Filing ITR? Here's how you can avoid a scrutiny notice from tax authorities
Under existing law, a scrutiny notice is issued to audit the filed tax returns, ensuring that income has not been understated, the losses claimed are justified, and that taxes have been fully paid.
The scrutiny guidelines issued by tax authorities every year identify triggers such as search or survey cases, institutions receiving Section 80G donations, high-value transactions, tax deducted at source (TDS), investigations, Enforcement Wing intelligence, and recurring legal or factual issues.
The implementation of a robust risk management strategy, enhanced international information exchange, and the use of artificial intelligence and data-driven tools have empowered tax authorities to effectively identify potential red flags.
But in many cases scrutiny can be avoided simply by exercising caution and due diligence at the time of filing tax returns.
This quote from Microsoft Corp. founder Bill Gates—'When you want to do your homework, fill out your tax return, or view the choices for a trip, you need a full-size screen"—serves as a reminder of the importance of having a comprehensive view of your financial situation and being meticulous at the outset.
To avoid scrutiny from tax authorities, it is essential to adopt a proactive approach, with accuracy and documentation being paramount.
When filing your tax return, ensure that your income is reported correctly and that taxes are paid on time. Using the appropriate return form and making all necessary disclosures is crucial. Failing to file or filing late can easily trigger scrutiny.
Maintaining organized documentation is also important; keep essential records such as bank statements, invoices, and proof of deductions or exemptions claimed.
Taxpayers must also reconcile their income and tax credits with Form 26AS (tax credit statement), AIS (annual information statement), and TIS (tax-payer information summary), all accessible on the e-filing portal.
For salaried employees, it is vital that Form 16 (TDS certificate issued by the employer) matches with Form 26AS, ensuring that Part A and Part B are duly reconciled.
Also, given the recent changes in capital gains taxation, it must be accurately computed and reported.
Large cash deposits and unexplained bank credits, withdrawals, or expenditures could trigger scrutiny notices from tax authorities. However, with proper documentation, these can be explained. It is advisable to keep narrations and explanations for all such transactions, along with supporting documentation.
Tax authorities monitor high-value transactions through the Statement of Financial Transactions, which requires financial institutions and others to report transactions exceeding specified limits, such as cash deposits over ₹10 lakh in a financial year or property transactions exceeding ₹30 lakh. All high-value transactions should be reported in the return, with documentation maintained.
Claiming large deductions with proper documentation enhances credibility and reduces the likelihood of scrutiny notice. It is essential to ensure that claims regarding donations, house rent allowances, and other expenses are well-supported.
Additionally, taxpayers must report assets in the Assets-Liabilities Schedule. For 2024-25, individuals with taxable income exceeding ₹1 crore are required to report the cost of all assets and corresponding liabilities as of 31 March, 2025.
Residents and Ordinarily Residents in India must also report any foreign assets or financial interests abroad, along with the income arising from them, as non-reporting or incorrect reporting can have implications under the Black Money Act.
Finally, if claiming an exemption or credit under a Double Taxation Avoidance Agreement, ensure that the Tax Residency Certificate of the country of residence, Form 10F or Form 67, and proof of tax payments in the concerned country are available, as the Automatic Exchange of Information allows tax authorities to share specific data.
Frequent travellers should maintain a detailed travel calendar along with copies of their passports, particularly non-resident Indians.
By recognizing common triggers for scrutiny notices and adhering to best practices, individuals can not only reduce the likelihood of receiving such notices but also handle the situation efficiently should they receive them.
Sonu Iyer is partner and national leader, people advisory services–tax, EY India.
Preeti Goel, senior tax professional, EY India, also contributed to the article.
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