The Risks and Consequences of False Income Tax Investment Declarations & Excess Refunds
Introduction
The annual income tax return (ITR) season brings a surge in investment declarations and refund claims. However, false investment declarations or claiming excess refunds may seem like a harmless shortcut to boost savings, but the consequences can be severe and long-lasting.
Common False Declarations and Refund Practices
• Fake HRA receipts: Submitting made-up rent receipts without paying actual rent.
• Bogus Section 80C investments: Listing LIC policies, PPF accounts, or mutual funds that don’t exist.
• Fabricated health insurance claims (Section 80D).
• Omitting taxable interest or other income to inflate refund claims.
Why the Risk Is Higher This Year
• Real-time data cross-verification via Form 26AS, AIS, TIS, employer data, and banks.
• AI-based flagging and scrutiny for mismatches and irregularities.
• Universal accountability: The taxpayer remains responsible for all information, even if prepared by an accountant or consultant.
Legal and Financial Consequences
1. Denial of Deduction/Refund
• Any false claim is immediately disallowed during assessment. Your tax liability is recalculated based on the correct information and you may need to return the excess refund, if already received.
2. Interest Liabilities
• Section 234B/234C: Interest on the additional tax due accrues from the due date, not detection date.
• Section 234D: If excess refund is received, penal interest of 0.5% per month (6% annually) is charged on the excess until repaid—even if you voluntarily file a revised return.
3. Penalty Provisions
| Offence Type | Section | Penalty/Consequence |
| Under-reporting genuine error | 270A | 50% of tax due on under-reported income |
| Misreporting (false declaration) | 270A | 200% of tax due on misreported amount |
| False entries in books (proven) | 271AAD | 100% of the value of the entry |
| Criminal willful tax evasion | 276C | 3 months to 7 years imprisonment + fine (Rs25 lakh+ cases) |
| Knowingly false statement in ITR | 277 | Criminal prosecution; imprisonment + fine |
Note: Failure to maintain documentary proof can also invite inquiry and penalties.
4. Prosecution
• Willful evasion and deliberate concealment can lead to criminal prosecution, including imprisonment from 3 months to 7 years along with hefty fines, especially in cases above Rs25 lakh.
5. Future Red Flags
• Your PAN and profile may be flagged, increasing risk of audits and scrutiny for years to come
What If You’ve Already Filed Incorrectly?
• Voluntary correction is key: File a revised or updated ITR (before assessment notice) and repay any excess refund with interest.
• Quick action can sometimes reduce or avoid penalties, especially if you correct mistakes and settle dues before formal proceedings begin.
• Once a notice is issued, penalties and prosecution become far more likely.
Takeaways and Best Practices
• Never declare investments or expenses you can’t prove.
• Retain receipts, certificates, or proof for every deduction claimed.
• Double-check all entries in your ITR before filing; do not trust shortcuts or “refund-boosting” consultants.
• Ethics and accuracy now matter more than ever: one “free” refund can become a costly liability.
• When in doubt, consult a qualified, trustworthy tax professional.
Conclusion
False declarations and exaggerated refund claims carry high risks. Increased scrutiny and severe penalties—including fines, interest, and even jail—are the reality under India’s updated tax laws. Always file honestly, back up every claim, and steer clear of dubious shortcuts.
Stay compliant. Stay protected.
