Updated ITRs: Costly compliance or smart move post-budget 2025?

ITR filing window is now extended to four years, but taxpayers must tread carefully as penalties escalate steeply

- Shipra Singh & Sashind Ningthoukhongjam

The Budget for 2025 has extended the window for filing updated income tax returns (ITRs) from two to four years. So, after you file an ITR, you get four years from the end of the assessment year to include any additional income in the updated ITR that you have missed reporting in the original tax return.

Sounds like a good deal for voluntary compliance? It is, but only until you realise that there is no free lunch and it comes with a steep 25-70% tax penalty.

The highest penal tax is 70% of the aggregate of tax dues, and interest, when the updated ITR is filed in the fourth year. In the third year, the penal tax is 60%.

Here's another catch—the cost of voluntary compliance by filing an updated return in the third or fourth year is significantly higher than getting a reassessment notice from the tax department.

When a case is reassessed for underreported income and a penalty order is passed, 50% of the tax due is to be paid as a penalty. Take note, this penalty is levied only on the tax due, unlike an updated ITR, where the penalty is calculated on the tax due plus the interest payable on it.

Therefore, in many cases, the penalty under reassessment may turn out to be lower than what you would pay by voluntarily filing an updated ITR.

Even after extending the window by two more years for filing updated returns, the Budget has left a loophole that may encourage some taxpayers to skip filing updated ITRs in the third or fourth year to avoid steep penalties.

The loophole in timelines