ITR Filing For AY 2025-26: What Taxpayers Should Know About Avoiding Fraudulent Claims

As the income tax return (ITR) filing season picks up pace, a stern reminder from the tax department has brought attention back to an issue that many individual taxpayers often overlook, the risks of making wrong or inflated claims. Whether it is a well-meaning mistake or an intentional attempt to stretch deductions, the penalties can be steep, and in some cases, even lead to prosecution.

The tax ecosystem today has changed with automated cross-checks, data pulled from multiple sources, and real-time monitoring. Therefore, the room for “grey zone” tax filing has shrunk considerably. However, every year, thousands of taxpayers end up filing in haste without cross-verifying key details leading to errors - which this time may be more costly.

“Taxpayers need to understand that it’s not just about dodging scrutiny anymore, it’s about staying fully compliant,” says Preeti Sharma, Partner at BDO India. “Even if someone claims a deduction without intending to mislead, say, they rely on an expired donation certificate or fail to check the limit under a particular section, the system can flag it.”

The Income Tax Department now uses third-party information such as Annual Information Statement (AIS) and Form 26AS, and expects your return to match what others (like your employer, landlord, bank, or even a charitable trust) have reported. Something as small as inflating a rent amount or entering the wrong section for a donation could get picked up.

The cost of a wrong claim?

There are two categories of trouble here: mistakes, and mischief.

For genuine errors, if the taxpayer is unable to prove their bonafide intent, penalties of up to 50 per cent of the tax amount may apply, warns Abhishek Mundada, Partner at Dhruva Advisors LLP. But where there is wilful intent, say someone fabricates rent receipts or makes up a home loan interest claim, the fallout can be far worse. “A deliberate misstatement can lead to a penalty of 200 per cent of the tax involved, and if the tax amount exceeds Rs 25,000, there is also the risk of prosecution,” Mundada adds.

He further advises, “All the claims (by taxpayers) should be substantiated by appropriate bank entries as payment by cash is not entitled for deduction beyond particular limits.”

“Taxpayers should prefer online mode of making payment as prescribed which provides a verifiable payment trail, which strengthens claim and eases verification during assessment,” he adds.

How to stay on the right side of the tax laws?

According to Sharma, taxpayers should:

• Match their claims with the AIS and Form 26AS, to avoid mismatches between self-declared and third-party-reported data;

• Retain supporting documentation for all deductions for at least six years;

• Avoid claiming deductions without complete documentation, even if advised otherwise by intermediaries;

• And most importantly, consult professionals in case of doubt.

It may be tempting to “round up” expenses or take a cue from what others have claimed to get maximum deductions, but with automated systems running in the background, that strategy can quickly backfire. One simple rule applies for taxpayers to make a rightful deduction in their ITRs: if you can’t prove it, don’t claim it.