Big Tax Refund Promises? Beware of 200% Penalty, Warns Expert
Caution: That Attractive Refund Might
Come at a Heavy Cost
As the Income Tax Return (ITR) filing deadline recently passed, many taxpayers were approached—either by unverified tax agents or through online promotions—offering unusually large tax refunds. While this might sound like a financial windfall, seasoned tax professionals are now raising red flags. According to Kaushik Jhunjhunwala, a chartered accountant and tax expert, such exaggerated refunds are often the result of misreporting income or manipulating deductions, which can eventually trigger a 200% penalty under the Income Tax Act. This penalty is not on the refund itself, but on the underreported or misreported income that falsely generated the refund in the first place.
How the 200% Penalty and Interest Work
Under Section 270A of the Income Tax Act, the penalty for misreporting income can be up to 200% of the tax due on the underreported amount. That means if you underreport ₹5 lakh in income and the tax on that comes to ₹1 lakh, the penalty can go as high as ₹2 lakh. In addition, the taxpayer is liable to pay interest under Sections 234A, 234B, and 234C, which could result in an extra 1% interest per month on the unpaid amount, further compounding the financial burden. What began as a “rewarding refund” could easily spiral into a costly legal and monetary issue.
Misreporting Triggers Red Flags in the Tax Department’s AI Systems
Today’s income tax system in India is heavily backed by technology and artificial intelligence. The Central Board of Direct Taxes (CBDT) has implemented sophisticated AI-based algorithms and data analytics to cross-check income, deductions, and refunds. So if a taxpayer claims a disproportionately high refund, the system flags it against data sourced from Form 26AS, AIS (Annual Information Statement), TDS data, PAN-based transactions, and even GST records for business entities. These red flags often lead to scrutiny assessments or notices under Sections 139(9), 143(1), or 143(2). Repeated discrepancies can also mark the PAN number for continuous monitoring in future financial years.
The Real Risk Behind Questionable Refund Claims
While some tax preparers promise “guaranteed refunds” by adding fake deductions, inflating business expenses, or misclassifying income, they may disappear when scrutiny starts, leaving the taxpayer to face the consequences. Many taxpayers are unaware that the legal responsibility lies entirely with them, not with the person who filed the return. If the return was filed with fraudulent claims—even unintentionally—the consequences could include audit, prosecution, recovery proceedings, and a ruined tax history. This can also negatively impact loan approvals, visa applications, and compliance ratings, especially for businesses.
Why Ethical Filing is Always the Safer Route
Senior tax professionals strongly advise individuals to file ITRs honestly, ensuring income is properly reported and deductions are claimed only with valid proofs. Not only does this build long-term financial credibility, but it also ensures peace of mind during refund processing. Jhunjhunwala warns: “A refund received unethically today can easily become tomorrow’s penalty notice.” The Income Tax Department has become increasingly agile and tech-driven, which means even minor mismatches may no longer go unnoticed.
Conclusion: Be Smart, Not Sorry
The lure of a big refund can be tempting, especially for salaried
individuals, freelancers, and small business owners looking to save more.
However, filing inaccurate or manipulated tax returns is not worth the risk.
The smarter approach is to rely on qualified tax professionals, use
income tax portals carefully, and verify Form 26AS and AIS data
before filing. Remember, a short-term gain could result in long-term pain if
penalties, interest, and investigations follow. It's always better to aim for accurate
compliance than aggressive refunds.