Levy of interest and penalty in certain cases
[Section-298 as per the Income Tax Act, 2025 (this Act) w.e.f. 1st April, 2026.]
Section 298(1) of Income Tax Act 2025
298(1) Where the return of total income as required under a notice under section 294(1)(a), is not furnished within the period specified in such notice, or is not furnished, then,—
- (a) the assessee shall be liable to pay simple interest at the rate of 1.5% of the tax on undisclosed income determined under clause (c) of said sub-section;
- (b) the interest in clause (a) shall be paid for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time specified in said notice, and ending on the date of completion of assessment under clause (c) of said sub-section.
Section 298(2) of Income Tax Act 2025
298(2) The Assessing Officer or the Commissioner (Appeals) in the course of any proceedings under this Chapter, may direct that the person shall pay by way of penalty a sum which shall be equal to 50% of tax so leviable in respect of the undisclosed income determined by the Assessing Officer under section 294(1)(c).
Section 298(3) of Income Tax Act 2025
298(3) The order imposing penalty under this section or section 444(1) or 450 or 451 or 452 shall not be made for the block period in respect of a person, if—
- (a) such person has furnished a return under section 294(1)(a);
- (b) the tax payable on the basis of such return has been paid or, if the assets seized consist of money, the assessee offers the money so seized to be adjusted against the tax payable;
- (c) evidence of tax paid is furnished along with the return; and
- (d) an appeal is not filed against the assessment of that part of income which is shown in the return.
Section 298(4) of Income Tax Act 2025
298(4) The provisions of the sub-section (3) shall not apply where the undisclosed income determined by the Assessing Officer is in excess of the income shown in the return and in such cases the penalty shall be imposed on that portion of undisclosed income determined, which is in excess of income shown in the return.
Section 298(5) of Income Tax Act 2025
298(5) The order imposing a penalty under sub-section (2) shall not be made—
- 298(5)(a) unless an assessee has been given a reasonable opportunity of being heard;
- 298(5)(b) by the Deputy Commissioner or Assistant Commissioner or the Deputy Director or Assistant Director, where penalty exceeds two lakh rupees except with the previous approval of the Additional Commissioner or the Additional Director or the Joint Commissioner or the Joint Director;
- 298(5)(c) in a case where the assessment is the subject-matter of an appeal under section 357 or 362,—
- (i) after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed; or
- (ii) six months from the end of the financial year in which the order of the Commissioner (Appeals) or the Appellate Tribunal is received by the jurisdictional Principal Commissioner or Commissioner,
- whichever period expires later;
- 298(5)(d) in a case where the assessment is the subject-matter of revision under section 377, after the expiry of six months from the end of the financial year in which such order of revision is passed;
- 298(5)(e) in any case other than those mentioned in clause (c) and clause (d), after the expiry of the financial year in which the proceedings, in the course of which notice for the imposition of penalty has been issued, are completed, or six months from the end of the financial year in which notice for imposition of penalty is issued, whichever period expires later.
Section 298(6) of Income Tax Act 2025
298(6) In computing the period of limitation under this section, the following period shall be excluded––
- (a) the time taken in giving an opportunity to the assessee to be reheard under section 244(2);
- (b) the period commencing on the date on which stay on proceeding under sub-section (2) was granted by an order or injunction of any court and ending on the date on which certified copy of the order vacating the stay was received by jurisdictional Principal Commissioner or Commissioner.
Section 298(7) of Income Tax Act 2025
298(7) Where immediately after the exclusion of the period referred to in sub-section (6), the remaining period of limitation referred to in sub-section (5) available to the Assessing Officer for making an order under sub-section (2) of this section is less than sixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.
Section 298(8) of Income Tax Act 2025
298(8) If after exclusion of the period referred to in sub-section (7), the remaining period of limitation for making of an order for imposition of penalty expires before the end of a month, such remaining period shall be extended to the end of such month.
Section 298(9) of Income Tax Act 2025
298(9) An income-tax authority on making an order under sub-section (2) imposing a penalty, unless he is himself an Assessing Officer, shall forthwith send a copy of such order to the Assessing Officer.
FAQs on Section 298 of Income Tax Act 2025
When is an assessee liable to pay interest under Section 298(1)?
An assessee is liable to pay interest if they fail to furnish a return of total income as required under a notice issued under Section 294(1)(a) within the specified period.
What is the rate of interest applicable under Section 298(1)(a)?
The interest is 1.5% per month (simple interest) on the tax related to undisclosed income determined under Section 294(1)(c).
From when to when is interest calculated under Section 298(1)(b)?
Interest is calculated from the day after the expiry of the period specified in the notice under Section 294(1)(a) till the date of completion of assessment under Section 294(1)(c).
What penalty can be levied under Section 298(2)?
A penalty equal to 50% of the tax leviable in respect of the undisclosed income can be directed by the Assessing Officer or Commissioner (Appeals).
Is penalty applicable if the assessee files the return and pays tax voluntarily?
No penalty shall be imposed if the person has furnished the return under Section 294(1)(a), paid the tax due, submitted evidence of payment along with the return, and not filed an appeal against the assessed income shown in the return.
What happens if the undisclosed income assessed exceeds the income shown in the return?
In such a case, penalty shall be imposed only on the portion of the undisclosed income that exceeds the income shown in the return.
Is an assessee given a chance to be heard before imposing penalty?
Yes, under Section 298(5)(a), the assessee must be given a reasonable opportunity of being heard before any penalty is imposed.
Can certain tax officers impose penalties beyond a specified limit without prior approval?
No, Deputy Commissioner, Assistant Commissioner, Deputy Director or Assistant Director cannot impose penalties exceeding ₹2 lakh without approval from senior authorities such as Additional Commissioner or Joint Commissioner.
What are the time limits for imposing penalties in appellate cases?
Penalty orders must be passed either by the end of the financial year in which the penalty proceedings were completed or within six months from the end of the financial year in which the appellate order is received—whichever is later.
What is the time limit for penalty in case of revision under Section 377?
Penalty must be imposed within six months from the end of the financial year in which the revision order is passed.
What is the limitation for penalty orders in other cases?
In cases other than those involving appeals or revisions, the order must be passed either by the end of the financial year in which penalty notice proceedings conclude or within six months from the financial year-end in which the notice was issued, whichever is later.
Are there any periods excluded from limitation computation?
Yes, the time taken to allow rehearing under Section 244(2) and any period during which a court has stayed the penalty proceedings is excluded.
What happens if after exclusion the remaining period is less than 60 days?
The remaining period is deemed to be extended to 60 days.
What if the remaining period ends before the month concludes?
If the remaining period for imposing penalty ends before the month concludes, it shall be extended to the end of that month.
Is the Assessing Officer always required to pass the penalty order?
No, but if a penalty is imposed by any authority other than the Assessing Officer, a copy of the order must be sent to the Assessing Officer immediately.
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