Income Tax Notices Explained: Why You May Get One And How to Handle It Right

Filing your Income Tax Return (ITR) can feel like closing a chapter, but it’s often just the beginning. Even after submission and verification, a taxpayer may receive a notice from the Income Tax Department. While this might seem intimidating, experts say most notices are routine and manageable, provided you respond promptly and correctly.

Republic Business spoke with leading tax professionals who shared actionable insights to help you decode these notices and handle them without panic.

Why You May Get an Income Tax Notice
A notice can land in your inbox for a variety of reasons, most of them procedural or clerical.

CA Gaurav Makhijani, Associate Partner and Head of Tax (North India & Gujarat) at Rödl & Partner India, says, “Notices are the means by which tax authorities under the law can communicate with taxpayers. Most of the notices we see are requests for clarification regarding mismatches between the information available with the tax department such as Form 26AS, AIS, or TIS and the data reported in the ITR.”

According to Makhijani, these discrepancies usually call for clarification or reconciliation. “If there is an error made in the ITR, the taxpayer can acknowledge it as a human error identified by the tax department’s system. In most cases, no penal action is taken, and the ITR is processed with the applicable tax demand as per law.”

Another common notice is the defective return notice, issued when the system detects inconsistencies or missing information during online processing. “The tax department provides a 15-day window to rectify the defects highlighted,” he says.

Common Scenarios That Trigger Notices
Manmeet Kaur, Partner at Karanjawala & Co., outlines typical instances that can lead to tax notices:

1. Mismatch in Reported Income (AIS/Form 26AS):
“The AIS and Form 26AS reflect income reported by banks, employers and brokers. If the income reported by a taxpayer doesn’t match, especially for salary, interest from banks/FDs, capital gains (shares, mutual funds, property) and TDS credits, a notice is almost certain,” Kaur explains.

2. Non-filing of ITR:
If a taxpayer skips filing returns altogether, a notice under Section 142 of the Income Tax Act, 1961 may be issued.

3. Defective Return (Section 139(9)):
Kaur notes that using incorrect ITR forms or failing to include essential schedules (like Schedule CG for capital gains), mismatched bank details or PAN errors, may prompt a defective return notice.

4. Incorrect Deductions or Exemptions (Section 143):
“Claiming deductions or exemptions without supporting documentation or improperly claiming capital gains exemptions without reinvestment can attract scrutiny,” she adds.

The Latest Triggers: Capital Gains Mismatches
Vivek Jalan, Partner at Tax Connect Advisory Services LLP, highlights a new area of concern for FY25- 26: incorrect disclosure of capital gains due to mid-year rate changes.
“This year, individuals are most likely to receive notices for wrong disclosure or levy of Capital Gains,” Jalan warns.

New Tax Rates for FY 2024-25:
Long-Term Capital Gains (LTCG) on sale of equity shares/mutual funds are taxable at 10% until July 22, 2024, and 12.5% thereafter.
Short-Term Capital Gains (STCG) under Section 111A are taxed at 20% post July 22, up from the earlier 15%.

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“Taxpayers have to be very careful and match the disclosure in the return with the statement from their share/mutual fund intermediaries. In case of mismatch, there would be a notice,” says Jalan.

Similarly, those applying indexation benefits on property sales after July 22, 2024, are also likely to receive notices due to incorrect treatment of capital gains.

What to Do If You Get a Notice
Receiving a tax notice isn’t a reason to panic, but it does require timely action.

1. Never Ignore a Notice
“Every notice has a deadline; missing it can result in penalties,” says Makhijani. Whether it’s a simple clarification or a more complex scrutiny notice, time is of the essence.

2. Cross-Verify Information Using Form 26AS & AIS
Use the Form 26AS and the Annual Information Statement (AIS) to verify and reconcile your income, TDS, and transactions. These tools are key to resolving most mismatch issues.

3. Accuracy Is Crucial
Any mismatch or incorrect claim can lead to scrutiny or additional tax demand. Ensure that your return matches the data reported by financial institutions, employers, and brokers.

4. Check the Validity of the Notice
“It is important to understand the reason for receiving the notice and to first check its validity. For instance, if a notice is not issued within the prescribed timeline, it is not considered valid and should be responded to accordingly,” Makhijani advises.

5. Be Thorough and Professional in Your Response
Where the notice is valid, make sure to understand the exact requirement and provide all relevant, complete information. “Timely response to notices is important, and in many cases, a request for additional time can also be made,” he adds.

Scrutiny Notices: What to Expect
In more complex cases, notices may be issued for detailed scrutiny assessments.

“During scrutiny, the tax authorities wish to examine the tax computation and return filed along with supporting documents with an aim to ensure the correct taxes have been paid,” Makhijani explains.

These proceedings may require detailed communication and sometimes even video conferencing or personal meetings with tax officials. Responding with a clear understanding of your filings and supporting documentation is critical.

Best Practices to Avoid Notices
Kaur says the key to preventing tax notices is diligence and discipline:
Cross-check AIS, Form 26AS, and TIS before filing.
Use the correct ITR form and include all applicable schedules.
Avoid claiming deductions or exemptions without valid documentation.
File your returns well in advance of the due date to avoid last-minute errors.

Stay Calm and Respond Smartly
Whether it’s a routine clarification or a scrutiny notice, staying calm and responding professionally is key. As Jalan puts it, “Precaution is better than cure.” Taxpayers who take the time to match their disclosures, use the right ITR forms, and maintain documentation can navigate the ITR season with minimal stress.

And if the situation becomes complex, experts agree: seek professional help. A qualified Chartered Accountant or tax consultant can provide the clarity and representation needed to resolve issues efficiently.
 

Key Takeaways:
Notices are common and often routine.
Most relate to mismatches in income data or documentation errors.
Use Form 26AS and AIS to verify reported income.
Respond within deadlines and seek help when necessary.
Accuracy, timeliness, and understanding the law are your best defences.

As Gaurav Makhijani concludes, it is important to understand the notice requirement and take action based on the facts of the case, without panic and in a professional way to satisfy the requirement of tax authorities.