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Section 298 Income Tax Act 2025: When Are Interest and Penalty Charged on Undisclosed Income?

Section 298 governs interest for late or missing returns of undisclosed income in a block assessment, a 50% penalty on the relevant tax, and important safeguards against penalty in qualifying cases.

Law in force: The Income-tax Act, 2025 applies from 1 April 2026, subject to its transitional provisions. This article reflects the consolidated Act as amended by the Finance Act, 2026. For a particular search, verify the applicable commencement and savings rules.

What does Section 298 provide?

Section 298, titled Levy of interest and penalty in certain cases, operates within the special block assessment framework following a search or requisition. It should be read with Section 294 (procedure for block assessment) and Section 297 (specified ordinary interest and penalty provisions excluded).

At a glance: A late or unfiled block return may attract simple interest of 1.5% per month or part of a month on the tax on assessed undisclosed income. A separate penalty may equal 50% of the tax on undisclosed income determined in the block assessment, subject to statutory conditions and safeguards.

Section 298(1): Interest for late or non-filing of block return

If the assessee does not furnish the return required by the notice under Section 294(1)(a) within the time stated in that notice, or does not furnish it at all, simple interest is payable at 1.5% on the tax on undisclosed income determined under Section 294(1)(c).

The period starts on the day immediately after the deadline in the notice and ends on the date of completion of the block assessment. Each month or part of a month is counted for this purpose.

Illustrative formula: Interest = tax on assessed undisclosed income × 1.5% × number of months or parts of months in the statutory period.

This interest rule concerns the return under the special block assessment notice, not an ordinary annual income-tax return.

Section 298(2): Penalty of 50% of tax

During proceedings under the block assessment provisions, the Assessing Officer or Commissioner (Appeals) may direct payment of a penalty equal to 50% of the tax leviable on undisclosed income determined under Section 294(1)(c). This is a percentage of tax, not a flat 50% of the undisclosed income itself.

Any penalty order must comply with the hearing, approval and limitation requirements set out below. The statutory protection in subsections (3) and (4) is particularly important.

Section 298(3) and (4): When is penalty protection available?

Section 298(3) bars penalty orders under Section 298 and the specified penalty provisions in Sections 444(1), 450, 451 and 453 for the block period when all four conditions are satisfied:

The person furnishes a return under Section 294(1)(a).
Tax payable on the basis of that return is paid, or seized money is offered for adjustment against that tax.
Evidence of tax payment is supplied with the return.
No appeal is filed against the assessment of the portion of income disclosed in that return.

Important exception: Under Section 298(4), if the Assessing Officer determines undisclosed income exceeding the amount shown in the return, the subsection (3) protection does not extend to that excess. The statutory penalty applies to the excess portion as provided by the section.

Section 298(5) to (9): Hearing, approval and limitation

Reasonable opportunity of being heard

Under Section 298(5)(a), no penalty order under subsection (2) may be made without giving the assessee a reasonable opportunity to be heard.

Prior approval for specified officers

Where the penalty exceeds Rs. 2,00,000, a Deputy Commissioner, Assistant Commissioner, Deputy Director or Assistant Director must obtain prior approval from the Additional Commissioner, Additional Director, Joint Commissioner or Joint Director, as applicable.

Limitation for penalty orders

Section 298(5) sets different deadlines depending on whether the assessment is in appeal, revision, or neither:

Appeal under Section 357 or 362: The later of the end of the financial year in which the relevant penalty-initiation proceedings were completed and six months from the end of the financial year in which the appellate order is received by the jurisdictional Principal Commissioner or Commissioner.
Revision under Section 377: Six months from the end of the financial year in which the revision order is passed.
Other cases: The later of the end of the financial year in which the proceedings involving the penalty notice were completed and six months from the end of the financial year in which the penalty notice was issued.

Section 298(6) excludes the period for rehearing under Section 244(2) and qualifying periods of court-ordered stay. Subsection (7) preserves at least 60 days where the remaining limitation after the exclusion is shorter, and subsection (8) extends a qualifying residual deadline to the end of the month. Under subsection (9), an income-tax authority imposing the penalty, if not the Assessing Officer, must promptly forward a copy to the Assessing Officer.

Relevant statutory definitions and connected provisions

Assessee: Defined in Section 2(11) to include persons liable for tax or other sums and persons covered by assessment and deemed-assessee provisions.

Assessing Officer: Defined in Section 2(12) by reference to officers exercising assessment jurisdiction under the Act.

Block period and undisclosed income: Read the special definitions in Section 301 of the Act together with Sections 292 and 293; they determine the period and income subject to block assessment.

Block assessment return: The return called for under Section 294(1)(a), distinct from the ordinary return of income.

Section 298 broadly corresponds to Section 158BFA of the Income-tax Act, 1961. Historical decisions may assist interpretation, subject to changes in statutory wording and the applicable transitional law.

Practical illustrations

Example 1: Interest on a late block return

Suppose the tax determined on undisclosed income is Rs. 10,00,000 and the statutory interest period covers two months and part of a third. At 1.5% for each month or part, the illustrative interest is Rs. 45,000 (Rs. 10,00,000 × 1.5% × 3). Actual liability depends on the notice deadline and assessment completion date.

Example 2: Penalty on assessed undisclosed income

Where the tax leviable on the relevant undisclosed income is Rs. 8,00,000, the 50% penalty figure is Rs. 4,00,000, subject to the statutory conditions, safeguards and any qualifying relief.

Example 3: Return accepted in part

An assessee discloses income in a block return, pays the tax and meets the remaining conditions of Section 298(3). If the Assessing Officer determines additional undisclosed income, the protection does not cover the excess determined under Section 298(4).

Frequently asked questions

Is interest under Section 298 compounded?

No. Subsection (1) expressly prescribes simple interest at 1.5% for each month or part of a month of the relevant period.

Is the penalty 50% of undisclosed income?

No. The statutory measure is 50% of the tax leviable on the relevant undisclosed income.

Can filing the block return prevent a penalty?

Potentially, but filing alone is insufficient. All four conditions in Section 298(3) must be met, and any excess income determined by the Assessing Officer is governed by subsection (4).

Must the taxpayer be heard before penalty is imposed?

Yes. Section 298(5)(a) requires a reasonable opportunity of being heard.

Does Section 297 remove the special penalty under Section 298?

No. Section 297 excludes certain specified ordinary interest and penalty provisions for block-period undisclosed income; Section 298 separately provides special interest and penalty rules.

Official law and further reading

Official consolidated Income-tax Act 2025 Income Tax Department: Act and resources

Last reviewed: 11 November 2026. This article provides general legal information, not advice for a specific assessment or proceeding.