Income Tax: How to respond after receiving a notice from the Income Tax Department, taxpayers should know important things..

Income Tax Notice: There has been a steep rise in the number of income tax notices issued to taxpayers in India in recent months. These notices, which often relate to faulty returns or additional tax demands, cause anxiety and confusion among individual taxpayers. The main reason for this increase is due to the Income Tax Department's increased focus on compliance and its efforts to identify discrepancies in financial reporting. There can be many reasons for this.

Filing the wrong income tax return-

The most common reason for receiving an income tax notice is selecting the wrong tax return form. The four forms for individuals are ITR 1, ITR 2, ITR 3 and ITR 4. Many taxpayers receiving income for the first time from capital gains or futures and options (F&O) trading mistakenly use ITR 1 or ITR 4 instead of ITR 2 or ITR 3. This leads to non-disclosure of such income, resulting in receiving defective return notices.

Mismatch with Form 26AS-
In June 2024, many taxpayers who filed income tax returns using data from Form 26AS were receiving notices due to a mismatch in income. This happened because some taxpayers did not match their actual income with the details given in Form 26AS. Form 26AS at that time did not include income for the last quarter (January to March) of FY 24. This oversight led to the under-reporting of income and resulted in the issuance of demand notices.

Non-taxable gifts-

Gifts received from specified relatives are exempt from income tax, and currently, there is no provision to declare these non-taxable gifts in income tax forms. Nevertheless, some individuals have received demand notices for non-payment of tax on such gifts, highlighting a gap in the reporting process.

Revised Return Processed-
Some taxpayers who filed revised returns after identifying errors in their original filing have received notices based on their original returns. These notices are often generated because the revised return has not yet been processed or because an automated query requires further verification by the taxpayer.

How to respond to income tax notices-

Verify the notice-

Verify the authenticity of the notice under the ‘Pending Actions’ tab on the Income Tax Department’s e-filing portal. This is particularly important because of widespread phishing scams, especially related to tax refunds.

Understand the types of notices-

Notices are issued under various sections of the Income Tax Act, and each requires a specific response. For example, Section 139(9) deals with defective returns, while Section 143(1) deals with processing errors. Identifying the type of notice helps determine the action required.

File a timely response-

Every tax notice has a specific time limit. For example, defective return notices usually have 15 days to rectify, while demand notices have 30 days. It is important to adhere to these time limits to avoid penalties, interest, or legal action. Responding on time shows that you are following the rules and are willing to cooperate with tax authorities.

Correct errors by filing a revised return-

If errors or omissions are highlighted in a notice, correct them by filing a revised return or providing the required information. For example, a notice issued under section 139(9) for a defective return can be addressed by correcting the errors and re-filing within the prescribed 15-day period.

Pay additional tax if required-

On additional tax demand due to under-reported income or discrepancies in the tax notice, immediately calculate the correct amount and pay it along with interest. There is no need to file a revised return. You can directly respond to this demand through the 'Pending Actions' tab on the dashboard of the e-filing portal.

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