December 2025 brought anxiety for many taxpayers who received official notices from the income tax department. These nudges asked them to revisit their Income Tax Returns for the financial year 2025. The department flagged possible discrepancies and urged revisions before the 31 December deadline. That window has now closed completely.
What Happens After Missing the Deadline?
What if an error remains uncorrected? What if a taxpayer completely missed a disclosure? In such situations, the only remaining option involves filing an updated return. This is commonly known as ITR-U. It offers taxpayers a genuine second chance to disclose missed income. However, this opportunity comes with significant limitations and serious financial consequences.
Understanding ITR-U's Specific Purpose
An updated return can be filed within four years from the end of the relevant assessment year. This allows reporting of income that was not disclosed earlier. The filing is subject to payment of additional tax, interest, and penalty. For example, a taxpayer who forgot to report bank savings interest income for FY25 can still correct this omission within the extended window. They must meet all prescribed conditions.
ITR-U does not function as a general correction tool for all errors. Vijaykumar Puri, partner at VPRP & Co LLP, Chartered Accountants, clarifies the restriction. "An updated return can be filed only to declare income that was not offered to tax earlier. It cannot reduce tax liability, claim refunds, or keep tax payable unchanged. Essentially, an updated return is permitted only when the final outcome means a higher tax payment."
Who Exactly Can File an Updated Return?
An updated return may be filed by any taxpayer who already submitted an ITR. This includes original returns, belated returns filed after the due date, or even revised returns. The provision applies when they later discover missed or incorrectly reported income details. The law also extends this opportunity to those who did not file any ITR at all. These individuals missed both the original and belated filing deadlines.
In essence, the law allows taxpayers to revisit past filings. They can do this if they uncover inaccuracies or omissions that create additional tax liability.
Permitted Corrections Under ITR-U
ITR-U can be used in specific cases. These include under-reporting or incorrect reporting of income. They also cover selecting the wrong head of income or applying an incorrect tax rate. However, ITR-U cannot be used to claim missed deductions or exemptions. It cannot disclose mandatory schedules like Schedule Foreign Assets or Schedule Assets and Liabilities. Taxpayers cannot add donations, correct losses, or make any change that reduces tax liability or leads to a refund.
Even if a correction does not change the tax payable, the updated return route remains unavailable. Consider a taxpayer who failed to report capital gains. They now want to disclose them through an updated return. However, they also have carried-forward or current-year losses that could be set off against those gains.
Bhawna Kakkar, chartered accountant and founder of Kakkar & Company, explains the eligibility. "If, after adjusting the losses, there is still additional taxable income and incremental tax payable, an updated return can be filed. But if the set-off of losses completely absorbs the additional capital gains and the tax payable remains unchanged, or reduces, the updated return will not be allowed."
No Shortcuts or Workarounds Allowed
Taxpayers who received notices in December but missed the revision deadline should not use ITR-U if there is no additional income to report. Kakkar states clearly, "Since the statutory trigger for a valid ITR-U is incremental tax, if the correction improves accuracy but does not enhance revenue, the route is legally blocked."
Puri notes that some taxpayers attempt clever workarounds. They declare small amounts of artificial income to use ITR-U for fixing past disclosure failures. "For example, if they had not reported foreign assets in previous ITRs, which could attract a penalty of up to ₹10 lakh under the Black Money Act, they might declare nominal interest income of ₹1,000 in ITR-U. This opens the opportunity to disclose the foreign assets. The tax and penalty on this small amount is minimal. It allows them to file an updated return while avoiding the risk of the much larger penalty later on a non-disclosure."
He strongly advises against this approach. "Artificially creating income to fix disclosures defeats the purpose of the updated return mechanism. Paying additional tax does not validate incorrect or misleading statements. Using one incorrect declaration to fix another only compounds the problem."
The Steep Cost of Voluntary Compliance
Voluntary compliance through an updated return comes at a significant price. That price increases steadily with time. Taxpayers must pay additional tax, interest on the tax, and a penalty calculated on the additional tax plus interest. Kakkar explains the interest calculation. "The interest is levied under Section 234B at 1% simple interest per month from 1 April of the assessment year till the month the updated return is filed."
The penalty structure escalates sharply. If the updated return is filed within one year, the penalty is 25% of the additional tax. This rises to 50% if filed within two years. It jumps to 60% within three years, and reaches 70% if filed within four years.
Consider this practical example. A taxpayer missed reporting interest income in FY25. This results in an additional tax liability of ₹20,000 and interest of ₹2,000. The base amount for penalty calculation becomes ₹22,000. If the ITR-U is filed before March 31, 2026, a penalty of 25% applies. That equals ₹5,500. The total payout reaches ₹27,500.
Voluntary Disclosure Versus Scrutiny Assessment
Budget 2025 extended the window for filing updated returns from two years to four. However, it introduced a clear trade-off. Voluntary filing in the third and fourth year can attract penalties of up to 60% and 70% respectively. By comparison, if a case is selected for scrutiny, the penalty for under-reporting is 50% of the tax due. This is calculated only on tax, not tax plus interest.
In some scenarios, this makes voluntary disclosure appear more expensive than being caught later. Experts caution against reading too much into this apparent arbitrage. The 50% penalty applies only to under-reporting. Misreporting attracts a much steeper penalty of 200% of the additional tax.
Puri highlights the practical reality. "In practice, most cases are treated as misreporting rather than under-reporting. This happens because Section 270A(9) lists several situations that qualify as misreporting. The wording of the law does not clearly define the difference between misreporting and underreporting." As a result, tax officers often classify cases as misreporting to levy higher penalties.
For instance, missing one out of four bank savings accounts may appear as under-reporting to a taxpayer. The department could interpret it as deliberate misreporting. Given these substantial risks, experts strongly advise taxpayers to disclose any missed income through ITR-U. They should not gamble on scrutiny outcomes.
31 March 2026 marks the deadline to file an updated return for FY2020–21. Taxpayers should carefully evaluate their eligibility. They should use ITR-U as a genuine second chance to disclose missed income. This is especially crucial for foreign income, where penalties can run as high as ₹10 lakh.
