Summary of this article
An increasing number of notices are being issued even where taxpayers have correctly reported their salary income and paid full taxes.
On many occasions, the trigger is not underreporting of income but inconsistencies between the return and information available with the Income Tax Department through various reporting mechanisms.
Differences in capital gain computations, omission of certain transactions, or incorrect reporting of losses can trigger system-generated queries.
A notice from the income tax office always rings an alarm for common taxpayers, and your anxiety level may increase, assuming that you may have made a mistake in your income tax return (ITR) or failed to disclose income. However, a communication from the tax department may not always mean a tax demand or penalty.
In fact, an increasing number of tax notices are being issued even where taxpayers have correctly reported their salary income and paid full taxes. On many occasions, the trigger is not underreporting of income but inconsistencies between the return and information available with the Income Tax Department through various reporting mechanisms.
“Over the last few years, the tax administration has significantly enhanced its data collection and analytics capabilities through tools such as the Annual Information Statement (AIS), Form 26AS, Statement of Financial Transactions (SFT), and information reported by employers, banks, brokers, mutual funds, depositories and other financial institutions. As a result, the tax department today has visibility into a much wider range of financial transactions than ever before,” says Preeti Sharma, Partner, Global Employer Services, Tax & Regulatory Services, BDO India.
The Most Common Reasons For Tax Notices
1. Mismatch between income reported in the return and information appearing in the AIS: Taxpayers may correctly disclose salary income but inadvertently misreport interest earned on savings accounts, fixed deposits, recurring deposits or digital investment platforms. Even relatively small amounts of omitted income can result in automated adjustments during return processing.
2. Capital gains misreporting: With growing participation in equity markets, mutual funds, exchange-traded funds (ETFs) and virtual digital assets, many salaried individuals now have investment-related transactions that need to be separately reported. Differences in capital gain computations, omission of certain transactions, or incorrect reporting of losses can trigger system-generated queries.
3. Tax deducted at source (TDS) mismatches: Taxpayers sometimes claim TDS credit based on Form 16 or other certificates without verifying whether the tax has been correctly deposited and reported by the deductor. If the corresponding credit does not appear in Form 26AS or AIS, the return may be processed with reduced credit, resulting in a tax demand.
4. Reporting foreign assets and foreign income: Even employees with foreign stock options or foreign RSUs (restricted stock units), and people who have foreign brokerage accounts, may need to disclose this information on their tax returns even if they already paid taxes on the foreign income. Failure to make the required disclosures can result in audits even if all other information is correct.
5. HRA exemption/donation: If a house rent allowance exemption is claimed for the monthly rent payment of more than Rs 50,000 and the employee, being a tenant, has not deducted TDS, he may likely receive a notice for TDS non-compliance. “Further, the instances such as the wrong disclosure of the PAN of the landlord or mismatch between HRA exemption and income reporting by the landlord may also trigger notices to the salaried taxpayer. Similarly, a donation to a charity or political party without the correct disclosure of PAN and details of the institution is likely to trigger an enquiry,” says Sharma.
Recent CBDT internal guidelines on compulsory scrutiny selection for FY 2026-27 indicate that scrutiny may be initiated in specific categories of cases, but the guidelines clarify that returns filed in response to AIS, SFT or TDS-related communications are not automatically selected for compulsory scrutiny merely for that reason.
“The growing number of notices should, therefore, be viewed as a consequence of greater data transparency and technology-led tax administration rather than an indication of widespread non-compliance,” advises Sharma.
As tax administration becomes increasingly data-driven, taxpayers who proactively review and reconcile their financial information before filing are likely to experience smoother return processing and significantly reduce the likelihood of post-filing notices.
FAQ’s
1. I have reported my salary income correctly, then why am I getting an income tax notice?
If you see an income tax notice for salary income you have reported correctly, then you might be having mismatch in AIS, Form 26AS, TDS Credit , capital gain reporting or other incomes which you have not reported fully in your ITR.
2. If I get an income tax notice, will I have to pay a penalty?
An income tax notice doesn’t always lead to tax demand or penalty. Many notices are issued for clarification, verification or just for rectification purpose.
3. What can I do to minimise chances of getting a tax notice?
Always cross verify your income, TDS credits claimed, investments and all other incomes mentioned in AIS or Form 26AS with your supporting documents before filing return.
