Income Tax Department Uses Data Analytics To Flag Bogus Deduction Claims

The Income Tax Department (ITD) has detected cases involving wrongful tax relief and non-genuine deduction claims by using data analytics, verification exercises and enforcement action, the government has told the Lok Sabha. The department has also carried out searches and surveys against taxpayers, professional intermediaries and other persons suspected of facilitating fraudulent claims. Evidence collected during these exercises has led to action under the Income-tax Act, 1961, depending on the nature of the violation.

“During the last five years, the Income Tax Department has detected cases of wrongful tax reliefs and claims of non-genuine deductions. Such cases have come to light, inter alia, through data analytics and verification exercises, and have been further corroborated through searches and surveys carried out against entities, professional intermediaries and other persons suspected of facilitating such claims,” Pankaj Chaudhary, Minister of State in the Ministry of Finance told Lok Sabha. 

 “These actions resulted in the recovery of evidence regarding tax evasion and other violations under the provisions of the Income-tax Act, 1961. Based on the evidence gathered, appropriate action has been taken in accordance with the applicable provisions of the Income-tax Act,” Chaudhary added.

How Tax Returns Are Cross-Checked

The Central Board of Direct Taxes (CBDT) operates an in-house analytics system that gathers information from several sources. These include Statement of Financial Transactions (SFT), tax deducted at source (TDS) and tax collected at source (TCS) statements, goods and services tax (GST) data, high-value transactions reported by banks and financial institutions, and records relating to the purchase or sale of immovable property.

This information is matched with details reported in income-tax returns, tax audit reports and other third-party filings. Risk rules are then used to identify returns or transactions showing signs of possible tax evasion, incorrect reporting or excessive claims.

The government said these rules are not static. They are regularly recalibrated as new patterns emerge, allowing the department to improve the way potentially risky cases are selected for verification.

Taxpayers May Be Asked To Correct Returns

CBDT is also using its NUDGE campaign, short for Non-intrusive Usage of Data to Guide and Enable, to encourage voluntary compliance. Under the initiative, selected taxpayers receive communications asking them to review returns where analytics indicate non-reporting of income or assets, or excessive deductions and exemptions.

The campaign follows a seven-stage SAKSHAM framework covering data collection, research, targeted intervention, communication, taxpayer assistance, transparency and evaluation. Employers have also been included in outreach programmes to encourage taxpayers to correct discrepancies through revised, belated or updated returns.

During financial years 2024-25 and 2025-26, the campaigns led to the filing of 1.25 crore updated or revised returns. Taxpayers paid an additional Rs 9,493.66 crore, while the overall revenue impact was reported at Rs 12,121.91 crore.

Action Against Intermediaries

Investigations have identified categories of intermediaries, including tax return preparers and chartered accountants, suspected of enabling fraudulent claims. Depending on the evidence, the department may conduct e-verification, reassessment, searches or surveys, and may impose penalties or begin prosecution.

Information relating to tax professionals may also be shared with regulatory or enforcement bodies, including the Institute of Chartered Accountants of India (ICAI). For taxpayers, the message is clear: deduction claims and income disclosures should be supported by records and should match information available with reporting entities.

FAQs

1. How does the Income Tax Department identify suspicious claims?

It matches ITR details with SFT, TDS, TCS, GST, property and high-value transaction data to detect unreported income or excessive deductions.

2. What should taxpayers do after receiving a CBDT communication?

They should review the return, verify the flagged information, and file a revised, belated, or updated return where correction is required.

3. What action can be taken over bogus deduction claims?

Depending on the evidence, the department may initiate e-verification, reassessment, penalties, searches, surveys or prosecution against taxpayers and intermediaries.