Filing your income tax return in India isn’t just a routine task you do once a year. It’s a serious matter that demands care, honesty, and a good understanding of the rules. Get it wrong, and you could end up facing questions from the Income Tax Department, or worse, penalties that hit your pocket hard. Many people think tax filing is simple—plug in some numbers, claim deductions, and hit submit. But small slips can lead to big problems. The department uses advanced tools like Form 26AS, the Annual Information Statement (AIS), and the Taxpayer Information Summary (TIS) to check everything. If something doesn’t match, a notice might land in your inbox.
Think about it: every year, thousands of taxpayers receive notices because of avoidable errors. These aren’t just random checks; they’re triggered by red flags in your return. A notice means extra work—gathering documents, explaining yourself, and sometimes paying fines. In severe cases, it could lead to a full audit, where officials dig deep into your finances. No one wants that stress. The good news is, most issues come from common mistakes. By knowing them, you can steer clear and file with confidence.
Tax Audit – 10 Mistakes That Invite Income Tax Notices and Scrutiny
Underreporting or Omitting Income
This is probably the biggest blunder people make. You might think forgetting a small bank interest or a one-time freelance payment isn’t a big deal, but it is. The Income Tax Department has eyes everywhere through digital records. They cross-check your filed income against reports from banks, employers, and investment platforms. If there’s a gap, even a tiny one, it raises suspicions of hiding money.
For example, imagine you’re a salaried employee earning Rs 10 lakh a year. You have a fixed deposit that earns Rs 20,000 in interest, but you forget to include it because the bank didn’t send a reminder. Or perhaps you sold some shares and made a profit of Rs 50,000, but you skip reporting the capital gains, thinking it’s not worth mentioning. Another common case: rental income from a property you own but rent out informally. If the tenant pays in cash and you don’t declare it, the department might spot it through other channels, like utility bills or property records.
Why does this trigger a notice? It’s seen as an attempt to evade tax. Penalties can be up to 200% of the tax due, plus interest. To dodge this, always start by downloading your Form 26AS and AIS from the tax portal. These list all reported incomes. Match them with your bank statements and investment summaries. Use apps or spreadsheets to track everything. If you’re unsure, consult a tax advisor early. Double-check before filing—it’s better to over-report and explain than to underreport and regret.
Claiming Excessive or Unsupported Deductions
Deductions are great—they reduce your taxable income. But pushing them too far without proof is like waving a red flag. Sections like 80C for investments, 80D for health insurance, and 80G for donations have limits, and claims that seem too high compared to your salary often get flagged.
Take a young professional earning Rs 8 lakh. They claim Rs 1.5 lakh under 80C for life insurance and mutual funds—that’s fine. But if they inflate house rent allowance (HRA) by submitting fake rent receipts for Rs 2 lakh when they actually pay Rs 1 lakh, trouble brews. Or someone donates Rs 10,000 to charity but claims Rs 50,000 without receipts. Home loan interest is another hotspot: claiming Rs 3 lakh when your loan is only for Rs 20 lakh doesn’t add up.
The department asks for evidence during verification. No proof? Your claim gets disallowed, and you pay extra tax plus penalties. To stay safe, keep all documents organized. Scan receipts for investments, get proper donation certificates with PAN details, and ensure medical bills are from registered providers. If your deductions look high, add a note in your return explaining why. Tools like tax software can help calculate limits accurately. Remember, honesty saves money in the long run.
Poor Maintenance of Books and Records
If you’re running a business or freelance work, keeping records isn’t optional—it’s required if your turnover crosses certain limits, like Rs 2 crore for businesses. Many skip this, thinking handwritten notes or memory will suffice. But messy books lead to doubts about your honesty.
Picture a small shop owner with Rs 50 lakh turnover. They don’t keep invoices for purchases or sales ledgers. When audited, they can’t prove expenses like Rs 10 lakh on stock. Or a doctor who mixes personal and professional bank accounts, making it hard to separate fees from family spending. During scrutiny, officials question every entry, leading to added taxes on unproven claims.
Weak records suggest possible fraud, triggering deeper checks. Fix this by using simple accounting apps like Tally or QuickBooks. Scan all bills and vouchers monthly. Keep separate accounts for business. For professionals, log client payments with dates and amounts. Retain records for at least 6 years. This not only avoids notices but also helps in business planning. Start small—dedicate one day a month to organizing.
Mismatch in TDS or Tax Credits
Tax Deducted at Source (TDS) is money your employer or clients hold back and pay to the government. You claim credit for it in your return. But if your claim doesn’t match Form 26AS or AIS, it’s a direct invite for queries.
Suppose your salary TDS is Rs 1 lakh, but Form 26AS shows Rs 80,000 because your employer filed late. You claim the full amount, and your refund gets stuck. Or a freelancer gets TDS from multiple clients, but one client enters the wrong PAN, causing a mismatch. Refunds are withheld until fixed, and repeated issues lead to scrutiny.
This happens due to others’ errors or your oversight. Always check Form 26AS before filing. If there’s a discrepancy, contact the deductor (like your boss or client) to correct their TDS return. Use the tax portal’s grievance section if needed. Track TDS certificates (Form 16 or 16A) throughout the year. This simple step ensures smooth processing and quick refunds.
Engaging in Large or Frequent Cash Transactions
Cash is convenient, but in tax eyes, it’s suspicious. Deposits over Rs 10 lakh or payments above Rs 2 lakh in cash can trigger reports to the department. They want to know the source—is it undeclared income?
Consider buying a car for Rs 15 lakh in cash. The dealer reports it, and if you can’t explain where the money came from, expect a notice. Or a business owner depositing Rs 5 lakh cash weekly without records— it looks like unaccounted sales. Property deals are common too: paying Rs 20 lakh cash for land without banking proof.
With digital India, cash raises eyebrows. Always use cheques, UPI, or bank transfers for big amounts. For unavoidable cash, keep source proofs like withdrawal slips or sale deeds. If depositing large cash, add an explanation in your return. Limit cash to small daily needs. This reduces risk and makes tracking easier.
Showing Unexplained Swings in Income or Losses
Your tax return tells a story. Sudden jumps or drops without reason make the department curious. A big loss one year followed by high profits might seem like manipulation.
For instance, a trader shows Rs 10 lakh profit in year 1, then Rs 2 lakh loss in year 2 due to market crash—but no proof. Or a salaried person claims huge deductions suddenly for medical emergencies without bills. Consecutive losses in business could be genuine, like during a pandemic, but without documents, it’s flagged.
They suspect tax dodging. Back up changes with evidence: market reports for losses, bills for expenses. Compare with past years’ returns. Add notes explaining trends, like “Loss due to inventory write-off from fire—insurance claim attached.” Maintain consistent filing habits. This builds trust over time.
Misusing the Presumptive Taxation Scheme
Sections 44AD and 44ADA let small businesses declare income at a fixed rate (like 8% of turnover) without detailed books. It’s easy, but abusing it—understating turnover or claiming extra perks—backfires.
A shop with Rs 1 crore turnover declares only Rs 50 lakh to stay under limits, or claims expenses on top of presumptive income. Or switching schemes yearly to minimize tax without qualifying.
This leads to audits and fines up to Rs 1.5 lakh. Check eligibility: turnover under Rs 2 crore for 44AD. Stick to rules—no extra claims. If opting out, maintain full books. Consult a CA to decide the best scheme. It’s meant to simplify, not cheat.
Non-Transparent Related-Party Transactions
Dealing with family or linked firms? If not at market rates, it looks like shifting income to save tax.
Example: Lending Rs 5 lakh interest-free to a relative’s business, or selling goods to your sister’s company at half price. Without agreements, it’s seen as evasion.
Document everything: loan agreements with interest rates, valuation for assets. Justify business need. Use arm’s length pricing—compare with market. Keep records separate. This protects you during checks.
Missing Tax Audit Requirements or Filing Late
If your business turnover exceeds Rs 1 crore (or Rs 10 crore with mostly digital payments), you need a tax audit under Section 44AB. Skipping it or filing ITR without the report invites penalties up to Rs 1.5 lakh.
A consultant earns Rs 60 lakh but forgets the audit. Or files late, losing loss carry-forward. Late filing also means interest on due tax.
Track deadlines: September 30 for audits, October 31 for ITR. Hire a CA early. Use reminders. Coordinate uploads. Timely filing avoids attention.
Failing to Disclose Foreign Assets or Income
With global ties, many have overseas bank accounts, stocks, or jobs. Not reporting them in Schedule FA or foreign income is a major oversight.
Say you have a US bank account with Rs 2 lakh interest, or own shares in a foreign company. Forgetting to declare invites black money suspicions.
Penalties are steep—up to Rs 10 lakh per year. Use the tax portal’s foreign asset section. Report even if no income. Gather statements yearly. If unsure, seek expert help.
In conclusion, these mistakes are avoidable with planning and care. Start early, use technology, and double-check. If in doubt, get professional advice. Clean filing means peace of mind—no notices, quick refunds. Stay compliant, and taxes become less daunting.
