Filing an income tax return is no longer just about reporting income and claiming deductions. It is increasingly becoming a data-matching exercise.
This year, experts expect more taxpayers to receive scrutiny notices as the Income Tax Department sharpens its use of artificial intelligence, data analytics, and information gathered from multiple sources. The goal is simple: identify mismatches between what taxpayers report and what the government already knows.
According to a Treasurer at BCAS, tax scrutiny today is far less dependent on random selection than it was a few years ago. “The process has become substantially data-centric,” he says. Returns are now cross-verified against information available through the Annual Information Statement (AIS), Form 26AS, TDS records, capital gains statements, bank interest reports, GST filings, and data received from various government agencies.
This means even small omissions can trigger questions.
A taxpayer may forget to report interest earned from fixed deposits. Another may overlook a stock market transaction. A business owner may report revenue figures that do not match GST records. What may appear to be a minor oversight can quickly show up as a red flag in the department’s systems.
The government’s visibility into financial transactions has expanded significantly over the years. High-value investments, property purchases, credit card spending, overseas travel, securities transactions, and interest income are now reported through multiple channels.
An tax expert says this interconnected ecosystem is making tax compliance more transparent than ever.
“Financial activities are increasingly being linked to income tax returns through various reporting mechanisms,” he says. “Any disparity between the income declared and the information available with the tax department can automatically invite scrutiny.”
Income Tax Returns Filing: Common Mistakes That Trigger Notices
One of the most frequent errors involves unreported income.
Bhuta points to the example of a salaried individual earning Rs 18 lakh annually who files a return showing only salary income but omits Rs 1.2 lakh earned from fixed deposits and savings accounts. Since banks report such information to tax authorities, the mismatch can be detected easily.
The consequences can go beyond paying the pending tax. Under-reporting of income may attract interest and, in certain cases, penalties that can be as high as 50 per cent of the tax payable on the under-reported income.
Capital gains are another major area of concern.
An investor who earns Rs 8 lakh in long-term capital gains from listed shares but fails to disclose the transaction may find the omission picked up through data analytics. The result could be additional tax demands, interest liabilities, and further scrutiny.
Bhuta notes that non-resident Indians often make a similar mistake. Many assume they are not required to file returns in India after selling property or investments here. In reality, such transactions frequently create tax filing obligations that cannot be ignored.
Incorrect deduction claims are also drawing attention.
Claims that do not match supporting records can be challenged during assessment proceedings. In recent years, authorities have closely examined deductions linked to donations made to entities that were later found to be ineligible or non-compliant.
Then there is the issue of turnover mismatches.
If a professional reports gross receipts of Rs 25 lakh in an income tax return while GST filings show receipts of Rs 35 lakh, the discrepancy is likely to attract scrutiny. With databases across departments becoming increasingly interconnected, such inconsistencies are easier to detect than ever before.
Why AI Is Changing The Game
The biggest shift is not necessarily new tax rules. It is technology.
Advanced analytics now allow authorities to compare information across multiple databases within seconds. Returns can be screened automatically for inconsistencies, unusual patterns, or gaps in reporting.
Bhuta says the department’s access to third-party information has widened considerably through AIS and other reporting frameworks. Data received from agencies such as GST authorities, market regulators, investigation wings, and other government departments further strengthens its ability to identify mismatches.
In some cases, publicly available information can also become part of the broader compliance picture. The result is a tax administration system that relies increasingly on data trails rather than manual verification.
A Notice Isn’t Necessarily Bad News
Despite expectations of increased scrutiny, experts advise taxpayers not to panic if they receive a notice.
Maurya says most scrutiny notices are not accusations of wrongdoing. Often, they simply seek clarification or supporting documents for a particular transaction or claim.
The best defence is preparation.
Taxpayers should carefully reconcile their AIS, Form 26AS, TDS certificates, bank interest statements, capital gains reports, and deduction documents before filing. Reviewing the return thoroughly before submission can significantly reduce the risk of future queries.
As the tax department’s digital capabilities grow, accuracy is becoming just as important as compliance.
