any of the three previous financial years, viz: 2020-21, 2021-22, 2022-23 and 2023-24. This will facilitate correction of mistakes by taxpayers, where such mistakes are discovered after the due date for revised returns."

Income tax calculator for FY 2025-26

Currently, an additional tax of 25% or 50% of the differential tax and interest is payable, depending on the delay in filing the updated return (that is, up to one year or more than one year from the end of the assessment year) under the Income Tax Act.

"The extended time for filing an updated return comes with a steeper cost. The additional tax payable on the incremental tax liability will be 60% if the return is filed more than two years after, but less than three years before, the end of the relevant assessment year. If filed after three years, but before four years, from the end of the relevant assessment year, the additional tax will be 70% of the incremental tax liability," explains Nayak.

However, tax experts argue that many other measures are not being introduced. For instance, an updated return can be filed only when an additional income has to be offered to tax: it can not be filed for making a tax benefit claim (such as a deduction for donations under the old tax regime) that was earlier missed out. If the original return was a loss return, an updated return can not be filed even to reduce the claim for loss.

Ketan Vajani, CA, said "While this is a welcome amendment, the legislature has missed addressing the request of allowing updated return in a loss-to-loss situation. For instance, if the original return had loss of Rs 10 lakh and the taxpayer wants to file an updated return with a loss of Rs 8 lakh, he cannot do so."

(With inputs from the Times of India)