Penalty for Tax Evasion in India

January 25, 2023

In India, the government poses direct and indirect taxes on the income of the individuals and consumer goods and services respectively. Income tax, import-export tax, state-border tax, etc. are some of the mandatory taxes levied in India. 

The Income Tax Department enables tax deductions to reduce the tax-paying liabilities. An effective taxation system encourages a nation to prosper on social and economic scales. However, the individuals and businesses indulged in fraudulent activities such as tax evasion shiver the roots of the Indian economic system. 

Tax evasion is a critical affair in any country and the fraudsters are liable to pay a fine and be imprisoned for some time. 

Taxation Laws for HUF

HUF (Hindustan United Family) is considered a single entity for taxation. Under Hindu law, a family with members in descending numbers from the same ancestors is referred to as HUF. Wives and unmarried daughters of such families following the hierarchy can avail the benefits of taxation under this rule. 

Although, Hindu law doesn’t govern Jain and Sikh families, yet they are eligible to avail the benefits under this act. 

For the accurate computation of the gross income of a HUF), it is important to use a tax calculator and ascertain the following points:

  • If a HUF has invested an amount in a company or firm then the profit earned by any member as a partner or director in the company will be processed for taxation purposes. 
  • If the profitability is generated by the member for services offered on his/her personal ability, the profitability is considered as the personal income. 
  • If a member of a HUF pays any wage to the doers, then the remuneration will be deducted from the income of HUF under a legitimate bonafide agreement. 
  • The income of HUFs is taxed at the same rate as that to other individuals. 
  • Moreover, HUFs pay Alternative Minimum Tax if the taxes on the payable amount is less than 18.5% that also includes cess and surcharge of ‘Adjusted Total Income.

Tax Evasion 

Tax evasion includes the undertakings of hiding or falsifying the income from the tax department. If you couldn’t pay due taxes or pay less than the affixed amount falls under tax fraud. In India, tax evasion is illegal and tax penalties and imprisonment is imposed on the evaders. 

How is Tax Evaded in India?

Tax evasion majorly impacts the Indian economy and pauses the growth of the nation. Here are some of the strategies used for tax evasion:

1. Illegal Smuggling

The offenders of the Income Tax Act smuggle goods through local or international boundaries. Abstaining from paying the state taxes, import-export taxes, or customs duties, defaulters continue to proceed with the activities on which people resort to. Under Indian laws and regulations, tax evasion activities are penalized under section 140 A (1). 

2. Filing Wrong ITR 

Presenting false or misleading information about the income, overstating deductions, or any false claims is a punishable income tax evasion strategy which is illegal as well. 

3. Maintaining Falsified Financial Statements

Account books and balance sheets are a means of presenting accurate financial data. Fake representations can give an impression of a low annual income of the individuals. 

Some businesses indulge in concealing the actual data of the profit generation to reduce due taxes for that year. 

4. Tax Deductions with Fake Documents

Under section 80U, disability is applicable for tax deductions, and presenting such fake documents is another shrewd tax evasion tactic. 

5. No Income Receipts

Many businesses resort to cash transactions to cover the illegal records of their earnings and gather black money. It disguises the paper income thereby depicting no records of a consistent income. Alternatively, businesses refrain from producing invoices on the sales they make.  

The rental deposits or transactions to landlords might be acceptable via cash instead of cheques or other payment modes that contribute to unaccounted money.  

6. Saving Money Outside the Country

Reserving money outside the territorial borders is a safe strategy for the individuals earning in India. Although international banks are not under the purview of Indian authorities, the fraudsters execute this strategy as well. 

7. Not Paying Taxes Deliberately

To save the taxes, many people refuse to pay taxes online. If there are tax dues, despite knowing, the person doesn’t agree to wilful payback of the taxes to the government. 

8. Tax Evasion by Bribing Officials 

Often bribing the officials helps the fraudsters to alter the income tax amount and pay taxes based on fake financial statements. 

Penalty for Tax Evasion 

Penalty for tax evasion in India varies depending on the fraud committed and the amount of due taxes. Based on the following activities, one is liable for penalties:

  1. According to subsection (1) of section 139 of the Income Tax Act, the taxpayers file an ITR, if not done, a penalty of Rs. 5000 or more is imposed.  
  2. The details of PAN (Permanent Account Number) are used in tax deductions by the companies. It further depicts the following conditions:
  • If the employees don’t present PAN then the employers deduct 20% taxes as opposed to 10%. 
  • If the employees provide incorrect PAN, in such cases, they will be penalized for a fine of Rs. 10,000. 

3. According to section 271 (C) of the Income Tax Act, falsifying the information of the income, the taxpayers shall be liable for a penalty between 10% to 200% of the tax amount.

4. Businesses or employers must have a TAN (Tax Deduction Account Number) otherwise, it might result in a penalty of Rs. 10,000.

  • If tax is not collected at the source, the businesses will have to pay the same penalty as that of the tax amount. 
  • In case, businesses fail to file an ITR within the due date, the penalty might range from Rs. 10,000 to Rs. 1,00,000. 


Evading taxes might weaken the bottom line of the Indian economy. Further, it decreases the GDP (Gross Domestic Product) thereby slowing down the nation’s growth. Based on the slab system, every individual is liable to pay taxes. If the taxpayer is found to be failing deliberately or having any issues, it shall be eligible for penalties.

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