Top 7 Reasons Why Your ITR Might Get Scrutinized
CA Gagan Gupta
Founder & Principal, Kishnani & Associates
CA Gagan Gupta is a seasoned Chartered Accountant with extensive expertise in taxation, audit, financial consulting, and business advisory. A fellow member of the ICAI since 2021, he has been practicing since 2016, providing strategic financial solutions to businesses, startups, and individuals. Under his leadership, Kishnani & Associates delivers precise and ethical financial services, ensuring seamless regulatory compliance and sustainable growth for clients.
Filing an Income Tax Return (ITR) is a mandatory obligation for many individuals and businesses in India. However, filing the return is not just about uploading numbers—it requires accuracy, consistency, and compliance with legal provisions. In recent years, the Income Tax Department has significantly enhanced its tracking and cross-verification systems, resulting in increased automated scrutiny of returns.
While scrutiny doesn’t always mean wrongdoing, it can lead to further questioning, document verification, or even penalties. To avoid such situations, it is important to understand the most common errors that typically invite scrutiny. This article highlights seven mistakes that could increase the chances of your return being picked up for a detailed review.
1. Mismatch Between ITR and Form 26AS/AIS/TIS
One of the leading causes of scrutiny is inconsistency between the income reported in the return and the figures reflected on Form 26AS or in the Annual Information Statement (AIS). These reports contain income and transaction details recorded by third parties—like employers, banks, and investment platforms—against your PAN.
For instance, if you declare ₹10 lakh as your annual income, but Form 26AS shows ₹12 lakh credited by employers or banks, the difference may prompt the department to issue a notice seeking clarification.
Solution: Always reconcile your return with Form 26AS and AIS before final submission.
2. Non-Disclosure of Foreign Assets or Income
Under Indian tax law, resident taxpayers must disclose all foreign income and assets, even if they are not taxable in India due to Double Tax Avoidance Agreements (DTAAs). This includes foreign bank accounts, overseas properties, and investments in global stocks.
Failure to report such details—even unintentionally—can result in action under the Black Money Act, which imposes heavy penalties and possible prosecution.
Solution: If you have foreign income or assets, ensure they’re reported in the applicable schedule of your ITR.
3. Over-Claiming Deductions or Exemptions
While deductions under sections like 80C, 80D, 80G, or exemptions such as House Rent Allowance (HRA) reduce taxable income, overstatement or improper claims often become red flags. Some common errors include:
a. Claiming deductions without actual investment.
b. Submitting inflated rent receipts.
c. Double-claiming employer-paid insurance.
These anomalies may appear suspicious, especially when not supported by corresponding entries in bank statements or salary slips.
Solution: Only claim deductions that are backed by valid documentation and are eligible as per law.
4. Ignoring High-Value Transactions
The tax department monitors high-value transactions reported by banks, property registrars, mutual funds, and other financial institutions. These may include:
a. Deposits above ₹10 lakh in savings accounts
b. Property purchases over ₹30 lakh
c. Credit card payments exceeding the prescribed thresholds
d. Large mutual fund or bond investments
If such transactions are not reflected in your return or if the source of funds is unclear, the return may be subjected to scrutiny.
Solution: Maintain consistency between reported income and actual lifestyle or spending patterns.
5. Choosing the Wrong ITR Form
Filing your return using the incorrect ITR form—such as using ITR-1 despite having capital gains or foreign income—may result in the return being treated as defective. In some cases, misclassification of income sources (e.g., showing trading income as business income or vice versa) may also lead to scrutiny.
Solution: Understand the eligibility for each form or consult credible sources to ensure correct filing.
6. Unreported Capital Gains
Capital gains from equity shares, mutual funds, property, or cryptocurrency are often underreported. Even if your broker or registrar does not deduct TDS on gains, such transactions are visible to the tax department through AIS.
A common oversight is failing to report long-term capital gains on stocks or mutual funds exceeding the ₹1 lakh exemption limit, or forgetting to report gains from the sale of ancestral property.
Solution: Keep detailed records of all capital transactions and compute gains accurately, including indexing for long-term assets.
7. Continuous Loss Reporting or Incorrect Carry Forward
While genuine losses are allowed to be carried forward under the Income Tax Act, repeatedly showing losses or claiming set-offs without filing the return within the due date can raise doubts. For example, continuous business losses without revenue growth, or repeated set-off of speculative losses, might trigger closer inspection.
Additionally, losses must be carried forward under the correct head and cannot be mixed up—speculative losses cannot be set off against business income, and so on.
Solution: Ensure timely filing and correct classification of losses as per the income head.
Final Thoughts
The scrutiny of ITRs is increasingly driven by technology, algorithms, and third-party data matching. While many notices may simply ask for clarification, responding to them requires time and the proper documentation. Preventing scrutiny is always better than dealing with it.
Being cautious and well-informed while filing your tax return goes a long way in maintaining compliance. Individuals with complex financial transactions—such as multiple income sources, foreign assets, capital gains, or frequent trading—should be particularly mindful of these potential red flags.
Filing an income tax return is not merely a formality; it reflects an individual’s financial profile. Taking care to avoid these mistakes ensures peace of mind, minimizes interactions with tax authorities, and helps maintain a clean financial record.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
Disclaimer
The content published on this blog is for informational purposes only. The opinions expressed here are solely those of the respective authors and do not necessarily reflect the views of Fintrac Advisors. No warranties are made regarding this information’s completeness, reliability, or accuracy. Any action taken based on the information presented in this blog is strictly at the reader’s own risk, and we will not be liable for any losses or damages resulting from its use. It is recommended that professional expertise be sought for such matters. External links on this blog may direct users to third-party sites beyond our control. We do not take responsibility for their nature, content, or availability.
