CBDT's New Compounding Guidelines: Key Changes for 2024-2025 Explained

CBDT FAQs on Revised Compounding Guidelines (2024-2025): Essential Information

The Central Board of Direct Taxes (CBDT) has significantly updated the compounding offences process under the Income Tax Act, 1961. As of October 17, 2024, new guidelines, issued on March 17, 2025, have made the compounding procedure more accessible, transparent, and easier for taxpayers.

Key Changes in the Compounding Guidelines

All Offences Compoundable: Now, all offences under the Income Tax Act, previously excluded from compounding, can be compounded, providing relief to a wider array of taxpayers.
Unlimited Applications: Taxpayers are permitted to submit an unlimited number of compounding applications, even after previous rejections, provided they address any defects.
No Time Limit: The previous 36-month limit for filing compounding applications has been removed. Taxpayers can file applications at any point, including after the initiation of prosecution.
Automatic Transition of Pending Applications: Applications pending as of October 17, 2024, will automatically fall under the new guidelines and do not require resubmission or additional fees.
Broader Scope for Compounding: Compounding is now allowed for offences under Sections 275A (related to search and seizure violations) and 276B (TDS defaults), with no applicable time restrictions.
Non-Admittance of Guilt: Utilizing the compounding process serves as a settlement and does not constitute an admission of guilt.
Online Payment Requirement: All compounding charges must be paid online through the Income Tax e-filing portal, enhancing the efficiency of the process.
Increased Charges for Subsequent Applications: Refiled applications incur higher charges—1.2 times for the second application, 1.4 times for the third, and so on.
Habitual Offenders Provision: Applications from habitual offenders may be rejected, despite no formal limit on the number of applications.
Appeal Withdrawal Not Mandatory: There is no need to withdraw appeals before applying for compounding, although an undertaking to withdraw related appeals is required if compounding is granted.
Non-Refundable Application Fees: Application fees are non-refundable and cannot be adjusted against other applications.
ED/CBI Investigations: Offences investigated by the Enforcement Directorate or CBI are eligible for compounding unless associated with anti-national or terrorist activities, for which special approval is necessary.
Guidelines for Companies and HUFs: The guidelines specifically address procedures for offences committed by companies and Hindu Undivided Families (HUFs).
Insolvency Cases: Compounding is allowed in cases of insolvency, following the prescribed conditions.
Payment Deadline Extension: The deadline for settling compounding charges can be extended up to 24 months without incurring additional interest.

How to File a Compounding Application

Application Format: Utilize the prescribed Annexure-1 format, ensuring all relevant offences and applicable periods/quarters are included.
Affidavit Requirement: Include an affidavit on ₹100 stamp paper as part of the application.
Jurisdiction Filing: Submit applications with the relevant Pr. CCIT/CCIT/Pr. DGIT/DGIT based on jurisdiction.
TDS Offences: For TDS defaults that span multiple jurisdictions, file where the primary default exists.
Fee Payment: Ensure payment of the application fee according to the guidelines; this fee is applicable solely to that specific application’s compounding charges.
Online Payment: Use the Income Tax e-filing portal for all payments related to compounding charges.

Conclusion

The revised CBDT guidelines and FAQs on the compounding of offences under the Income Tax Act, 1961, represent a significant advancement in simplifying tax compliance for individuals and businesses in India. With all offences now eligible for compounding, the absence of time and frequency restrictions, and a more streamlined process, taxpayers can efficiently address defaults, minimizing the need for prolonged litigation.