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5 Common ITR Mistakes That Get You an Income Tax Notice (Avoid These)

ITR Mistakes That Trigger an Income Tax Notice

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5 Common ITR Mistakes That Get You an Income Tax Notice (Avoid These)

Most Income Tax Notices are not sent because the department suspects fraud.

They are sent because an automated system compared two numbers and found a gap. The number you declared in your income tax returns. And the number the department already had from your bank, your employer, your broker, or your mutual fund registrar.

The department knows more than most people filing this July realise. Every high-value transaction, every TDS deduction, every dividend payment, every stock redemption, every fixed deposit renewal feeds into the Annual Information Statement and Form 26AS before you even open the e-filing portal. What you declare gets cross-checked against all of it automatically.

The five mistakes below are the most common reasons cross-checks fail, and an Income Tax Notice lands in the inbox. All five are entirely avoidable.

Mistake 1: Not Reconciling Your AIS Before Filing

This is the mistake that triggers more notices than anything else in the current filing season:

  • The Annual Information Statement is a comprehensive document that the Income Tax Department maintains for every taxpayer. It pulls in data from banks, brokers, mutual fund registrars, employers, payment gateways, foreign remittance records, and more. Every significant financial transaction involving your PAN is reflected there before you file.
  • What most people do is open the e-filing portal, trust the pre-filled data, make a few additions, and submit. The pre-filled data comes from Form 26AS and some AIS sources but it is not always complete or accurate. There can be duplications, entries from transactions you forgot about, or income sources you did not realise were tracked.
  • The fix is straightforward. Before filing your income tax returns this year, download your AIS from the e-filing portal under the Services section. Download your Form 26AS and your Taxpayer Information Summary. Compare all three against your actual income documents: Form 16, bank statements, broker statements, and any other income records.
  • Wherever there is a mismatch between what the AIS shows and what you are filing, either correct your return or use the AIS feedback mechanism to flag an incorrect entry before submitting. The department’s systems flag discrepancies automatically after filing. Catching them before submitting is almost always faster and cheaper.

Mistake 2: Filing the Wrong ITR Form

A return filed on the wrong form is not processed. It is treated as a defective return under Section 139(9), which means a notice goes out asking you to refile correctly within 15 days.

This sounds like a minor procedural issue. It is not because refiling correctly takes time, and the original filing date does not protect you from penalty if the defect is not corrected within the given window.

The form selection mistakes that come up most often in AY 2026-27:

  • Using ITR-1 when capital gains exist. Even small capital gains from mutual fund redemptions in FY 2025-26 push most taxpayers to ITR-2. The new rule for AY 2026-27 allows LTCG under Section 112A up to Rs. 1.25 lakh to be reported in ITR-1, but any STCG, any LTCG above that threshold, or any gains from property, gold, or debt funds still require ITR-2.
  • Using ITR-1 or ITR-2 when freelance or side business income exists. If you earned anything from freelancing, consulting, tuition, content creation, or any business activity outside your salary, that is business or professional income. ITR-1 and ITR-2 do not cover it. ITR-4 covers it under presumptive taxation if gross receipts are within limits. ITR-3 covers it otherwise.
  • Using ITR-1 when holding a director position. Any company directorship, even a nominal one in a startup or family business where no remuneration was received, disqualifies ITR-1.

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Mistake 3: Not Disclosing All Income Sources

This is the category that triggers the most scrutiny under the department’s data-matching systems, because the department already has the data that you chose not to declare.

The income sources people most commonly omit:

  • Interest income from savings accounts, fixed deposits, and recurring deposits. Banks report TDS to the department. If TDS was deducted and you do not declare the corresponding interest income, the mismatch is flagged automatically.
  • Dividend income. If you received dividends from stocks or mutual funds during FY 2025-26, that income is taxable and must be declared. The registrar reports it. The AIS shows it.
  • Income from a previous employer if you changed jobs during the year. Two Form 16 documents exist. Both must be combined and the total salary disclosed. Filing only the most recent employer’s Form 16 leaves the earlier employer’s income undisclosed, and both are visible to the department.
  • Interest accrued on NSC, KVP, or similar instruments. These are not tax-free. The interest is taxable under Income from Other Sources and must be declared even if it was reinvested or not received in cash.
  • Freelance income where the client deducted TDS under Section 194J. The TDS shows up in Form 26AS. If the corresponding income is not declared, the mismatch is automatic.
  • None of these are things the department discovers eventually through an investigation. They are things the automated system flags within the normal processing cycle.

Mistake 4: Misapplying the Section 87A Rebate on Special Rate Income

  • This is the mistake that caught many taxpayers in AY 2025-26 and is showing up again this year. It is also one of the more technically specific ones.
  • The Section 87A rebate under the new regime for AY 2026-27 makes income up to Rs. 12 lakh effectively tax-free. The rebate is up to Rs. 60,000. Most taxpayers, and some tax software tools, apply this rebate against the total tax computed on all income.
  • But the rebate does not apply to income taxed at special rates. Specifically, STCG on listed equity under Section 111A taxed at 20% and LTCG on equity above Rs. 1.25 lakh under Section 112A taxed at 12.5% are computed separately from regular slab rate income. The Section 87A rebate applies only to the slab rate tax. Not to the special rate tax.
  • Applying the rebate incorrectly reduces the apparent tax to zero when some special rate tax is actually still owed. The CPC at Bengaluru recomputes this during processing and sends a demand notice for the difference.
  • If you had any capital gains from equity or equity mutual funds during FY 2025-26, verify how the rebate is being applied before submitting the return.

Mistake 5: Filing But Not Verifying

This one is entirely avoidable and yet it comes up every filing season:

  • A return that is filed but not e-verified within 30 days is treated as if it was never filed. Processing does not start. The return sits in a pending state. And if the 30-day window passes without verification, the entire filing has to be redone, potentially as a belated return with the associated penalties and loss of carry-forward benefits.
  • E-verification takes approximately two minutes using Aadhaar OTP, net banking, or Electronic Verification Code. It can be done immediately after filing.
  • The deadline of 30 days for e-verification was tightened from the previous 120 days after a 2022 notification and has remained at 30 days since. Many taxpayers still operate on the old 120-day assumption. They file in July, forget about verification, and discover the problem months later when they follow up on a refund that was never processed.

File and verify on the same day. There is no reason not to.

 

Filing income tax returns before July 31? Talk to our expert today and make sure none of these mistakes are sitting in your return before you hit submit.

FAQs

  • Why does the Income Tax Department send notices for small income mismatches?

The department’s processing systems at CPC Bengaluru run automated cross-checks between what was declared in income tax returns and data received from banks, employers, brokers, mutual fund registrars, and other reporting entities. These systems do not filter by the size of the mismatch. A Rs. 500 dividend that was not declared triggers the same automated flag as a larger gap. The notice itself is not a sign of suspicion. It is an automated output from a data comparison. Reconciling the AIS with your return before filing prevents the mismatch from existing in the first place.

  • Can filing on the wrong ITR form affect my refund?

Yes. A return filed on the wrong form is treated as defective under Section 139(9). The CPC sends a notice asking for correction within 15 days. Processing of the return, including any refund, is paused until the defect is corrected. If the 15-day window passes without correction, the original return is treated as invalid. The most common form selection error in AY 2026-27 is salaried taxpayers with mutual fund redemptions using ITR-1 instead of ITR-2, and salaried taxpayers with freelance income using ITR-2 instead of ITR-3 or ITR-4.

  • What happens if I do not verify my ITR within 30 days of filing?

A return that is not e-verified within 30 days of submission is treated as unfiled. Processing does not begin and no refund is initiated. The original filing date is lost. The return would need to be refiled, and depending on when the 30-day window passed, this may mean filing as a belated return under Section 139(4) with the Section 234F penalty applying. E-verification using Aadhaar OTP takes approximately two minutes and should be completed on the same day as filing.

  • Is it mandatory to declare exempt income in income tax returns?

Yes. Income that is exempt from tax, including LTCG below Rs. 1.25 lakh from equity, agricultural income below Rs. 5,000, PPF interest, and life insurance maturity proceeds under Section 10(10D), must still be disclosed in the relevant schedules of the ITR. Omitting exempt income because it carries no tax liability is a common and flagged filing error. The department’s systems check for completeness of disclosure, not only for taxable amounts. Undisclosed exempt income that appears in the AIS or Form 26AS creates the same automated mismatch as undisclosed taxable income.

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