The Income Tax Department has outlined the rules and charges for compounding offences under the Income-tax Act, 2025, as amended by the Finance Act, 2026. The framework allows eligible taxpayers and other persons to seek compounding of specified offences by applying to the competent authority and fulfilling prescribed conditions.
Compounding essentially provides a mechanism through which a person who has committed a specified offence can approach the competent authority, accept the default and seek to have the offence compounded. The current guidelines are based on CBDT Letter F. No. 285/08/2014-IT(Inv. V)/163 dated October 17, 2024, and apply to applications filed thereafter as well as certain applications that were pending disposal.
Re-filing of Rejected Compounding Applications
One of the significant aspects of the guidelines is the possibility of re-filing certain applications that were rejected under the earlier guidelines.
A rejected application may be filed again where the rejection was due to curable defects, such as non-payment of outstanding tax, interest or penalty, filing in the wrong format, incorrect assessment year or financial year, incorrect section, short payment of compounding charges, or failure to submit an undertaking regarding withdrawal of appeals.
Where multiple applications were rejected under the earlier guidelines for such curable reasons, a consolidated compounding application may also be filed.
However, applications rejected on merits by the competent authority will not be reconsidered under this provision. Any payment already made towards the earlier application can be given credit against the compounding charges payable under the new guidelines.
Who Can Apply for Compounding?
The compounding application has to be submitted to the jurisdictional Principal Chief Commissioner/Chief Commissioner or Principal Director General/Director General in the prescribed format.
The application is required to be submitted as an affidavit on Rs 100 stamp paper. It may cover offences relating to a single financial year in the case of taxpayers, a quarter for deductors, or multiple periods through a consolidated application.
For offences involving a company or HUF, the main accused and/or co-accused, such as a director or manager, may file the application either jointly or separately. The competent authority may compound the offence of both the main accused and co-accused if the applicable charges are paid by any of them.
12-Month Rule for Compounding Applications
The timing of the application has a direct impact on the compounding charges.
An application can generally be filed at any time after the offence. However, where a prosecution complaint has already been filed in court, the application should be filed within 12 months from the end of the month in which the complaint was filed.
If the application is filed after this 12-month period, compounding charges increase to 1.5 times the normal charges.
The basic rule can be summarised as follows:
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Application filed within 12 months: Normal compounding charges
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Application filed after 12 months: 1.5 times the normal compounding charges
Compounding Application Fee
Applicants are required to pay a non-refundable application fee of Rs 25,000 per application.
For a consolidated application, the fee is Rs 50,000. The fee may subsequently be adjusted against the final compounding charges.
However, no application fee is required for applications that were pending as of October 17, 2024 and had been filed under the previous guidelines.
Outstanding Tax and Other Dues Must Be Paid
Before filing the compounding application, the applicant is required to pay outstanding tax, interest, penalty and other related dues connected with the offence.
If the department identifies outstanding dues after the application is filed, the applicant will be informed. The application will be treated as valid only if the demand is paid within 30 days of the intimation or within an extended period granted by the competent authority, subject to the specified limit.
The applicant must also undertake to pay the compounding charges determined and communicated by the competent authority within the prescribed period.
Compounding Charges for Key Income-tax Offences
The amount payable depends on the nature of the offence.
For example, under Section 476, relating to failure to pay TDS or certain taxes on winnings from online games or consideration for transfer of virtual digital assets in kind, the compounding charge is 1.5% per month or part of a month of the tax amount in default. The charge cannot exceed the TDS amount in default.
Similarly, for Section 477, relating to failure to pay TCS, the charge is 1.5% per month or part of a month of the tax in default, subject to the prescribed ceiling.
For Section 478(1), covering wilful attempts to evade tax, penalty or interest or under-reporting of income, the compounding charge is 125% of the tax amount sought to be evaded or the tax on under-reported income, as applicable.
For certain failures to furnish returns under Section 479, the charge is 30% of the tax sought to be evaded or tax on under-reported income, subject to a minimum of Rs 10 lakh in specified search or survey-related cases. In other cases, the charge is 15%, subject to a minimum of Rs 5 lakh.
Other offences have separate prescribed rates. For instance, failure to get accounts audited under Section 481 attracts a charge of 10% of returned or assessed income, whichever is higher, subject to a minimum of Rs 5 lakh.
Additional Charges for Delayed Applications
The guidelines also provide for an additional financial impact where the compounding application is filed after the prescribed 12-month period.
The compounding charges are increased by 50% of the computed amount when the application is made beyond 12 months from the end of the month in which the prosecution complaint was filed.
Higher Charges for Repeat Offences
Repeat offences can result in progressively higher compounding charges.
Under the guidelines:
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1st offence: Normal prescribed charge
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2nd offence: 1.2 times the prescribed charge
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3rd offence: 1.4 times the prescribed charge
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4th offence: 1.6 times the prescribed charge
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Subsequent offences: Increase by 0.2 times for each additional offence
This makes the number and history of previous compounding applications an important consideration when determining the financial liability.
Withdrawal of Appeal Is Also Required
A person seeking compounding must undertake to withdraw appeals relating to the offence proposed to be compounded.
Where an appeal contains multiple grounds, the undertaking is required to cover only those grounds that relate to the offence for which compounding is being sought.
Defective Applications Can Be Revived
A compounding application containing curable defects may be treated as defective and not processed further.
Examples include non-payment of related tax, interest or penalty, use of an incorrect proforma, or mentioning the wrong financial year, assessment year or section.
If the defects are corrected within one month from the date of intimation, the application may be revived without additional compounding charges. If the defects are not rectified within the prescribed period, the application will be returned and a fresh filing will be treated as a new application with applicable charges.
Cases Requiring CBDT Chairman's Approval
Certain cases can be compounded only with the approval of the Chairman, CBDT.
These include specified cases involving convictions with imprisonment of two years or more, certain offences connected with convictions under other laws, cases involving anti-national or terrorist activity based on agency investigation, and certain cases involving facilitation of tax evasion through mechanisms such as bogus invoices or accommodation entries.
The higher-approval requirement also covers offences connected with the Black Money Act, the Prohibition of Benami Property Transactions Act, and offences under Sections 473 and/or 474 of the Income-tax Act.
What Taxpayers Should Keep in Mind
The new framework provides taxpayers with a structured route for seeking compounding of specified income-tax offences, but compounding is not an automatic right. Even where the guideline conditions are fulfilled, the competent authority may reject an application in exceptional circumstances, including habitual offences or cases involving serious gravity based on the facts.
Taxpayers facing prosecution should therefore carefully verify the relevant offence, clear outstanding dues, calculate the applicable charges and ensure that the application is filed in the prescribed manner and within the applicable timeline.
The Income Tax Department document states that its contents are intended for information and quick public access and advises readers to verify the provisions against the relevant Government Acts, Rules and Notifications.
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