Understanding the Income Tax Department’s Monitoring of Financial Activities
With the income tax return (ITR) filing season underway and employers starting to release Form 16, taxpayers must be preparing to file returns for FY 2024-25. The deadline, extended to September 15, 2025, gives individuals more time to review and match their income data. Experts advise taxpayers to stay alert to how the Income Tax Department monitors financial activities—particularly high-value transactions—to ensure their ITR aligns with official records.
How the Tax Department Tracks Financial Activity
The Income Tax Department relies on information reported by banks and financial institutions to track significant financial activity. Vivek Jalan, Partner at Tax Connect Advisory Services LLP, explains that several types of transactions are automatically reported under existing rules. These include:
- Cash deposits in savings accounts exceeding ₹10 lakh in a financial year
- Cash deposits or withdrawals from current accounts over ₹50 lakh
- Credit card bill payments (excluding cash) above ₹10 lakh
- Cash deposits into fixed or recurring deposit accounts above ₹10 lakh
- Cash receipts above ₹2 lakh from the sale of goods or services, if the recipient is liable to a tax audit
Once reported, these transactions are matched with the taxpayer’s declared income. Any inconsistencies can lead to further scrutiny.
Mismatches Can Trigger Notices
If the Income Tax Department detects a gap between reported income and financial behaviour, it may issue a notice. “For instance, if a person withdraws over ₹1 crore from a current account but reports losses or unusually low profits, the case may be selected for scrutiny using the department’s Computer Assisted Scrutiny Selection (CASS) system,” said Jalan.
The Role of AIS and Form 26AS
The Annual Information Statement (AIS) and Form 26AS are key tools used by the department. These documents reflect financial transactions such as property purchases, stock market trades, interest income, and TDS deducted by various entities. The department expects taxpayers to ensure that the information in their ITR matches these records.
Any mismatch could result in:
What Taxpayers Should Do
To reduce the risk of scrutiny, taxpayers should:
- Compare AIS and Form 26AS with their ITR draft before submission
- Declare all income sources, not just those with TDS or those appearing in Form 26AS
- Maintain documentation such as rent receipts, investment proofs, loan agreements, and bank statements in case verification is required
Early filing allows time to correct any discrepancies without rushing as the deadline approaches.