What Happens If You File Wrong ITR? Penalty & How to Correct It

Filing an income tax return is mandatory for assessees whose total income during the financial year exceeds the basic exemption limit. The Income Tax Department has notified different forms, namely form ITR-1 to ITR-7, based on the nature and complexity of the taxpayer’s income. 

To choose the correct ITR form, taxpayers must carefully consider their legal status (individual, partnership firm, or company), income level, and the specific heads under which income has been earned during the year. 

If an incorrect ITR form is chosen, the returns filed themselves may be invalid. The taxpayer might also choose complicated ITR forms when the assessee can opt for simple ITR forms. In such situations, the chances of committing errors in the ITR are more probable, which might also result in notices.

When a simpler ITR form is chosen where elaborate disclosures are required, it might result in underreporting income, which might even result in severe penalties. This article explains in detail the consequences of showing the wrong ITR and steps to correct it.

Types of ITR

There are different types of ITR notified for taxpayers, depending on their legal status, the amount and the complexity of income earned. The following table presents in summarized manner, different types of ITR applicable for assesees.

What is Wrong ITR Filing?

• ITR form must be chosen based on criteria as mentioned above.
• It is always recommended to choose the simplest ITR one can file, given one's income levels and the nature of the assessee.
• Wrong ITR forms refer to a situation wherein the taxpayer choosing an ITR form that does not match with the income heads and status of the assessee.

What Happens If You File the Wrong ITR Form?

The following are the adverse consequences for filing the wrong ITR form

Defective Notice u/s 139(9)

• When the return is filed using the wrong ITR form, the department considers it defective and sends a notice under section 139(9).
• The assessee can file a return within 15 days in response to the defective notice, making the appropriate corrections and choosing the right ITR form.
• If the particulars given in the response are correct, the department will accept it, and the return will be considered valid.

Illustration

Let’s understand how this could adversely affect the taxpayer. 

Scenario:

A taxpayer has earned income from intraday trading during the financial year. While filing the return, he mistakenly treats this income as capital gains and files the return using ITR-2.

What went wrong?

Intraday trading income is treated as speculative business income under the Income Tax Act.

Therefore, the correct ITR form in such cases is ITR-3, which is applicable for individuals earning income from business or profession.

Consequences:

Since ITR-2 does not support business income, the return filed using it is incomplete and incorrect.

The Income Tax Department will issue a defective return notice under Section 139(9), notifying the taxpayer of the mismatch.

Return can be Rendered Invalid

• The return is rendered invalid when the taxpayer does not file the response within the prescribed time.
• This means the return you filed choosing the wrong ITR is not considered a return at all.
• In this case, the taxpayer should file a fresh return after the return is treated as invalid.
• This would significantly delay the date of return filing for the assessee, which may result in missing the deadline for filing.
• If the return filing deadline is missed, the taxpayer is not eligible to claim many deductions and benefits.

Illustration 

Let’s understand the implications of choosing an incorrect ITR form through the following example:

Original Filing Date: 20th July 2024

Issue: The taxpayer selected the wrong ITR form

Defective Notice Issued Under Section 139(9): 22nd July 2024

Deadline to Respond to Defective Notice: 6th August 2024 (15 days from notice date)

Scenario 1: Response Filed in Time

If the taxpayer files a corrected return on or before 5th August 2024, the original return filed on 20th July will be treated as valid.

Result: The return is considered filed within the due date (31st July), and the taxpayer continues to be eligible for relevant tax benefits and exemptions.

Scenario 2: Response Filed Late

If the taxpayer submits the corrected return on 8th August 2024, the earlier return (20th July) becomes invalid.

The return filed on 8th August will now be treated as a belated return, not a revised one.

Result: The taxpayer is considered to have missed the original filing deadline (31st July) and may lose out on many tax benefits available to him.

Loss of Tax Deductions and Other Benefits

• There are many tax benefits available to the taxpayer when he files the return on or before the due date. Some of the tax benefits are:
  • Opting for old tax regime and claiming tax deductions for the lower taxes.
  • Carrying forward of losses of the current year to the future years.
  • Avoiding late fees and penalties
• Besides, there are other tax related benefits available when we file ITR on time, like:
  • Easy Loan approval
  • Simple processing of VISA
• If the taxpayer is not rectifying the defect, due to which the return becomes invalid and the ITR due date is missed as explained in the above illustration, the assessee cannot enjoy any tax benefits that can be availed only before the due date. 

Delayed Refunds

• Since the processing of defective returns results in a delay, the refund payment to the taxpayer will also result in a delay.
• If the defective return becomes invalid due to non-response, the refund will not be processed until a fresh return is filed.

Increased chances of Scrutiny

• The assessing officer would proceed to scrutinize the return if he is of the belief that the particulars given in the return is incomplete or inaccurate.
• Filing the wrong ITR might be a reason for the assessing officer to select your return for scrutiny.

Penalties for Filing Wrong ITR

• If the choice of wrong ITR results in non reporting of income, the taxpayer would be subject to provisions of underreporting or misreporting of income.
• Penalty of 50% of the underreported income and 200% of the misreported income can be levied in this case.

Let us understand this situation using an illustration

Illustration

Mr. A, a salaried employee, has been filing his income tax returns using ITR-1 every year. In FY 2024-25, he sold a building and earned capital gains income of Rs. 50 lakhs. However, while filing his return for that year, he continued to use ITR-1, which is meant only for salaried individuals and does not allow reporting of capital gains.

Since ITR-1 doesn’t have a field for capital gains, Mr. A inadvertently failed to report this income. Although the omission was due to using the wrong ITR form, it still qualifies as a case of misreporting of income under the Income Tax Act as it had resulted in suppression of fact.

This will result in a penalty of 200% of Rs. 50 lakhs, that is, a penalty of Rs. 1 crore.

How to Correct a Wrongly Filed ITR?

• ITR filed with errors can be corrected even before a defective notice is issued to the assessee.
• By simply revising the return, the defect can be rectified.
• However, if the defective notice is issued to the assessee, it is always a better option to file the rectified return as a response to the defective notice instead of simply revising the return.

Final Word

To choose the right ITR form, the taxpayer must carefully understand their legal status, the nature of income earned, and other aspects. Doing so would save the assessee from adverse consequences.