Union Finance Minister Nirmala Sitharaman on Monday revealed that the central government has issued 100,000 notices to taxpayers for various reasons, including non-filing of returns, under-reporting of income, and misrepresentation of income. These notices were specifically targeted at individuals whose income was found to be close to Rs 50 lakh. 

Receiving an income tax (I-T) notice can be an unsettling experience for taxpayers, often leaving them puzzled about the reasons for the inquiry. Nonetheless, it is crucial to respond promptly and accurately to these notices to prevent any legal repercussions. 

Tarun Kumar, head of Direct tax practice at Coherent Advisors, explains some key reasons why you might receive such a notice.

Discrepancies in Reported Income

The Annual Information Statement (AIS) provides a comprehensive summary of a taxpayerโ€™s financial transactions, such as interest on deposits, dividends, securities transactions, mutual fund dealings, foreign remittances, and interest on savings accounts. To ensure accuracy and avoid discrepancies, it is vital to review this information before filing your Income Tax Return (ITR). Even minor omissions or errors can trigger an inquiry or notice from the tax department, making it essential to double-check your information.

Non-filing of ITR

The tax department conducts e-campaigns to notify taxpayers who have not yet filed their income tax returns for a specific assessment year. If you have missed the deadline for filing your original or belated return of income, you can still file an updated return within 24 months from the end of the relevant assessment year. However, along with the updated return, an additional 25% or 50% tax must be paid, depending on the delay.

High-Value Transactions

If your reported income does not align with high-value transactions, such as property purchases or significant credit card bills, you may receive a notice from the I-T department. The department may request an explanation regarding the source of funds used for such financial activities.

Income variation or inconsistency in advance tax payments 

Inconsistencies in your advance tax payments or sudden fluctuations in your income can prompt the income tax department to issue a notice asking for an explanation for these deviations. Additionally, the department may ask you to deposit the appropriate advance tax if required.

Bogus Deductions and Claims

Claiming deductions like House Rent Allowance (HRA) or Section 80C without proper reflection in your Form 16 issued by your employer may attract the attention of the tax department. They may issue a notice to investigate the authenticity of such claims.

Mismatch in TDS Credit

It is essential to ensure no discrepancies or inconsistencies exist, especially concerning the TDS credit claimed, when filing your tax returns. A mismatch between the TDS credit claimed in your return and the amount reflected in your Form 26AS can result in a notice from the income tax department. This could lead to disallowance of the claimed credit and cause unnecessary delays in processing your tax return. To avoid such issues, cross-check the TDS credit claimed in your return with the amount shown in Form 26AS before filing your tax returns and take necessary steps to rectify any discrepancies.

If you receive an income tax notice, take the time to understand the reason behind it. Carefully review the notice and seek guidance if required to ensure an appropriate response. Stay proactive and diligent with your tax filings, ensuring accuracy and completeness.

Additionally, cross-checking the TDS credit claimed in your tax returns with the amount reflected in Form 26AS, and verifying AIS and Taxpayer Information Summary (TIS) before filing your income tax return can help detect any inconsistencies or errors. Moreover, ensure that any deductions claimed, such as HRA or Section 80C, are genuine and supported by relevant documentation to reduce the likelihood of receiving a notice from the income tax department seeking clarification.