How To Respond To Income Tax Notices for Salaried Individuals

Receiving an official-looking envelope from the Income Tax Department can be a source of anxiety for anyone. For most salaried individuals, who diligently see their tax deducted at source (TDS), a tax notice can seem confusing and unwarranted. However, it’s crucial to understand that a notice isn’t always an accusation of wrongdoing. It’s simply a communication channel used by the department to seek information, clarify discrepancies, or ensure you are compliant with the law.

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The objective of a notice is not always punitive; often, it is to reconcile data mismatches (like AIS/26AS vs. ITR), confirm claims, or request supporting evidence so that assessments are finalized correctly and tax compliance is ensured.

Introduction to Income Tax and Notices.

In India, income tax is a primary source of revenue for the government, funding public services and infrastructure. For salaried employees, this is primarily managed through TDS, where the employer deducts a portion of the salary as tax and deposits it with the government. At the end of the financial year, you file an Income Tax Return (ITR), which is a summary of your total income, deductions claimed, and tax paid.

The Income Tax Department uses sophisticated systems to process millions of these returns. Sometimes, their automated systems or an Assessing Officer (AO) may find a discrepancy or require further clarification. This is when they issue an income tax notice.

The purpose of a notice is to:

• Ask for additional documents or information.
• Point out a discrepancy between the information you provided and the data they have.
• Inform you about a potential tax demand or refund.
• Select your case for a detailed review (scrutiny).

Ignoring a notice is a mistake. Responding correctly and on time is a legal obligation and the best way to avoid further complications.

Types of Income Tax Notices.

While there are many types of notices, a salaried individual is most likely to encounter one of the following.

Detailed Information on Types of Income Tax Notices.

Several common notice types apply to salaried taxpayers, each serving a distinct purpose.

Section 139(9): Defective Return.

• Meaning: Issued when an ITR is found “defective,” such as using the wrong ITR form, missing mandatory schedules, incorrect or incomplete information, or discrepancies with Form 26AS/AIS.
• Typical scenarios: Wrong ITR selected (e.g., omitting capital gains), missing bank interest disclosure, or incomplete verification fields.
• Response window: Typically 15 days from intimation to correct the defect; failure may render the return invalid and trigger further assessment.

Section 142(1): Inquiry Before Assessment.

• Meaning: A requisition for additional information, documents, or explanations to complete processing, or a direction to file a return if not filed.
• Typical scenarios: Asking for salary break-up, Form 16, interest certificates, capital gains statements, or proof supporting deductions and exemptions.
• Consequences of non-response: Penalty up to ₹10,000, “best judgment” assessment, and possible prosecution; non-compliance can escalate tax demand.

Section 143(1): Intimation (and 143(1)(a) Adjustments).

• Meaning: System-generated intimation after processing of ITR showing acceptance, demand, or refund; may propose prima facie adjustments for mismatches or computational issues.
• Typical scenarios: Differences between ITR and 26AS/AIS (e.g., undisclosed interest), arithmetical errors, incorrect claims under law, or disallowance of ineligible deductions.
• Time limit: Issuance is bounded by statutory timelines; commonly referenced as within months after the end of the relevant financial year per guidance.

Section 143(2): Scrutiny Notice.

• Meaning: Initiates detailed scrutiny when the Assessing Officer (AO) is not satisfied with the return or requires deeper verification of claims.
• Typical scenarios: Unusual high-value transactions, significant deductions, or mismatch patterns prompting a full inquiry into declared income and claims.
• Next steps: Often followed by detailed questionnaires and hearings; culminates in assessment under Section 143(3).

Section 148 / 148A: Income Escaped Assessment.

• Meaning: Issued when the AO believes income has “escaped assessment,” enabling reassessment of past years after due process under Section 148A.
• Typical scenarios: Undisclosed bank interest, capital gains, rental income, foreign assets/income, or failure to file returns despite taxable income.
• Process: Pre-notice inquiry (148A), opportunity of being heard, and then reassessment notice under 148 if reasons are sustained.

Section 156: Demand Notice.

• Meaning: A formal demand to pay tax, interest, fee, or penalty determined payable pursuant to processing or assessment.
• Typical scenarios: Post-143(1) adjustments, scrutiny additions, or reassessment outcomes raising demand.
• Action: Pay within the stipulated period to avoid further interest and recovery action.

Section 245: Set-off of Refund Against Demand.

• Meaning: Intimation of intent to adjust a current refund against outstanding past demand after providing opportunity to respond.
• Typical scenarios: Taxpayer has an old unpaid demand; department proposes to set off against current-year refund unless objected with valid reasons.

Section 131(1A): Investigation Where Income is Concealed or Likely Concealed.

• Meaning: Empowers inquiry and investigation, including impounding books/documents, when concealment is suspected.
• Typical scenarios: Risk flags around unreported sources, high-value cash or securities transactions, or patterns indicating concealment.

Common Reasons for Receiving Notices.

Salaried individuals often receive notices due to data mismatches and compliance gaps.

• AIS/26AS mismatches: Non-reporting of interest income (savings/FD/RD), dividends, capital gains, or differences between the nature of income and TDS section can trigger 143(1)(a) adjustments or scrutiny.
• Non-filing or late filing: Failure to file despite taxable income or delayed filing can prompt 142(1) or other compliance notices.
• Incorrect claims/deductions: Ineligible or unsupported deductions/exemptions (HRA, LTA, 80C/80D/80G) can lead to adjustments or scrutiny queries.
• Form selection or incomplete return: Wrong ITR form or missing schedules is a classic 139(9) trigger.
• Underreporting/misreporting: Omission of secondary income streams (interest, rent, freelance/consulting) may invite reassessment or penalties.

Tax practitioners increasingly warn that even minor mismatches (e.g., a missing ₹500–₹1,000 interest entry) can cause automated adjustments or notices due to the digitized AIS/26AS system. Industry explainer resources also emphasize high prevalence of Form 26AS/AIS-based mismatches for salaried filers, making reconciliations critical.

Common Reasons for Receiving Notices.

Most notices are triggered by data mismatches. Here are the most frequent reasons a salaried person might get flagged:

• TDS Mismatch: The TDS you claimed in your ITR doesn’t match the data in your Form 26AS or AIS. This often happens if your employer made an error in filing their TDS return or if you made a typo while entering the figures.
• Forgetting to Report Other Income: Salaried employees often mistakenly believe that only salary income is taxable. Forgetting to declare income from other sources is a major red flag. Common examples include:
  • Interest from savings bank accounts and fixed deposits.
  • Capital gains from the sale of stocks, mutual funds, or property.
  • Rental income.
  • Income from freelance work or a side hustle.
• Mismatch with AIS/TIS: The Income Tax Department now compiles an Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) for every PAN holder. If the income declared in your ITR is less than the income reflected in your AIS, it will trigger a notice.
• Incorrectly Claimed Deductions: Claiming deductions under Chapter VI-A (like Section 80C, 80D) without valid proof or for an amount higher than what you are eligible for can lead to scrutiny.
• Not Filing ITR at All: If your total income exceeds the basic exemption limit and you fail to file an ITR, the department will send a notice asking you to do so.
• High-Value Transactions: Making high-value transactions that seem disproportionate to your declared income is a common trigger for scrutiny.

How to Respond to an Income Tax Notice – A Step-by-Step Guide.

Receiving a notice can be stressful, but a systematic approach can resolve the issue smoothly.

1. Don’t Panic and Read Carefully: The first step is to stay calm. Read the entire notice to understand which section it’s under, the reason for its issuance, and the deadline for response.
2. Verify the Authenticity: Check if the notice is genuine. A valid notice from the department will have a Document Identification Number (DIN). You can verify the DIN on the income tax e-filing portal to confirm its authenticity.
3. Identify the Issue: Pinpoint exactly what the notice is asking for. Is it a simple mismatch in TDS? A request for documents? Or a notice for a defective return?
4. Gather Your Documents: Collect all relevant financial documents to prepare your response. This may include your Form 16, salary slips, bank statements, proof of investments and deductions, Form 26AS, and AIS.
5. Prepare and Submit Your Response Online: Most responses are now submitted electronically through the income tax e-filing portal.
   • For Section 139(9) (Defective Return): You need to file a revised ITR, correcting the defect mentioned in the notice.
   • For Section 143(1) (Intimation/Demand): If you agree with the demand, pay it through the portal. If you disagree, you can file a rectification request under Section 154.
   • For Section 143(2) or 148 (Scrutiny): This is more complex. You will need to upload the requested documents and a detailed written submission. It is highly recommended to consult a tax professional to draft and file the response.
6. Keep Records: Always save a copy of the notice you received and the response you submitted for future reference.

Consequences of Ignoring Income Tax Notices.

Ignoring a tax notice is never an option and can lead to severe consequences.

• Penalties: The Income Tax Act has provisions for penalties for non-compliance. For instance, failure to comply with a notice under Section 142(1) or 143(2) can attract a penalty of ₹10,000 under Section 272A.
• Best Judgement Assessment: If you fail to respond, the Assessing Officer is empowered to make a “Best Judgement Assessment” under Section 144. This means the AO will assess your income and tax liability based on the information they have, which will likely result in a much higher tax demand.
• Higher Tax and Interest: The resulting tax demand will also accrue interest until the date of payment.
• Prosecution and Legal Action: In cases of deliberate tax evasion or repeated non-compliance, the department can initiate prosecution proceedings, which could lead to fines and even imprisonment.

Preventive Measures: How to Avoid Notices.

As they say, prevention is better than cure. Following good tax practices can significantly reduce your chances of receiving a notice.

• ✅ File Your ITR on Time: This is the most basic rule. Always file your return before the due date (typically July 31st for salaried individuals).
• ✅ Declare All Sources of Income: Be meticulous about reporting all your income, no matter how small.
• ✅ Reconcile with Form 26AS and AIS: Before filing, cross-check every entry to ensure that the income and TDS details in your records match the government’s records.
• ✅ Claim Only Genuine Deductions: Don’t be tempted to inflate your deductions. Only claim amounts for which you have legitimate proof.
• ✅ Maintain Good Records: Keep a dedicated file for all your financial documents for at least 7-8 years.
• ✅ Keep Your Contact Details Updated: Ensure your email address and mobile number on the income tax portal are current so you don’t miss any important communication.

Conclusion:

An income tax notice is a formal communication that demands your attention, not your fear. By understanding why it was sent and how to respond, you can handle the process with confidence. The key lies in being a diligent and proactive taxpayer. Always maintain accurate records, declare your income honestly, and file your returns on time. This financial discipline is the best way to ensure a smooth and stress-free relationship with the Income Tax Department.

Call to Action:

If you have received an income tax notice and feel unsure about how to proceed, do not hesitate to seek professional help. A Chartered Accountant (CA) or a qualified tax consultant can provide the right guidance, help you draft a proper response, and ensure you remain compliant with the law. Staying informed about your tax obligations is the hallmark of a responsible citizen.

Disclaimer: The information provided in this article is for general informational and educational purposes only. It is not intended as a substitute for professional tax, legal, or financial advice. Tax laws are subject to change, and their application can vary widely based on the specific facts and circumstances. You should consult with a qualified professional for advice tailored to your individual situation.

C.K. Gupta

Hello, I am C.K. Gupta Founder of Taxgst.in, a seasoned finance professional with a Master of Commerce degree and over 20 years of experience in accounting and finance. My extensive career has been dedicated to mastering the intricacies of financial management, tax consultancy, and strategic planning. Throughout my professional journey, I have honed my skills in financial analysis, tax planning, and compliance, ensuring that all practices adhere to the latest financial regulations. My expertise also extends to auditing, where I focus on maintaining accuracy and integrity in financial reporting. I am passionate about using my knowledge to provide insightful and reliable financial advice, helping businesses optimize their financial strategies and achieve their economic goals. At Taxgst.in, I aim to share valuable insights that assist our readers in navigating the complex world of taxes and finance with ease.