Income Tax Notice Explained: Types, Reasons & How to Respond

An income tax notice is a written communication that the Income Tax Department sends to taxpayers to inform them about missing information, discrepancies, unreported income, or overdue filing. Whether you are a resident or an NRI, getting a tax notice does not sound good, but it does not always indicate issues. In most scenarios, it is just a request for clarification or additional details on your tax returns. The way to avoid it is to be aware of the different types of income tax notices and stay in compliance with them. 

Thinking about the different types of income tax notices and the reasons for receiving them? Then you are on the right page. This blog provides you with complete information about the income tax notice, from its meaning to its types, and how to respond to it. So read on and gather all the information.

What is an Income Tax Notice?

An income tax notice is an official communication received by the taxpayer from the Income Tax Department regarding non-compliance, discrepancies, or additional information for their filed ITR. Each tax notice is issued by the tax department under a specific section of the Income Tax Act. Additionally, to avoid penalties or legal consequences, taxpayers need to take timely action.

Further, you may receive a tax notice for the following reasons:

• Mismatch in reported income
• Non-filing of returns
• Demand for outstanding tax
• Verification of claims

This was all about an income tax notice. Moving ahead, let's know in detail the common reasons for receiving it.

What Are the Reasons for Receiving Income Tax Notices?

The most common reasons for receiving an income tax notice include:

• Inconsistency in the TDS reported amount
• Inaccuracy in your filed tax return
• Not filing your tax returns
• Failure to submit all your required documents
• High-value transactions occurred during the financial year, but were not disclosed correctly in your income tax return
• When you invest in the name of your spouse but fail to report it on your tax returns
• Long-term capital gains from stock investments are not disclosed properly
• The assessing officer randomly checks your tax return
• You used the wrong income tax return form to file your tax return
• You fail to declare any income on your tax return
• Outstanding tax demand from a prior year
• Foreign income or asset disclosure issues for NRIs and returning Indians
• Mismatch between the declared income in your ITR and the data in your Annual Information Statement (AIS) or Form 26AS

These are the reasons for receiving an income tax notice. Moving further, now let's know the types of tax notices issued under different sections of the Income Tax Act.

Different Types of Income Tax Notices

For issuing different types of income tax notices, the Income Tax Act 1961 includes several provisions. Considering this, to provide you with an idea, some key notices are mentioned below:

Notice Under Section 143(1): Intimation Notice

It is the most common income tax notice issued by the IT department to salaried taxpayers. It is generated automatically after your ITR is processed by the Centralised Processing Centre (CPC). The notice tells you where there is a tax refund, demand, or no change after processing. The Intimation Notice Under Section 143(1) is issued within 9 months from the end of the financial year in which you filed your return.

• What to do if you receive this notice:
• There is no tax demand or refund: You do not need to take any action.
• It shows a tax refund: Check your bank account details on the income tax portal.
• It shows a tax demand: Check whether it is because of a TDS mismatch or an arithmetic error. If the tax demand is incorrect, under section 154, file a rectification or pay if it is valid.

Further, NRIs receive these notices when claiming DTAA, and their TDS credits do not reconcile correctly. So, before responding, cross-verify Form 26AS and AIS.

Notice Under Section 142(1): Inquiry Before Assessment

You receive this income tax notice when either you have not filed your tax return or when the Assessing Officer (AO) needs more details and clarification from you. Respond to the notice within the mentioned timeline, generally 15 to 30 days.

In case you do not file your tax return, do so immediately. Additionally, if the notice asks for additional information, gather all the supported documents like bank statements, receipts, invoices, etc, and submit them on the income tax e-filing portal. Do not ignore this notice, as non-compliance with it can lead to a best judgment assessment under section 144 of the Income Tax Act.

Notice Under Section 143(2): Scrutiny Notice

This tax notice means your ITR return has been selected for detailed examination. The income tax department wants to check whether your stated income, tax deductions, and taxes are accurate or not. The Scrutiny Notice Under Section 143(2) must be issued within the time limit prescribed under the Income Tax Act for the relevant assessment year.

• What to do if you receive this notice:
• First, carefully read the notice. It will specify what aspects of your income tax return are being examined.
• With a cover letter and supporting documents, respond to the notice through the e-proceedings section.
• Not replying or responding late can result in serious consequences.

Additionally, NRIs with large capital gains, property transactions, or foreign remittances are more likely to get scrutiny notices. So, it is advisable to ensure that all your sources of income and asset disclosures are properly documented before responding.

Notice Under Section 148: Reassessment Notice

If you receive this income tax notice, it means the tax department believes the income that should be taxed was not stated in your original assessment. Considering this, a notice under Section 148 is issued for reopening an assessment.

The time limit to issue a notice to a taxpayer under section 148 is as follows:

• Normal Time Limit: Three years from the end of the relevant assessment year if the escaped income is up to INR 50,00,000.
• Specified Time Limit: Ten years from the end of the relevant assessment year if the escaped income is more than INR 50,00,000.

Further, no notice is issued for the relevant assessment year. Additionally, before issuing a tax notice under section 148, the tax departments now need to first issue a section 148A show cause notice, allowing taxpayers to explain themselves. In case your explanation is unsatisfactory, you receive a tax notice.

Do not take the reassessment notice lightly and respond within the given timeline. You can also request the reasons for reopening. Apart from this, if you believe the notice is factually incorrect or time-barred, you can challenge it, but do this with legal guidance.

Moreover, NRIs with undisclosed foreign assets or income are at higher risk of getting this notice. Through data sharing of FATCA and CRS, more than you realise, the income tax department has information.

Notice Under Section 156: Demand Notice

Demand notice under section 156 is issued by the assessing officer when any interest, tax, penalty, fine, or any other sum is payable by the taxpayer as a result of any order under the Income Tax Act. After getting this notice, you have 30 days to pay the due amount.

Further, let's know what to do in this situation.

• Verify the tax demand amount against your own records.
• In case the notice is correct, pay the due amount within 30 days through Challan 280 on the portal and update the payment information.
• If the notice is incorrect, under section 154, file a rectification or respond disagreeing with the tax demand through the portal.

Moreover, ignoring a section 156 notice, under section 220(2), leads to interest at 1% per month on the due amount, and recovery action includes bank account attachment.

Notice Under Section 139(9): Defective Return

In case wrong or incomplete information has been stated while filing the income tax return, then a Defective Return Notice Under Section 139(9) of the Income Tax Act is issued to the taxpayer. You get 15 days to reply to this notice. The common reasons for receiving this notice include a name mismatch with PAN, a missing audit report, incomplete schedules, or TDS claimed without corresponding declared income.

For replying this notice, you need to log in to incometax.gov.in → e-Proceedings → respond to the notice with the correct income tax return. In case you failed to respond to the tax notice, your ITR return will be treated as not filed.

Further, generally, NRIs receive this notice when their Schedule FA (foreign assets) is incomplete or when their Residential Status is declared incorrect.

Notice Under Section 245: Intimation Notice

An Intimation Notice Under Section 245 allows the tax department to adjust your tax refund against any outstanding tax demand. However, by making this adjustment, the tax department officially sends you an intimation in writing and allows you to respond.

The timeline to respond to the notice is within 30 days. In case the outstanding tax demand is incorrect, provide proof with supporting documents. In case you fail to respond to the notice within the given timeline, the adjustment will proceed automatically, and the refund will be absorbed.

NRIs who have filed ITRs across multiple years and have pending tax demands from previous assessment years frequently get this notice when a new refund is due.

Notice Under Section 133(6): Information Request

An information request notice under section 133(6) of the Income Tax Act allows the tax department to gather information from individuals, entities, or third parties. The notice may be issued when the department requires information, documents, or clarification regarding specific transactions, investments, assets, or tax matters.

The notice requests you to confirm or explain specific transactions. Additionally, it applies to both taxpayers and non-taxpayers, and the data sought can range from financial transactions to property ownership.

To answer this notice, you need to log in to the portal → Compliance Portal → e-Verification → submit your response with supporting documents and explanation. For high-value transactions, it is one of the most common tax notices that taxpayers receive. 

This was all about the different types of income tax notices received by taxpayers. Moving further, let's know how to verify or authenticate income tax notices.

How to Verify or Authenticate Income Tax Notices?

Before responding to any income tax notice, it is vital to verify its authenticity. Using the "Authenticate Notice/Order" feature, you can check whether the income tax notice is genuine or not. This option is available on the Income Tax e-filing portal. Here is how you can do so:

• Step 1: Visit the income tax e-filing portal. On the home page, you get the option of "Authenticate notice/ order issued by ITD" under "Quick Links."
• Step 2: You can authenticate the notice using either:
• PAN, document type, assessment year, mobile number, or issue date (for notice issued AY 2011-12 and subsequent years only)
• Document Identification Number (DIN) and mobile number (for all assessment numbers)
• Step 3: After choosing the option and filling in all the information asked, you get an OTP. Mention the received OTP. 
• Step 4: Once the OTP is validated, the DIN of the issued notice, along with its issued date, will be shown on your screen. In case the notice is not issued by the income tax department, the message will display, "No record found for the given criteria."

This is how you can verify or authenticate the received income tax notice. Moving forward, let's know how to respond to an income tax notice. 

How to Respond to an Income Tax Notice?

Follow the steps below to respond to an income tax notice:

• Step 1: First, carefully read the received notice and understand the reason for getting it.
• Step 2: You can also verify the authenticity of the notice through the income tax portal.
• Step 3: Once you know the reason for getting the notice, gather the necessary information and documents, such as bank statements, Form 16, investment proofs, transaction details, or any other related records.
• Step 4: Visit the income tax portal and navigate to Pending Action > e-Proceedings to view the notice. 
• Step 5: Prepare your response, write a clear explanation of your situation, and attach all the required document proofs to support your claims.
• Step 6: Submit your reply online through the income tax portal. Additionally, save or download the acknowledgment ID or receipt for further reference. 
• Step 7: For further communications from the income tax department, track the portal and email for further communications. 

So, here is how you can respond to an income tax notice. Moving ahead, let's know the documents required to respond to an income tax notice. 

Documents Required to Respond to an Income Tax Notice

The documents required to respond to an income tax notice depend on the specific notice type. To provide you with an idea, here is the list of documents as per the most common tax situations:

• For Income or TDS Mismatch
• Form 26AS and AIS for the relevant year
• ITR acknowledgment and computation
• Bank statements
• Form 16/ Form 16A
• For High-Value Transaction Queries
• Source of funds documentation
• Sale deed or investment statements
• Loan documents, if applicable
• Bank statements showing fund trail
• For NRIs- Additional Documents
• Passport with travel history
• Form 10F
• Tax Residency Certificate (TRC)
• Form 15CA/15CB if applicable
• Foreign bank account statements
• SWIFT remittance records

These are documents that you need as per the above-mentioned tax situation. Now, moving further, let's know the consequences of ignoring an income tax notice. 

Consequences of Ignoring an Income Tax Notice

The consequences of ignoring an income tax notice are as follows:

These are the consequences you face if you do not respond to the income tax notice. Moving forward, let's know the key considerations for NRIs. 

Key Considerations for NRIs

When dealing with income tax notices, NRIs face additional complexity layers. Additionally, their stakes are often higher, given income and assets across multiple countries. 

• Residential Status Disputes: Many income tax notices for NRIs arise from a mismatch of residential status. If the tax department's records show that you spent more days in India than reported in your return, your residential status determination may be questioned. Additionally, a change in residential status can significantly impact your tax liability and reporting obligations in India.. 
• Foreign Income and Asset Disclosure: NRIs who return to India and become Resident and Ordinarily Resident (ROR) are liable to pay tax on their global income. Considering this, for scrutiny notices, incomplete Schedule FA disclosures are frequent triggers.
• DTAA Claims: NRIs claiming DTAA benefits need to have proper documents by their side. It includes a tax residency certificate, Form 10F, and a treaty citation. Improperly claimed treaty benefits can result in demand notices.
• Section 195 TDS Disputes: Incorrect TDS deduction on NRI income, specifically, property transactions often lead to 143(1) or 156 tax notices. Before tax filing, it is advisable to reconcile the deducted TDS against Form 26AS. 
• Portal Access from Abroad: To receive notice intimations and OTPs for authentication and response submission, keep your mobile number and email mentioned on the e-filing portal updated.

Further, let's understand this with an example.

For instance, Saurabh Sharma is an NRI who lives in the UK. For the assessment year 2022-23, under section 148, he received a reassessment notice, stating that he had not declared his rental income of around INR 4,08,000 from his Mumbai property. However, Saurabh has already declared this income in his ITR under a different income category. He responded to the ITR notice and provided a copy of his ITR, showing rent payments, bank statements, and a breakdown of the amounts. After reviewing his response, the tax department dropped the reassessment process. In case Saurabh ignores the notice, it could lead to an ex parte assessment, resulting in a tax demand of INR 1,05,000, along with interest and penalties.

Final Thoughts

Lastly, receiving an income tax notice is not a thing to get tensed up about, but it is important to respond quickly, accurately, and with proper documentation. The notice type affects how urgently you need to act, what documents you need, and how to respond. Additionally, because of issues like residential status, DTAA claims, foreign income, and cross-border documentation, these things become more complicated for NRIs. 

Further, if you get an ITR notice about foreign assets or large amounts, it is good to seek help from tax professionals like Savetaxs. We provide Income Tax Notice Handling Services through a team of experienced CAs and tax professionals who offer personalized guidance based on your tax situation. So, connect with us and get the best tax services for sure.