Can AI Help You Navigate The ITR Filing Maze?

Just a few years ago, even the thought of calculating our taxable income or figuring out exemptions and deductions while filing income tax returns (ITRs) could give sleepless nights to a majority of taxpayers. The intricacies of personal taxation in India have long been a challenge for individual taxpayers.

However, with AI stepping into the tax ecosystem, what was once a maze of paperwork and jargon is now becoming a streamlined process. From personalised tax-saving recommendations and automated document classification to intelligent alerts on compliance deadlines and AI-powered resolution of tax notices, technology is reshaping how individuals manage their taxes.

But AI-led processes have their limitations and risks. Over-reliance can create a new maze for you.

Making Personal Tax Simpler

AI has already begun simplifying personal taxation in India, though full automation and error-free assistance are still work in progress.

“While its full potential is still unfolding, AI is already playing a key role in enhancing efficiency, reducing errors, and improving the overall taxpayer experience,” says Neeraj Agarwala, partner, Nangia & Co. LLP.

Ease of Filing ITR: The income tax portal now offers partially AI-driven pre-filled ITRs that pull in data from multiple sources, such as Form 26AS, the Annual Information Statement (AIS), and Tax Information Statement (TIS). While this feature is still evolving, it has increased transparency, gives a consolidated view and reduces manual errors.

“What was once a complex and time-consuming activity is now being simplified through automation and data extraction,” says Santhosh Sivaraj, partner, global employer services, tax & regulatory services, BDO India.

With the rise of Unified Payments Interface (UPI) and digital banking, individuals now have multiple bank accounts. “AI tools help in consolidating bank transactions across multiple accounts, irrespective of the format of the summary (PDFs, JSON files, or even scanned images), drastically reducing the manual effort to sort data,” says Sivaraj.

Some popular Indian tax platforms, such as ClearTax AI, EZTax AI and TaxBuddy SmartBot, even support automated uploading of ITRs on the e-filing portal.

Data Matching: AI tools analyse data from multiple third-party sources, such as banks, mutual funds, stock depositories, and registrars to detect mismatches between reported and actual income. This significantly reduces the scope of making mistakes in tax calculations.

For instance, if an individual fails to report interest earned from fixed deposits (FDs), the system can automatically identify the discrepancy by comparing the reported income with the Statement of Financial Transactions (SFT) submitted by the banks. A notification is then sent to the taxpayer for rectification.

Computer-Assisted Scrutiny: AI is also being used for risk profiling and flagging of suspicious ITRs. Instead of relying solely on random scrutiny, the system uses algorithms to assess past filing behaviour, nature of income, and high-value transactions to identify potentially suspicious cases.

For instance, “a salaried individual who claims large deductions under multiple heads (like high house rent allowance or HRA, home loan deduction and donations under Section 80G) and shows relatively low net taxable income might be flagged for scrutiny if property purchases indicate otherwise. AI flags such returns for verification, saving time and effort,” says Agarwala.

But Only In A Limited Way

Possibility Of Errors: Though automatic ITR form filling is convenient, the accuracy of these systems is limited by the quality of data they receive. Most of the financial information fed into these systems is manually reported by third-party entities, such as banks, employers, mutual fund houses, and registrars. If these source-level filings are delayed, incomplete, or incorrect, the AI-generated summaries may also reflect the same errors, leading to confusion rather than clarity.

Says Sivaraj: “AI only works with prompts that are provided and backed with the data shared. Since personal taxation varies based on the taxpayer’s various facts and circumstances, the taxpayer remains responsible for ensuring that all the sources of income are properly disclosed. AI cannot independently determine the nature of bank credit whether it’s taxable income or a loan or a mere internal transfer.”

Lack Of Context: One of the major limitations of AI is the inability to understand life events and behavioural context, which are often central to tax decisions.

Consider a taxpayer who has taken a sabbatical to care for a family member and has temporarily stopped earning a salary. They begin withdrawing from long-term savings, such as mutual funds, to manage household expenses.

“While these redemptions may trigger capital gains, the AI system might suggest deductions or tax-saving investments based on past patterns, unaware that the individual currently has no regular income or cash flow,” says Agarwala.

Lack Of Transparency: As AI becomes more complex—especially when powered by machine learning—it becomes harder for tax experts to understand why a certain deduction was flagged or suggestion was made.

This lack of transparency reduces trust and makes it difficult for users to dispute or validate outcomes. Unlike a human consultant who explains the reason, AI often offers conclusions without any reasoning, which is risky in a field governed by compliance.

“AI struggles when tax computation requires interpretation, judgement, or application of legal precedent, especially where facts are nuanced or the tax outcome depends on intent, context, or multi-year analysis,” says Amit Baid, head of tax at BTG Advaya, a law firm.

AI Hallucination: This happens when the system generates plausible but incorrect response to a user’s query or prompt. Says Baid: “This is particularly risky when a tax position depends on judicial rulings or department clarifications.”

For instance, an AI chatbot might suggest a deduction under Section 80EE (tax benefit when you use a home loan to buy or build a house) without verifying property ownership or loan eligibility, potentially leading to incorrect claims and consequences like defective returns or notices.

Subjective Interpretation Is Suspect: The Indian tax system, like many others, involves legal provisions that are open to multiple interpretations. AI is not yet equipped to handle the subjective interpretation of the tax law or to navigate the grey areas.

Many deductions, exemptions, and classifications are governed not just by the text of the law, but by how it has been interpreted in different factual contexts and through judicial precedents over time.

Agarwala gives an example. “Subjective areas, such as determining whether a transaction constitutes a capital or revenue item, require a deep understanding of the taxpayer’s specific facts, intent, documentation, and sometimes even industry practices. This level of nuanced analysis goes well beyond the current capabilities of AI, which primarily functions through rule-based logic or pattern recognition.”

The Risk It Poses

When individuals use AI-enabled platforms to file ITR, they often upload or grant access to a wide array of personal financial information: income details, investment records, property ownership, Permanent Account Number (PAN), Aadhaar, banking transactions, family relationships, and more.

A breach of a tax-filing platform can potentially expose financial records of millions of users. Baid gives an example. “In 2023, several unofficial Chrome extensions and Telegram bots promoted as ‘AI tax assistants’ were discovered to be capturing user data without consent. Even legitimate platforms like Cleartax, Quicko, and TaxBuddy had to bolster their authentication and security protocols after phishing attempts mimicking their interfaces surfaced during peak filing season.”

Another issue is data profiling and algorithmic bias.

Says Agarwala: “As AI learns from user data, there’s a risk that platforms begin to profile taxpayers, offering suggestions not necessarily in their best financial interest, but in ways that align with the platform goals. Without transparency in how AI makes decisions, users may unknowingly surrender control over their own tax planning.”

The Way Forward

Over the next 3-5 years, AI is likely to become far more integrated into India’s personal taxation ecosystem, not just as a convenience tool, but as part of the government’s larger vision to create a seamless, faceless, and data-driven compliance environment.

Importantly, the Income Tax Department itself is already working with AI and analytics.

“We can expect AI to evolve beyond basic pre-filling and discrepancy detection, toward more proactive assistance in areas like personalised tax nudges, investment-linked tax planning, real-time error alerts, and even interactive query resolution,” says Agarwala.

At the same time, it must not be forgotten that tax is a legally-sensitive area with significant financial consequences for the taxpayers. Regulators should, therefore, consider setting standards for transparency, data security, and auditability in AI-driven tax tools.

What Should You Do?

Over-reliance on AI in tax filing is not advisable. AI may not fully grasp your unique financial situation, which may lead to missed tax-saving opportunities or misreporting of income.

For instance, “AI may show non-taxable items like reimbursements or loans as income, if not properly entered. That’s why it is essential for taxpayers to check AI-generated results against actual tax laws and consult tax experts,” says Sivaraj.

Remember that under the Indian tax law, individuals are personally accountable for the correctness and completeness of their returns regardless of whether it was filed manually, through a tax consultant, or via an AI-based software. Most AI platforms include disclaimers stating they act only as facilitators. Therefore, review is a must.

Says Sivaraj: “If errors such as underreporting income, claiming incorrect deductions, or mismatches with AIS or Form 26AS occur, the taxpayer is liable and may face penalties, interest, or notices from the tax authorities. Therefore, it’s essential to carefully review all filings before submission, even if generated or pre-filled by AI.”

Ideally, rely only on tools certified or provided by the Income Tax Department (or built in partnership with it) for matters related to taxation.

Precautions Taxpayers Must Take

Verify All Prefilled Data

AI tools often pull data from sources like Form 16, AIS, and bank statements. Always cross-check the prefilled figures, especially income, TDS, and capital gains with your own records.

Be Aware Of Limitations

AI tools are often built for standard tax situations. If your finances involve complex transactions, such as business income, foreign assets, property sales, and so on, consult a qualified tax professional.

Read The Fine Print

Most ITR filing platforms include disclaimers clarifying that the user is responsible for the final filing. Understand what the tool can and cannot do before relying on it fully.

Don’t Use Unregulated Tools

Use of unregulated private tools by individuals with limited financial literacy can lead to errors, missed deductions, or even legal hassles.

sanjeev.sinha@outlookindia.com