income tax notice to salaried individual
income tax notice to salaried Employees

A notice from the income tax department is an official alert that indicates the need for further clarification, corrections, or additional details related to your tax filings. In the current fiscal year, the importance of income tax notices for people with salaried income has increased. Tax authorities are now using advanced technologies, such as AI-powered systems, to scrutinize discrepancies such as fraudulent claims, undisclosed earnings, failure to file tax returns, inconsistencies in filed returns, and notifications related to high-value transactions. Therefore, if your tax filings have unreported income or unjustified deductions, the chance of receiving a notice has significantly increased. This guide provides everything you need to understand about income tax notices for salaried employees, including how to address them properly. The team of tax professionals at IndiaFilings is ready to guide you through filing and addressing any income tax notices you may receive.

What is an Income Tax Notice?

An income tax notice is an official message from tax officials to taxpayers, whether individuals or organisations, regarding their tax affairs. It is a tool for the tax department to communicate with taxpayers about matters such as tax dues, discrepancies in tax returns, or the need for an audit. The triggers for an income tax notice can range from unreported earnings and incorrect claims for refunds or deductions to mismatches in the provided information. The purpose of the notice is to alert the taxpayer about a particular issue or discrepancy that the tax authorities have identified. The notice may ask for additional documentation, correction of errors, or clarification of inconsistencies in the tax filings. It is important to address the notice promptly and accurately within the given deadline to maintain tax compliance and avoid potential fines.

Reasons for Income Tax Notices to Salaried Employees

Salaried individuals can receive income tax notices for various reasons, including but not limited to:

  • Income Discrepancies: If the income you have reported does not match up with what your employer, banks, or other sources have reported to the tax authorities, you may receive a notice requesting clarification.
  • Unreported Income: Neglecting to declare all income streams, such as rent, interest, or income from side gigs, including online platforms or additional part-time work, could result in a notice for income underreporting.
  •  Incorrect Deductions: Claiming deductions or exemptions without sufficient proof, or for which you are not eligible, might lead to a notice. This includes instances where the tax department identifies fraudulent deduction claims, such as submitting fake rent receipts to claim Housing Rent Allowance (HRA) exemptions.
  • High-Value Transactions: Engaging in significant financial transactions that stand out, such as substantial cash deposits, property dealings, or large investments, might prompt the tax authorities to issue a notice to verify these transactions.
  • Form 26AS Mismatch: If the income declared in your tax return does not align with the transactions listed in your Form 26AS, a comprehensive tax statement linked to your PAN, you could receive a notice.
  • Non-Filing or Late Filing of Returns: Not filing your tax return or submitting it past the deadline can lead to a notice asking why there was a delay.
  • Random Scrutiny: The tax department occasionally selects tax returns for random detailed examination to ensure they comply with tax laws and are accurate.
  • Foreign Income and Assets: If you have foreign income or assets and fail to disclose them as mandated by tax laws, you might be flagged for a notice.
  • Undisclosed Gifts or loans: Failing to report certain gifts or loans, especially those above a specific value, could attract scrutiny from the tax authorities.
  • Ignoring Previous Notices: Not responding to or inadequately addressing previous notices can escalate to more serious follow-up notices from the tax department.

If you have received a tax notice for any of these reasons, our tax experts are ready to help you respond accurately and within the required timeframe.Get Started!

Types of Income Tax Notices to Salaried Employees

Exploring the type of Income Tax Notices for Salaried Employees:

1. Section 143 (1) notice: Intimation notice

This notice is sent to an individual after the income tax department processes the ITR. The notice informs an individual whether his ITR calculations match with that of the income tax department. If there is a mismatch, then this intimation notice will inform whether there is a refund due or additional taxes are payable. An individual will get this notice, even if there is no mismatch or error in the ITR.

When can this notice be issued: “The intimation notice under section 143 (1) will be issued within nine months from the end of the financial year in which the ITR is furnished under Section 139 or in response to notice under section 142 (1). For ITR filed for FY 2022-23 (AY 2023-24), the intimation notice will be issued on or before December 31, 2024,” says Manmeet Kaur, Principal Associate, Karanjawala & Co, a Delhi based law firm.

Time limit to respond: If the intimation notice is issued due to a refund or if there is no mismatch between you and the tax department’s calculation, then you do not need to respond. However, if there is a tax demand, the taxpayer is expected to respond within 30 days from the date of issue of intimation notice either agreeing/disagreeing with the adjustment proposed.

2. Section 139(9): Defective ITR

According to Archit Gupta, founder, Clear, a tax filing platform, “Notice under section 139(9) of the Income Tax Act, 1961 is sent when there are some errors in the filed ITR. The tax department will send this tax notice requiring the assessee to correct the errors by filing a revised ITR.”

Some of the common reasons to receive this income tax notice

  • Tax exemption on house rent allowance claimed in the ITR but breakup of salary not showing HRA component.
  • TDS on income claimed while filing ITR but the same income is not reported. For example, salary from a previous employer is not reported in the ITR form but TDS has been claimed. Similarly, FD interest not mentioned in the ITR form but TDS has been claimed.

When can this notice be issued: According to Sanjoli Maheshwari, Executive Director, Nangia Andersen India, a business consultancy company, “Income tax notice under section 139(9) may be issued within nine months from the end of the financial year in which the return is filed.” Hence, for ITR filed for FY 2022-23 (AY 2023-24) (due date July 31, 2023), the tax department can issue a notice on or before December 31, 2024.

Time limit to respond: The tax notice will mention the due date by which an individual will have to respond. “Usually, the tax department allows individuals a 15 days’ period to respond.

3. Section 142: Inquiry before scrutiny assessment

The reason this notice is issued is that the income tax department wants to seek clarification why ITR was not filed, despite the individual earning an income above the basic exemption and evidence of various sources of income being present in AIS, etc.

“Notice under section 142(1) may be issued to the assessee taxpayer requiring him to furnish tax return if no such return has been furnished under section 139(1)

Further, such notice may also be issued requiring the assessee to produce accounts or documents required to make an assessment and furnish in writing any information on matters. For instance, a statement of all the assets and liabilities of the assessee.

An individual will be required to answer all the queries raised by the tax department through notice issued under section 142(1) and provide the requisite details and documents asked in support of the claim made in the ITR filed within the time prescribed in the notice.

When can this notice be issued: “There is no maximum time limit prescribed for issuing a notice under section 142 (1)

Time limit to respond: The time limit for responding to this notice will be mentioned in the notice itself. According to tax experts, the income tax department usually allows 15 days to respond.

4. Section 143 (2): Scrutiny assessment

This income tax notice is sent to the salaried individual to do a detailed assessment of the ITR and confirm the correctness and genuineness of incomes and deductions claimed in the ITR.

Notice under section 143(2) of the Income Tax Act, 1961 would be issued to the individual for the purpose of making scrutiny assessment under section 143(3).

Usually, a questionnaire is attached in this type of notice along with the list of documents which is required to be submitted by an individual. Responding to the tax notice is an online process. This scrutiny process will go on till the time the income tax department is satisfied that all its questions have been answered by the individual truthfully and in a satisfactory manner. There is no clear saying when the income tax department will be satisfied.

When can this notice be issued: According to Maheshwari, in case the ITR has been selected for scrutiny, then notice under section 143(2) can be issued “within three months from the end of the financial year in which the return is filed.” For FY 2022-23 (AY 2023-24), the tax department can send this notice on or before June 30, 2024.

Time limit to respond: The time limit to respond to such notice would be mentioned in the notice itself. All you need to do is submit your “response to the assessing officer by way of uploading the necessary documents. Generally, the time limit is 15 days to respond to scrutiny notice.

5. Section 148: Income escaping assessment

This tax notice is issued when the assessing officer (AO) has any information which suggests that a certain income of an individual has escaped assessment in the previous year. This means that an individual has not reported certain income in the ITR filed in the previous year.

Before issuing notice under section 148, the income-tax department will issue a show cause notice to the individual under section 148A(b). This show cause notice is issued to provide reasons why a particular ITR was selected for reassessment.

An opportunity will be given to individuals as to why reassessment proceedings should not be initiated. Based on the information provided by the individual, the assessing officer can either continue with the reassessment proceedings or dispose of the case.

When can this notice be issued: The time period for issuing a notice under this section depends on the amount of income that has escaped from assessment. The tax notice will be issued within 3 years from the end of the relevant assessment year if income is below Rs 50 lakh.

However, if the income exceeds Rs. 50 lakh the reassessment of the ITR filed can be done up to 10 years from the relevant assessment year with the prior approval of specified tax authority.

For example, if an income has escaped assessment in FY 2016-17 (AY 2017-18) then the income tax department can send notice till FY 2025-26 (AY 2026-27) if the income exceeds Rs. 50 lakhs or more. If escaped income is less than Rs. 50 lakhs, the tax notice can be issued up to FY 2019-20 (AY 2020-21).

Time limit to respond to such notice: The notice will mention the time limit for response. Usually, the tax department allows 30 days to respond to the tax notice.

6. Section 245: Adjustment of tax payable with refund amount

The income tax department has the power to set off income tax refunds due for a particular year against an outstanding demand of previous years. This adjustment only happens if there are outstanding income tax dues or tax refund due in the current year.

An intimation notice under section 245 may be issued to the taxpayer in case the income tax department intends to adjust current year’s income tax refund with any of the pending tax demand of the taxpayer from the previous years.

If you have any objection to this notice, or you have already paid the outstanding demand, “then the taxpayer should submit a response providing evidence of payment and requesting the department not to make the proposed adjustment.

An assessee will have outstanding tax dues when he/she has missed the timeline to pay income tax dues. Here an assessee is considered as an assessee in default. As per section 222, tax recovery officers can issue notices to such assessee in default for recovery of unpaid demands. Such recoveries can be made from properties owned by such assessee in default, which may include but not limited to land, building, bank accounts, and income tax refunds too. Section 245 empowers the income tax department to make such recoveries from refund payable to an assessee

When can this notice be issued: “There is no time limit for issuing this tax notice under section 245. This means that if as per the income tax department, a taxpayer has an outstanding tax demand for FY 1999- 2000 (AY 2000-01), and for FY 2022- 23 (AY 2023-24) has a tax refund due, then tax officer can set off the refund with the outstanding demand.

Time limit to respond: The time limit for responding to this notice will be mentioned in the notice. “Generally, 30 days from the date of issuing the notice is allowed to individuals to respond.

The Income Tax Act has specified time limits to issue a specific tax notice. Beyond the specified time limit specific tax notices should not be issued. However, in practical situations individuals get tax notices beyond the expiry of timelines. An individual must verify if the tax notice issuing time limit exceeded or not. It may happen that tax notice was issued before the expiry of the time limit. But it is doubtful if the tax notice was received by the individual on time.

Addressing Income Tax Notices for Salaried Employees

Handling income tax notices with precision involves a structured approach and compliance with the directives provided by the tax authorities. Here’s a guideline on how to tackle income tax notices effectively:

  • Comprehensive Review of the Notice: Begin by thoroughly examining the notice to grasp the reasons behind its issuance, identify the particular concerns highlighted, and understand the actions you are required to take.
  • Compilation of Necessary Documentation: Assemble all pertinent documents such as your income tax returns, Form 16, Form 26AS, proofs of investments, bank statements, and any other documents relevant to the notice’s queries.
  • Adherence to Deadlines: Pay close attention to the response deadline specified in the notice. Replying within this timeline is crucial to prevent further complications or penalties.
  • Submission of Supporting Evidence: Along with your response, include all necessary supporting documents that corroborate your provided information. Ensure these documents are well-organized to aid the reviewing officer’s verification process.
  • Consultation with Tax Professionals: If the notice appears intricate or you’re uncertain about how to proceed, it’s advisable to seek advice from tax professionals.  IndiaFilings Tax experts can offer valuable insights and guidance.
  • Monitoring of Response Submission: If you’re responding online, monitor the submission process closely to ensure you receive an acknowledgement or any form of response from the tax department.
  • Vigilant Follow-up: Stay proactive in checking your email, tax portal, and other communication mediums for any follow-up correspondence or additional notices from the tax department, ensuring you address them promptly.

By following these steps, you can respond to income tax notices with clarity and confidence, ensuring compliance and minimizing potential disputes with the tax authorities.

Enhanced Scrutiny on False Deduction Claims by Salaried Taxpayers

In recent developments, the Income Tax Department has intensified its focus on salaried employees who claim unwarranted deductions and exemptions. A significant surge in the issuance of notices, particularly concerning House Rent Allowance (HRA) and other rent-related deductions, has been observed, with many instances involving the submission of fabricated rent receipts. Under the conventional tax framework, taxpayers are entitled to various deductions and exemptions, such as those for HRA, Leave Travel Allowance (LTA), and interest deductions on housing loans. Despite these legitimate avenues for tax relief, there is a noticeable trend of individuals attempting to exploit these provisions by providing counterfeit documentation to support their claims. The government has employed sophisticated Artificial Intelligence (AI) technologies to counteract these deceptive practices. These AI systems are adept at identifying and flagging falsified documents and pinpointing taxpayers who submit fraudulent claims for deductions. Taxpayers planning to file returns with deductions such as HRA or LTA are advised to ensure the authenticity of their supporting documents. Authentic rent receipts are indispensable for substantiating HRA claims to circumvent the risk of receiving a tax notice. Similarly, legitimate travel documents must back LTA claims. The AI technology employed by the tax authorities is not limited to scrutinizing HRA and LTA claims but extends to a broader range of documentation. As a result, the Income Tax Department has adopted a more rigorous approach, issuing notices to individuals suspected of utilizing fraudulent documents to claim any deductions or exemptions, including but not limited to HRA, LTA, and charitable donations.

How to Avoid Penalties and IT Notices for Salaried Taxpayers?

To steer clear of potential penalties and unwelcome notices from the tax authorities, salaried employees can adopt the following measures:

In light of the Income Tax Department’s increasing vigilance, particularly towards salaried individuals, it’s crucial to regularly check for any communication from tax authorities and respond within the given deadlines to avert substantial fines. For seamless ITR filing and to navigate any tax-related queries or notices, consider seeking assistance from IndiaFilings tax experts.