By Neeraj Agarwala
Every year as the deadline for filing income tax returns (ITR) approaches, taxpayers rush to gather documents, tally figures, and upload their returns on the income tax portal. Despite the growing simplicity of e-filing systems, one persistent problem remains: many taxpayers either fail to disclose all relevant information or inadvertently make incorrect disclosures.
What often seems like a small mistake can, in practice, trigger tax notices, interest, and even penalties.
Reporting of exempt income
One area where taxpayers frequently slip up is in reporting exempt income. While it may seem unnecessary to disclose income that is not taxable the law requires full reporting. Including exempt income ensures that one’s financial profile is complete and avoids mismatches with the data already available to the tax department.
It also serves as a voluntary declaration that the exemption being claimed is legitimate. If such income is not disclosed, the omission might not attract an immediate penalty, but it can prompt clarifications or scrutiny, particularly if the department later questions whether the exemption was correctly claimed.
Capital gains
Several important changes have been introduced in the capital gains schedule of income tax returns for AY 2025-26. Taxpayers should note that while ITR-1 and ITR-4 now allow disclosure of long-term capital gains up to Rs 1.25 lakh, these forms do not provide for reporting of capital losses.
Filing under these forms in such cases could result in the inability to carry forward losses.
Over reliance on AIS
A concern is the overreliance on the (annual information statement) AIS itself. It has undoubtedly become a valuable tool, giving taxpayers a consolidated view of their income and transactions as reported by third parties. Yet it is not a flawless record.
Reporting delays, mismatches, and gaps are common. Some taxpayers assume that if an item is not reflected in the AIS, it need not be declared. This assumption is risky. The legal responsibility to report income lies with the taxpayer, regardless of whether it appears in the AIS. Using the statement as a substitute for personal record-keeping can lead to inadvertent omissions and under reporting, exposing the filer to interest and penalties down the line.
High value transactions
Transactions such as large cash deposits, significant credit card payments, purchase of property, or foreign exchange are closely monitored by the income tax department. If the taxpayer’s ITR does not align with such reporting, it raises an immediate red flag. Inconsistent reporting can quickly escalate into a scrutiny assessment, where the department demands detailed explanations and supporting evidence.
The taxpayer may receive notices nudging for filing of updated returns or can escalate into detailed scrutiny assessments. Incorrect disclosures like under reporting of income can result in additional tax liability as well as penalties up to 200% of the tax sought to be evaded in cases of concealment.
The writer is partner, Nangia & Company. Inputs from Neetu Brahma.
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