What happens if you are caught evading tax?

Individuals have the freedom to self assess income and pay taxes. That doesn't mean you can avoid declaring a particular stream of income to evade taxes and expect to get away with it.

Tax evasion is an illegal activity which includes not filing income tax returns altogether or misrepresenting the tax payable amount. It is different from tax avoidance, which is a legal activity because tax laws are used to reduce the tax amount payable.
Income tax returns are scrutinized only if income tax authorities feel that there is tax evasion. If they conclude that you have deliberately concealed income to reduce tax liability, you will be penalized.
What does scrutiny of income mean?
Scrutiny essentially means evaluating the income tax return for its authenticity i.e. the income tax assessing officer will go through the returns filed and various other documents such as bank statement, Form 16 among other things to check if there is any mismatch in tax liability assessed by the individual and the actual tax liability. The income tax officer will request all bank account statements, credit card statements, details of all family members, Form 16 and other relevant documents as part of the scrutiny process.
In most cases, if a return is picked up for scrutiny, a scrutiny notice will be served within a period of one year from the month in which returns have been filed. So if you file your returns on 30^th July, 2012, then you may get a scrutiny notice anytime on or before 29^th July, 2013. The notice is in a standard format and it will contain relevant details of the tax payer and also will contain a date on which the tax payer needs to appear before the concerned income tax officer.
The tax payer need not attend this meeting in person. He can send across a representative to plead his case, which in most cases will be the chartered accountant of the tax payer.
How is an income tax return picked up for scrutiny?
There are various guidelines/thresholds in place which will determine the selection of income tax return for scrutiny. Some of them include

• All assessments pertaining to search and seizure cases
• All returns where deduction claimed under chapter VI-A of the Income tax act is Rs. 25 lakhs or above
• All returns where refund claimed is Rs. 5 lakh and above
• Withdrawal of less than Rs. 50,000 p.a. will be picked up for scrutiny. The logic being that you may have access to black money which you may be using for your daily expenses and hence withdrawals from the bank account are minuscule.
• In addition, cases will be picked through a Computer Assisted Scrutiny System (CASS) by giving specific instructions.

What are the implications?
If the income tax officer figures that you have concealed income, a penalty will be levied which can be anywhere up to 3 times the amount of income concealed. So if the tax evaded amount is Rs. 10,000, you can be charged a penalty of anywhere between Rs. 10,000 to Rs. 30,000.
What should you do to avoid such a situation?
Many salaried individuals believe that since Tax is deducted at source for salary and for other streams of income, when it crosses a particular threshold, their tax liability is nil. That may not necessarily be the case.
There are several other streams of income, where tax may not be deducted at source. For e.g. Post office saving deposit interest, interest on bank savings account, rent received from property among other things. Also if you have switched jobs, it is likely that if you haven't declared that your old organization has taken into consideration deductions under Section 80 while calculating TDS, the amount of TDS charged by the new organization may be lower as they would consider the full quantum deductible under Section 80, resulting in you paying lower tax.
Therefore while filing returns make sure you consider all these factors. It is better to take precautions while filing returns because if your return is picked up for scrutiny because of some anomaly, apart from the financial impact, you will witness a lot of mental stress.