Income Tax Notices Decoded: Things Every NRI Must Know About ITR Filing

The first step to ensure compliance in ITR filing for FY 2025-26 is to file it accurately. You must not make any errors, as it will lead to scrutiny from the Income Tax Department and also receiving a tax notice. The error can be very simple, like choosing the wrong ITR form, failing to report capital gains, or even not adding interest earned from all your banks.

However, there is one thing that you must keep in mind. It is that the increase in the number of tax notices is happening due to inconsistencies in the data and not the intent.

Even a minor gap in reporting can attract system-based queries because the Income Tax Department has now started using advanced technologies and third-party reporting, says Amarpal Chadha, Tax Partner at EY India.

The tax notice not only requires you to explain the discrepancy but also freezes your refund claim until the department completes its verification. So, what common errors could lead to inquiries or notices from the tax department? What trends have emerged over the last few years, and what should taxpayers focus on when filing their income tax returns? Let's decode income tax notices.

What are the Common Mistakes that Triggers Tax Notices?

Tanu Gupta, Partner at Mainstay Tax Advisors LLP, highlights that tax authorities are now receive data from various sources. It includes banks, financial institutions, employers, and even foreign tax authorities through information-sharing agreements. So, the tax experts outline several common mistakes that can lead to receive a notice when filing your income tax returns:

Failing to Report Income Streams

Taxpayers often overlook certain income sources, mainly those that are not fully captured in Form 16. This includes interest income, dividends, and small investment gains.

Amarpal Chadha from EY India points out that there is a misconception that tax deduction at source removes the need for reporting. However, it is wrong; you must still report such income in the return to avoid discrepancies.

Incorrect or Excessive Deduction Claims

The tax department is paying increased attention to overstated or incorrect deductions, says Amarpal Chadha. It includes those found in Section 80C, 80D, and Chapter VI-A deductions, claims of exemptions like HRA without proper evidence, and overstating deductions to reduce taxable income. All these errors can trigger scrutiny from the Income Tax Department.

Discrepancy Between High-Value Transactions and Reported Income

Any high-value transactions reported under the statement of financial transactions (SFT) are monitored closely. This includes property purchases, significant investments, or expenses. Any mismatches between these transactions and declared income can raise questions from the tax authorities.

Mismatch Between ITR and AIS/Form 26AS

A frequent case of tax notices arises from inconsistencies between reported income on tax returns and the data available with the authorities via the annual information statement (AIS) and Form 26AS. The AIS merges financial data from multiple sources, meaning any mismatch can trigger notices or automated adjustments.

Gaps in Reporting Capital Gains

Any errors or omissions in the report on capital gains can attract scrutiny due to increased transparency in capital market transactions. This is because the tax administration now has visibility into most securities transactions through AIS feeds.

Incomplete Disclosure of Foreign Income and Assets

Failing to report foreign income, assets, or tax credit claims accurately can lead to tax notices.

What Trends From the Last Few Years Indicates?

Inaccuracies in filing and unintentional mistakes can also trigger a tax notice due to the increased use and reliance on data-driven technology. Taxpayers must understand that the tax department has increased its scrutiny, and these tax notices are not random. In fact, the data is extensively used to identify any discrepancies.

This is one reason even salaried taxpayers are facing this scrutiny, and the error could be something as basic as failing to report a source of income.

Tanu Gupta from Mainstay Tax Advisors explains, "From our observation, the tax department is paying significant attention to areas with information mismatches and higher tax risk. Nowadays, the selection for scrutiny is mainly guided by data analytics and risk assessment systems that compare taxpayer-reported information against data obtained from third parties.”

EY's tax expert adds, "In recent years, tax scrutiny has transitioned into a risk-based, data-driven framework that is supported by advanced analytics and third-party reporting. Additionally, certain tax returns are automatically selected for comprehensive scrutiny according to predetermined triggers set by tax authorities. This can include searches, surveys, or specific information suggesting tax evasion.

A major portion of scrutiny arises from data inconsistencies, incomplete reporting, and discrepancies between the financial information held by the authorities and what is disclosed in the returns.

Moreover, Amarpal highlights additional key areas that have become focal points for tax department scrutiny:

High Refund and Loss Claims

Returns reflecting unusually high refund claims or substantial carry-forward losses are more likely to come under intensive scrutiny. In these situations, tax authorities conduct thorough examinations to verify the legitimacy and accuracy of any claimed tax credits and exemptions, including reviewing the submitted supporting documentation.

Cross-Border Transactions and Foreign Assets

The Central Board of Direct Taxes (CBDT) receives details regarding overseas financial assets owned by Indian tax residents from partner jurisdictions under the Common Reporting Standard (CRS), as well as data from the United States under the Foreign Account Tax Compliance Act (FATCA) through global information-sharing frameworks. This improved data exchange allows the Income Tax Department to closely monitor the taxpayers' foreign financial interests and disclosures.

This includes monitoring foreign bank accounts, overseas investments, and income generated outside India with a focus on ensuring that disclosures made in tax returns are both complete and accurate. Failing to disclose or incorrectly reporting such information can lead to scrutiny proceedings.

What are Some Tips to Avoid Inaccuracies?

To avoid inaccuracies, tax experts recommend verifying all sources of income and ensuring there are no mismatches or discrepancies in key documents. It includes AIS, Form 26AS, and Form 16.

Parizad Sirwalla, Partner and Head of Global Mobility Services, Tax, KPMG in India, states one key thing to keep in mind. It is reconciling your tax return with Form 26AS, the AIS, and the Taxpayer Information Summary (TIS) before submission. She advises in an interview that any discrepancy must be identified and resolved properly before filing.

Taxpayers must ensure that all income sources are reported accurately (if applicable). It includes interest, capital gains, dividends, and salary income from previous or multiple employers. Also, keep supporting documents for any deductions, exemptions, and tax credits claimed.

She states that a complete reconciliation of documents must also be completed. For example, overseas bank statements, passport, and the income/assets declared in the return.

In addition, a few things like selecting the correct income tax return (ITR) form, accurately declaring bank accounts, foreign assets, and other reportable information, along with timely filing of the return, can notably reduce the chance of receiving an inquiry or notice from the tax department.

It's also important to compare the current year's return with the previous year's. This will help ensure consistency in positions taken and the facts disclosed. Above all, instead of viewing the tax return as a tax payment exercise, view it as a comprehensive disclosure document. She concludes by saying that ensuring completeness, accuracy, and transparency during filing is the best defense against future notices. Here are some tips to avoid inaccuracies:

Complete Reporting of Income

Report all income streams fully, regardless of tax deduction at source. This is mainly important for various types of income like interest income, dividends, and investment-related gains.

Review and Validate AIS Data

Review the AIS carefully for any inaccuracies, mainly to identify duplicate or misreported entries. Taxpayers must use the feedback mechanism provided through the portal to address any discrepancy before filing.

Align Financial Transactions with Reported Income

Keep in mind that high-value transactions and financial outflows are properly explained and supported by documents. Any mismatch between reported income and financial activities may trigger scrutiny from the system.

Avoid Unsupported Deductions

According to Tanu Gupta, taxpayers should avoid making unsupported claims for deductions or exemptions. It's equally crucial to maintain appropriate supporting documentation, such as bank statements, investment records, and documents that validate deductions and exemptions. Taxpayers must also verify if any income needs to be included under their name according to tax law.

Post-Filing Checks

It's advised to revisit the AIS and Form 26AS before the due date, even if the return is submitted early. This is to confirm that no subsequent updates made by banks, employers, or other reporting entities have created any mismatch. She advises that a bit of extra diligence during filing can greatly reduce the likelihood of receiving a tax notice later.

Amarpal Chadha suggests that if discrepancies are identified after filing, taxpayers should consider submitting a revised return within the allowed timelines to regularize the matter and reduce the chance of further complications.

Taxpayers must be attentive to 'nudge' communications from the authorities as the Income Tax Department is adopting proactive compliance steps increasingly. Such notices often highlights potential inconsistencies such as incomplete foreign asset disclosures, mismatched deductions/exemptions between Form 16 and tax returns, or situations requiring refund revalidation. Carefully reviewing such nudges and taking corrective steps can help reduce the risk of formal notice proceedings, he concludes.

The Bottom Line

Tax notices are not random anymore; instead, they are data-driven and system-generated. The Income Tax Department now cross-checks your ITR against various sources, leaving little room for errors or omissions. The best defense to tax notices is simple: report all your income accurately, reconcile all documents prior to filing, avoid unsupported deductions, and stay alert to nudge communications from the department.

Moreover, if you are in doubt, consult an expert at Savetaxs. We have a team of experts who can ensure your ITR is filed accurately and completely. Our team can help you stay away from receiving a tax notice every filing season. Connect with us right away, as we are working 24/7 across all time zones.