What are the common Reasons for Scrutiny & How to Avoid Them

What are the common Reasons for Scrutiny & How to Avoid Them

Why Do You Receive an Income Tax Notice?

Even if you have filed your Income Tax Return (ITR) correctly and on time, a notice may still land in your inbox. The reasons could range from minor errors to major mismatches.
Understanding these can help you minimize the chances of facing scrutiny.

Types of Cases for Scrutiny by the Income Tax Department

Scrutiny Assessment: When the Income Tax Department believes that the information declared in your return is incorrect, incomplete, or suspicious, your case is selected for scrutiny assessment. The taxpayer will receive a formal notice asking for clarifications, documents, or even personal hearings. Income tax scrutiny assessments are categorized into two types:

• Manual Scrutiny : Selected based on specific red flags in your return or transaction history. Can be avoided with careful and accurate tax compliance.
• Compulsory Scrutiny : Selected based on system-generated criteria or mandates. And Cannot be avoided, even with best efforts.

Common Reasons for Scrutiny & How to Avoid Them

Non-Filing of Income Tax Return (ITR)

• Required if gross income exceeds INR 2.5 lakh (below 60 years of age).
• Mandatory Scrutiny if you:
  • Own foreign assets,
  • Have signing authority in a foreign bank account,
  • Even if TDS is already deducted by your employer.

How to avoid it: Taxpayers should file their return on time every year and pay advance tax and self-assessment tax as required.

TDS Mismatch :

• TDS claimed by you doesn’t match TDS reported in Form 26AS or AIS (Annual Information Statement).

How to avoid it: Taxpayer should Cross-check Form 26AS before filing. Ensure the deductor (employer, bank, etc.) files TDS returns accurately and on time.

Non-Disclosure of Other Income

• Includes interest on Savings Accounts, FDs, RDs, rental income, etc.
• Banks deduct TDS at 10%, but if you’re in the 30% tax bracket, underreporting may trigger scrutiny.

How to avoid it: Taxpayer should Collect annual interest statements from your bank. And Disclose all income—even tax-exempt ones—in your ITR. Concealing income may lead to a penalty of up to 300% of the tax payable.

Defective ITR Filing

• Using the wrong ITR form, missing mandatory fields, or incorrect disclosures.
• May result in notice under Section 139(9) requiring you to revise the return.

How to avoid it: Taxpayer must collect all necessary documents beforehand (Form 16, Form 26AS, AIS, bank statements, etc.).

High-Value or Suspicious Transactions

Stay Within These Limits to Avoid an Income Tax Notice 

These are automatically reported to the ITD via SFT (Statement of Financial Transactions) filed by banks, brokers, etc. Details of these high-value or suspicious transactions are mentioned here under :

Nature of Transaction	Threshold/Limit
Cash deposit in Savings Account	INR 10,00,000 per financial year
Cash deposit in Current Account	INR 50,00,000 per financial year
Credit Card Bill Paid in Cash	INR 100,000
Total Credit Card Payments (Any Mode)	INR 30,00,000
Purchase or Sale of Immovable Property	INR 10,00,000
Investment in Fixed Deposit (FD)	INR 10,00,000
Foreign Travel or Forex Purchase	INR 200,000
Investment in Shares, Bonds, Debentures, Mutual Funds	INR 10,00,000
Cash Gifts Received Without Documentation	INR 50,000
Cash Received from a Person in One Day	INR 200,000

How to avoid it: Maintain records and proper justification for all high-value transactions. And Report even losses (e.g., from trading) to avoid mismatches. Exceeding these thresholds doesn’t automatically mean you’re in trouble—it just means the Income Tax Department may be notified via the Annual Information Statement or Statement of Financial Transactions. Always keep proper documentation and file accurate returns. Use PAN or Aadhaar wherever applicable. If you receive cash gifts, ensure they’re properly documented—especially for amounts above INR 50,000.

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