Updated tax returns: Budget 2025 offers a wider window to report omitted income

Three years on, this initiative has seen a significant uptake, with nearly 9 million taxpayers opting to update their returns. Building on this success, the finance ministry has now proposed to extend the deadline for filing updated returns from two years to four years. 

Taxpayers are required to file their income tax returns (ITR) within four to six months from the end of the financial year. For the financial year 2024-2025, a salaried individual must file their original ITR by 31 July, 2025. If a taxpayer misses this deadline or discovers any omissions or errors thereafter, they have the option to submit a belated or revised return. 

The deadline for filing a belated or revised return is three months before the end of the assessment year, which, in this case, is 31 December, 2025. A belated or revised tax return can be filed without having to pay any additional tax beyond the usual tax amount due.

If the deadline for filing a belated or revised tax return has passed, taxpayers had no means to voluntarily declare any income they might have omitted in their ITR. To address this gap and alleviate concerns among taxpayers, the government introduced the concept of an updated return.

In essence, an updated return allows taxpayers to voluntarily declare omitted income even after the deadlines for belated or revised returns have passed. This mechanism offers an opportunity to rectify past omissions and avoid potential scrutiny or penalties from the income tax department, but comes at the cost of additional tax. 

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Greater flexibility, but at a cost

Previously, the window for filing an updated return was limited to two years from the end of the relevant assessment year. However, the latest Budget proposal seeks to extend this period to four years, providing greater flexibility for taxpayers to amend their filings.

Under the new proposal, an updated return filed within 12 months will incur an additional tax of 25%. If filed between 12 and 24 months, this rate increases to 50%. For returns filed between 24 and 36 months, the additional tax is proposed at 60%, and for those submitted between 36 and 48 months, it is set to rise to 70%.

Suppose a taxpayer realises that they have failed to report an income of ₹1 lakh on which a tax of ₹30,000 and interest of ₹10,000 are payable, they now have the option to file an updated return, with the additional tax payment varying depending on the timing of the filing from the relevant assessment year.

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In recent years, the income tax department has increasingly used data analytics and technology to detect mismatches between reported incomes and third-party data. This has triggered a rise in mismatch inquiries, alerting taxpayers of discrepancies in their filings. 

Common issues leading to these mismatches include unfiled ITRs, incorrect deductions claims like house rent allowance or home loan interest, and inconsistent claims under Chapter VI-A, such as deductions for investments (80C) and political donations (80GGC). These inquiries act as a soft nudge for taxpayers, encouraging them to voluntarily file updated returns to avoid comprehensive scrutiny assessments.

Although taxpayers now benefit from an extended window to report omitted income, updating past income tax returns will incur higher tax payments due to the additional tax levied. While this provides a broader opportunity for voluntary disclosures, it raises a critical question: will taxpayers continue to voluntarily declare the omitted income despite the increased additional tax? Only time will tell.

Neeraj Agarwala is a partner and Neetu Brahma a consultant at Nangia & Co. Llp.