Updated Return: New Change by Budget 2025 in Income Tax
Background
In a significant move towards fostering a culture of voluntary tax compliance, the Indian government introduced the concept of updated returns through the Finance Bill, 2022. This initiative aimed to provide taxpayers who might have missed filing their income tax returns or inadvertently underreported income, a simplified pathway for self-correction. Since its inception, this facility has seen remarkable adoption, with over 90 lakh taxpayers proactively updating their returns and contributing to the national exchequer.
This proactive approach is rooted in the government’s evolving philosophy of “Trust first, scrutinize later.” This principle emphasizes building a tax ecosystem based on mutual trust and simplified regulations, encouraging honest taxpayers and reducing unnecessary scrutiny. The core objective is to nurture greater confidence within the taxpayer community, fostering a collaborative environment for tax compliance.
Continuing this commitment, the Finance Bill of 2025 proposes a significant enhancement: extending the timeframe for filing updated returns from the existing 24 months to a generous 48 months from the end of the relevant assessment year. This proposed change signals the government’s continued dedication to taxpayer empowerment and ease of compliance.
Understanding the Existing Updated Return Facility
Currently, the tax law allows taxpayers to file an updated return within 24 months from the end of the assessment year. This facility is a boon for those seeking to rectify errors or omissions in their originally filed, belated, or revised returns. It also provides an opportunity for non-filers to submit their income tax return for the first time.
The current structure of additional income tax payable on updated returns is as follows:
Table 1: Existing Additional Income-Tax Rates
| Time Frame | Additional Income-Tax Payable |
|---|---|
| Within 12 months from the end of the relevant assessment year | 25% of the aggregate of tax and interest |
| After 12 months but within 24 months | 50% of the aggregate of tax and interest |
However, the existing provisions come with certain limitations. Updated returns cannot be filed if assessment, reassessment, recomputation, or revision proceedings are pending or completed for that assessment year. Furthermore, taxpayers are restricted to filing only one updated return per assessment year, and no further modifications are allowed once filed.
Typical Scenarios for Filing Updated Returns:
Taxpayers often opt for updated returns in situations such as:
- Inadvertent Underreporting: Correcting unintentional underreporting or misreporting of income in the original return.
- TDS/TCS/MAT Credit Adjustments: Accounting for subsequent reductions in TDS, TCS, or MAT credit.
- Post-Audit Financial Statements: Adjusting returns filed based on unaudited financials after the audit is completed beyond the revised return timeline.
- Changes in Tax Law/Jurisprudence: Adapting to new legal interpretations or retrospective law changes that lead to additional tax liability.
- Department Reminders: Responding to gentle reminders from the Income Tax Department (messages/emails, not formal notices) about unreported income or particulars.
Proposed Amendment in Finance Bill 2025: Expanding the Horizon
The Finance Bill 2025 proposes to significantly enhance the updated return facility by extending the time limit to 48 months from the end of the relevant assessment year. This extension aims to provide taxpayers with even more flexibility and time to ensure accurate tax compliance.
Alongside the extended timeline, the rates for additional income-tax payable have also been revised to reflect the extended period:
Table 2: Proposed Additional Income-Tax Rates
| Time Frame | Additional Income-Tax Payable |
|---|---|
| Within 12 months from the end of the relevant assessment year | 25% of the aggregate of tax and interest |
| After 12 months but within 24 months | 50% of the aggregate of tax and interest |
| After 24 months but within 36 months | 60% of the aggregate of tax and interest |
| After 36 months but within 48 months | 70% of the aggregate of tax and interest |
specific restriction to file Updated Return
updated returns will not be permitted if a show cause notice for reassessment proceedings is issued U/S 148a after 36 months from the end of the assessment year. However, if an order is subsequently passed stating that reassessment is not warranted, the taxpayer can still file an updated return up to the 48-month limit. Memo explaning Provisions is as follow
It is further proposed to provide that no updated return shall be furnished by any person where any notice to show-cause under section 148A of the Act has been issued in his case after thirty-six months from the end of the relevant assessment year. However, where subsequently an order is passed under sub-section (3) of section 148A of the Act determining that it is not a fit case to issue notice under section 148 of the Act, updated return may be filed upto 48 months from the end of the relevant assessment year.
Impact of the Proposed Amendment: A Wider Window for Compliance
This amendment, effective from April 1, 2025, will redefine the deadlines for updated returns for various assessment years. The following table illustrates the impact:
Table 3: Impact on Updated Return Time Limits
| Assessment Year | Situation Before Amendment | Situation After Amendment |
|---|---|---|
| 2020-21 | Time limit expired | Time limit expired* |
| 2021-22 | Time limit expired | Can file updated return from 01 April 2025 to 31 March 2026 with 70% additional tax* |
| 2022-23 | Can file till 31 March 2025 with 50% tax | (1) Till 31 March 2026 – 60% additional tax; or (2) Till 31 March 2027 – 70% additional tax |
| 2023-24 | (1) Till 31 Mar 2025 – 25% tax; (2) Till 31 Mar 2026 – 50% tax | (1) Till 31 March 2026 – 50% additional tax; or (2) Till 31 March 2027 – 60% additional tax; or (3) Till 31 March 2028 – 70% additional tax |
*Note: While the amendment extends the limit to 48 months, it is effective from April 1, 2025. Therefore, updated return opportunities for AY 2020-21 and AY 2021-22 expiring before April 1, 2025, will not be revived.
This extension is a commendable step towards promoting greater voluntary compliance. By providing a more extended timeframe, taxpayers gain ample opportunity to meticulously review and rectify any discrepancies in their tax returns.
Conclusion: Fostering a Culture of Trust and Compliance
The proposed amendment to extend the updated return timeline underscores the government’s commitment to building a tax system founded on trust and ease of compliance. This initiative is expected to:
- Enhance Voluntary Compliance: Provide taxpayers with a more comfortable window to correct errors and fulfill their tax obligations voluntarily.
- Reduce Litigation: By enabling self-correction, it is likely to decrease tax-related disputes and litigation.
- Benefit Taxpayers: Empower individuals and businesses to proactively manage their tax affairs in a supportive environment.
- Reinforce Trust-Based Regulation: Strengthen the government’s approach of prioritizing trust and simplifying tax procedures.
Ultimately, the updated return facility and its proposed extension represent a significant stride towards creating a taxpayer-friendly ecosystem, fostering a culture of compliance, and building a stronger, more trusting relationship between taxpayers and the tax administration.
Key Points to Remember:
- Finance Bill 2025 proposes to extend the updated return timeline to 48 months.
- New additional tax rates are structured for the extended 48-month period.
- Restriction on filing updated returns after 36 months if reassessment notice is issued.
- Amendment effective from April 1, 2025, impacting deadlines for AY 2021-22 onwards.
- This initiative aims to promote voluntary compliance and build taxpayer trust.