The ITR (income tax return) filing season ended on September 16 without giving more extension to the deadline. The ITR AY 2025-26 saw basically two extensions – 46 days from August 1 to September 15, and another 24-hour extension till September 16 midnight. Now, taxpayers who filed their ITRs are eagerly awaiting their refunds to be credited to their bank accounts. Around 7.59 crore taxpayers have filed their returns till September 23 for AY 2025-26, and about 5.09 crore returns have been processed, meaning 2.5 crore income tax returns are yet to be processed by the Income Tax Department.
Many taxpayers took to social media to vent their frustration over delays of 2 to 3 months in getting their refunds. Some say that they filed their returns in mid-June but have yet to get their returns processed. So why are they facing delays in getting their income tax refunds? One key reason, according to experts, is that the Income Tax Department is closely scrutinising returns filed under the old tax regime, especially where inflated deductions and exemptions were claimed in the past. The tax department has tightened the noose and started doing an extensive scrutiny process.
The Income Tax Department has found a surge in fraudulent exemption claims and has added extra layers of risk assessment at the Central Processing Centre to stop wrongful refund payments, say tax experts.
What do income tax rules say on withholding of refunds?
Under the Income Tax Act, 1961, Section 245 empowers the department to adjust or withhold refunds if there is an outstanding demand or if further verification of the return is warranted. In practice, this means that taxpayers who had earlier claimed excessive deductions — sometimes without adequate documentation — under provisions like Section 80C (investments), Section 80D (health insurance), HRA exemptions, or other allowances, may now see their refunds delayed until the assessments are complete.
Defending the rule, Dinkar Sharma, Company Secretary and Partner, Jotwani Associates, said “The approach is not arbitrary, it reflects a targeted compliance strategy. The department uses data analytics and AI-enabled systems to identify patterns of inflated or suspicious claims. Once flagged, these cases are kept under review, and refunds are released only after reconciliation of facts.”
While this may inconvenience some taxpayers temporarily, it ensures that the exchequer is not disbursing refunds against illegitimate claims, he added. “Importantly, genuine taxpayers with substantiated deductions have no cause for concern, as refunds — though delayed—must eventually be issued once verification is completed.”
This crackdown is not only about plugging revenue leakage but also about sending a strong signal that the old practice of “creative filing” is no longer acceptable, Sharma noted.
I-T Dept’s large-scale verification campaign
In fact, the Income Tax Department launched a large-scale verification campaign in July itself. It took action against individuals and entities who were filing income tax returns by falsely claiming deductions and exemptions. The investigation also revealed that some ITR preparers and intermediaries were running organised rackets that deceived taxpayers by claiming fraudulent deductions and exemptions, promising them hefty refunds, and then taking commissions.
To this end, the department used financial data from third-party sources, ground-level intelligence, and advanced artificial intelligence tools.
Refunds down in AY 2025-26
Commenting on this whole exercise, Deepashree Shetty, Partner, Global Employer Services, Tax & Regulatory Services, BDO India, said:
“The CBDT has made several awareness initiatives to educate salaried taxpayers and employers on rightful claim of exemptions and deductions.”
As per the latest data released on the direct tax collections, the net tax collections for FY 2025-26 by non-corporate taxpayers, including individual taxpayers, have increased and the refund claims have gone down considerably.
The refund processing time by the CBDT has reduced considerably in the previous years, Shetty noted.
“However, as per CBDT’s earlier publication dated June 2025, there has been an increase in the cases of wrongful deductions in the ITRs filed which were identified using AI tools and data analytics. This has necessitated a meticulous verification by the tax department for processing of tax returns with large refund claims,” according to Shetty.
“The CBDT has been monitoring refund claims made by taxpayers, especially salaried taxpayers opting the Old Tax Regime which allows deductions for most of the expenditures (rent, medical expenses, etc.). This has put a slow start to the refund processing time,” he further said.
This time, he said, special attention is being paid to those filing returns under the old tax regime, as deductions are claimed on various types of expenses (such as rent, medical expenses, etc.). This is why refund processing is taking time.
CBDT scrutinising refunds before release
On tax collections and ITR scrutiny this year, Vivek Jalan, Partner, Tax Connect Advisory Services LLP, says, “The direct tax collections in FY 25-26, till 17th September 25, give a very clear indication on the policy change of the CBDT in the recent past.”
On account of very strict monitoring of claims for exemptions in the ITRs this year, driven by heightened disclosures, the refunds are being closely scrutinised before release, and hence the non-corporate refunds have almost dropped to one-third YoY, i.e. from Rs 1.01 lakh crore to Rs 0.37 lakh crore, Jalan said.
Over 9,000 individuals claimed deductions under Section 80GGC for donations above Rs 5 lakh in FY 2020-21 and many recipient parties lacked basic credibility, some didn’t even contest elections in donors’ constituencies, Jalan says while sharing details. “For these kinds of taxpayers who have a history of false claims in the past, all their recent claims are also being scrutinised closely, and hence refunds are getting delayed.”
However, for those taxpayers who retain proof like acknowledgement receipts, party’s tax exemption certificate, bank transaction records, and credibility of the political parties, their exemptions are being duly cleared, he explains.
According to him, the CBDT has kept a strict vigil on the refunds of non-corporate taxpayers this time. Especially those taxpayers who previously made suspicious donations or false claims, their refunds are being thoroughly investigated.