Reporting incorrect income in an income tax return can result in severe penalties under the Income Tax Act, 2025. Misreporting can lead to penalties of up to 200% of the tax payable, while under-reporting incurs a 50% penalty. Taxpayers are encouraged to ensure accurate reporting to avoid scrutiny and additional tax liabilities. However, provisions introduced in the Union Budget 2026 allow taxpayers to avoid these steep penalties by voluntarily disclosing errors and paying the necessary taxes and interest. For example, if a taxpayer owes ₹10 lakh in taxes, they can pay an additional ₹10 lakh for immunity instead of facing a ₹20 lakh penalty. To avail of this immunity, taxpayers must pay the tax and interest in full and cannot file an appeal against the assessment order. An application for immunity must be submitted within one month of receiving the assessment order. Additionally, unexplained credits or investments flagged by tax authorities may also incur penalties, but similar immunity can be claimed by paying the tax due and an additional 120% of the tax payable on the misreported income. This initiative aims to reduce litigation and compliance burdens for taxpayers.