Section 456 Income Tax Act 2025: When Is Rs. 5 Lakh Penalty Imposed on Eligible Investment Funds?
Section 456 addresses a specific reporting default by eligible investment funds. An eligible fund that fails to furnish a required statement, information or document within the time prescribed under paragraph 4 of Schedule I may face a fixed penalty of Rs. 5,00,000.
What does Section 456 provide?
Section 456 is titled Penalty for failure to furnish statement or information or document by an eligible investment fund. It applies when an eligible investment fund required to furnish a statement, information or document under paragraph 4 of Schedule I does not furnish it within the time prescribed there. The income-tax authority prescribed under that paragraph may direct the fund to pay a penalty of Rs. 5,00,000.
- The person concerned is an eligible investment fund.
- A reporting or document-furnishing obligation arises under paragraph 4 of Schedule I.
- The relevant prescribed deadline has not been met.
- The authority competent under that paragraph considers the imposition of a fixed Rs. 5,00,000 penalty.
Relevant statutory definitions and linked provisions
Eligible investment fund
Paragraph 1(1) of Schedule I, read with Section 9(12), describes an eligible investment fund as a fund established, incorporated or registered outside India that collects funds from its members for investment for their benefit and satisfies the statutory conditions. These include requirements relating to residence, investor participation, diversification, regulatory supervision and other matters. Not every overseas investment vehicle automatically qualifies.
Business connection and fund management
Section 9(12), together with Schedule I, addresses the circumstances in which qualifying fund management activities undertaken in India do not constitute a business connection in India for the eligible fund. Reporting obligations assist the tax authorities in verifying the relevant conditions.
Prescribed income-tax authority
This means the income-tax authority identified under the relevant statutory and rule-based framework for the reporting obligation. Section 456 does not empower every tax officer indiscriminately to impose this penalty.
Which statements and documents must be furnished?
The reporting requirement arises under paragraph 4 of Schedule I. The Income-tax Rules, 2026 prescribe relevant reporting forms, including Form No. 173 (corresponding to the earlier Form 3CEK) for a statement by an eligible investment fund and Form No. 172 (corresponding to the earlier Form 3CEJA) for the accountant's report relating to prescribed conditions.
The fund should check the current rule, applicable form, filing channel, competent authority and deadline for its particular tax year. The reporting obligation and any accountant certification should not be assumed to be interchangeable.
What is the penalty under Section 456?
| Question | Legal position |
|---|---|
| Amount | Fixed Rs. 5,00,000 |
| Who may be liable? | Eligible investment fund subject to Schedule I reporting |
| Trigger | Failure to furnish the required statement, information or document within prescribed time |
| Authority | Income-tax authority prescribed under paragraph 4 of Schedule I |
| Daily accumulation? | No daily-rate formula is stated in Section 456 |
| Earlier counterpart | Section 271FAB of the Income-tax Act, 1961 |
Practical illustrations
Example 1: Statement not furnished
An overseas investment fund qualifying under Schedule I is required to furnish the prescribed statement but does not submit it by the applicable deadline. The prescribed authority may consider imposing a Rs. 5,00,000 penalty under Section 456, subject to the applicable legal safeguards.
Example 2: Filing is late by 20 days
If the statutory conditions for penalty are met, Section 456 does not multiply Rs. 5,00,000 by 20. The provision specifies a fixed amount rather than a per-day charge.
Example 3: Fund not covered by the reporting obligation
If a vehicle is not an eligible investment fund subject to the particular Schedule I reporting requirement, Section 456 cannot be applied merely because it is an investment fund. Its actual status and obligations must first be examined.
Penalty procedure, reasonable cause and appeal
Before accepting a proposed penalty, examine the notice, the statutory basis of the filing obligation, the deadline, proof of filing, the competence of the issuing authority and the opportunity to be heard. Section 471 contains procedural provisions relevant to penalties. Section 472 addresses limitation for imposing penalties.
Reasonable cause: Section 470 sets out circumstances in which certain penalties are not imposed on proof of reasonable cause. Its precise scope and its application to Section 456 should be checked against the current statutory text; do not assume that every penalty is covered by a general reasonable-cause exception.
Any available statutory appeal or other remedy depends on the nature of the order, the authority passing it and the applicable appellate provisions. The fund should preserve filing acknowledgments, correspondence, technical-error evidence and supporting records.
Frequently asked questions
Is the penalty under Section 456 Rs. 5 lakh?
Yes. The section specifies Rs. 5,00,000 for the relevant reporting failure by an eligible investment fund.
Does Section 456 apply to all mutual funds or investment funds?
No. It specifically addresses eligible investment funds required to report under paragraph 4 of Schedule I.
Is the penalty automatic?
No. Section 456 says the prescribed authority "may direct" payment. The legal preconditions and procedural safeguards must be considered.
Which provision of the 1961 Act corresponds to Section 456?
Section 271FAB of the Income-tax Act, 1961 dealt with the corresponding reporting default by eligible investment funds.
Official statutory references
Read the provision together with the current consolidated Act, Schedule I and the Income-tax Rules, 2026:
This article is general statutory information and should be read with the latest amendments, rules, notifications and facts of the individual case.