Common Income Tax Filing Mistakes

Common Income Tax Filing Mistakes

Filing your income tax return for AY 2026-27 is not the hard part. The hard part is filing it correctly. The Income Tax Department's AIS infrastructure now cross-references bank interest, securities transactions, VDA trades, and property registrations against your return — automatically. Mistakes that went unnoticed a decade ago now surface within days of processing. This guide identifies every major failure point, explains exactly what goes wrong, and gives you the steps to get it right before you click Submit.

Picking the Wrong ITR Form

Every ITR form is a gating mechanism. If your income profile does not fit the form you chose, the Central Processing Centre (CPC) issues a defective return notice under Section 139(9), forcing you to refile — and potentially inviting scrutiny in the process.

The correct mapping for AY 2026-27 (income earned in FY 2025-26):

The two mistakes CA firms see most often:

• A salaried employee with Rs. 12,000 in equity mutual fund redemptions files ITR-1. Even one capital gain event moves you to ITR-2 — no exceptions.
• A freelancer earning Rs. 35 lakh in consulting fees files ITR-4, but their gross receipts have exceeded Rs. 75 lakh cumulatively over prior years. They should be on ITR-3.

How to self-check: Before touching the portal, list every income head you received in FY 2025-26 — salary, interest, dividends, capital gains, professional fees, VDA, rental income, foreign income. If even one head falls outside ITR-1's scope, move to the next appropriate form. A wrong form caught at defective-return stage is fixable; a wrong form after assessment adds complexity you do not want.

AIS and TIS Reconciliation: The Step Most Filers Skip

The Annual Information Statement (AIS) available on incometax.gov.in now aggregates data from banks, depositories (NSDL/CDSL), GST returns, registrar offices (via Statement of Financial Transactions), Form 15CA/15CB foreign remittance filings, and crypto exchanges reporting under Section 194S. The Taxpayer Information Summary (TIS) is the processed version that feeds your pre-filled return.

What AIS captures for AY 2026-27 that filers routinely miss:

• Savings account interest (from every bank you hold an account with)
• Fixed deposit interest, even where TDS was deducted
• Scrip-wise dividend credits from listed companies and mutual funds
• Securities sale consideration — purchase and sale price, separately
• Mutual fund redemption proceeds
• Virtual digital asset (VDA) transactions reported by exchanges under Section 194S
• High-value property purchases from registrar SFTs
• GST-reported turnover (visible to the income tax system via GSTN sharing)

The reconciliation procedure — do this before opening the ITR:

1. Log in to the portal. Go to Services → Annual Information Statement.
2. Download AIS in PDF or JSON. Also download Form 26AS from the same section.
3. Open a spreadsheet with three columns: AIS entry | Your own records | Difference.
4. For each difference, determine: Is this an AIS data error (e.g., the exchange reported the wrong amount)? Or is it income you did not track?
5. For AIS errors: submit feedback using the Feedback option in AIS. The entry moves to Denied or Partially accepted status, which the system notes at assessment.
6. For genuine omissions: add the income to your return before filing.
7. Do not file until all significant differences are resolved.

An AIS mismatch — where your return shows less income than AIS records — triggers an automated adjustment under Section 143(1)(a). This is not a notice you can ignore; the adjustment becomes a tax demand with interest under Section 220(2) at 1% per month from the demand date.

Tax Regime Selection: Default Is Not Always Optimal

Section 115BAC makes the new tax regime the default for all individuals from FY 2023-24 onwards. For AY 2026-27, if you take no deliberate action, your return is processed under the new regime. That is the right outcome for many taxpayers — but not all.

How to switch:

• Salaried employees can indicate regime choice directly in the ITR. You can switch each year, forward and back, without restriction.
• Business or professional income taxpayers must file Form 10-IEA on or before the return due date to opt out of the new regime. The option is not available inside the ITR itself. Note: once you opt out under Form 10-IEA, switching back in a later year is allowed — but you permanently lose the ability to opt out again. Treat this as a one-direction gate.

Rebate under Section 87A: Under the new regime for AY 2026-27, individuals with total income up to Rs. 12 lakh are entitled to a full tax rebate, making their net tax liability nil. For salaried employees, the Rs. 75,000 standard deduction means gross salary up to Rs. 12,75,000 can result in nil tax under the new regime. Do not assume this applies if your income exceeds the threshold — the rebate cuts off sharply.

Worked comparison — Rs. 15 lakh gross salary:

New regime (FY 2025-26 slabs):

• Standard deduction: Rs. 75,000 → Taxable income: Rs. 14,25,000
• Tax: Rs. 20,000 (4–8L @ 5%) + Rs. 40,000 (8–12L @ 10%) + Rs. 33,750 (12–14.25L @ 15%) = Rs. 93,750 + 4% cess = Rs. 97,500

Old regime — standard deduction Rs. 50,000 + 80C Rs. 1,50,000 + 80D Rs. 25,000 only:

• Taxable income: Rs. 12,75,000
• Tax: Rs. 12,500 (2.5–5L @ 5%) + Rs. 1,00,000 (5–10L @ 20%) + Rs. 82,500 (10–12.75L @ 30%) = Rs. 1,95,000 + 4% cess = Rs. 2,02,800
• New regime saves Rs. 1,05,300.

Old regime — additionally claiming HRA exemption Rs. 1,80,000 + NPS Section 80CCD(1B) Rs. 50,000 + home loan interest Section 24(b) Rs. 2,00,000:

• Total deductions: Rs. 50K + Rs. 1.5L + Rs. 25K + Rs. 1.8L + Rs. 50K + Rs. 2L = Rs. 6,55,000
• Taxable income: Rs. 8,45,000
• Tax: Rs. 12,500 (2.5–5L @ 5%) + Rs. 69,000 (5–8.45L @ 20%) = Rs. 81,500 + 4% cess = Rs. 84,760
• Old regime saves Rs. 12,740 in this scenario.

The lesson: the new regime wins unless you have substantial genuine deductions — particularly home loan interest and HRA combined. Open a spreadsheet, compute both, choose the lower number. This takes five minutes and the payoff is recurring.

Missing Entire Income Heads

Partial reporting of an income head is under-reporting. Complete omission of an income head can be treated as misreporting. The distinction is significant: Section 270A imposes 50% penalty for under-reporting and 200% penalty for misreporting — assessed on the tax attributable to the unreported income.

Interest Income

Every savings account and fixed deposit generates taxable interest. Interest on savings accounts is taxable as "Income from Other Sources" (you get a deduction under Section 80TTA up to Rs. 10,000 under old regime only). Interest on FDs is taxable at slab rate and frequently under-reported because filers report only the amount credited to the bank account, not the accrual during the year. Report the full accrual — check your bank's interest certificate, not the credit entry.

Dividend Income

Dividends from Indian companies and equity mutual funds are fully taxable at your slab rate since FY 2020-21. They appear in AIS scrip-wise. Even small dividends from legacy holdings are tracked. If you have folios you opened ten years ago and have not reviewed, check AIS — the dividend data will be there even if you forgot about the investment.

Freelance, Consulting, and Platform Income

Fees received via Razorpay, Stripe, PayPal, or direct bank transfers for freelance or consulting work are taxable as business or professional income. GST return data (if you are registered) is visible to the income tax system. Omitting income while your GST filings reflect it is a flagged discrepancy.

Virtual Digital Asset (VDA) Gains

VDA — Bitcoin, Ethereum, NFTs, all digital tokens — is taxed under Section 115BBH at a flat 30% on net gains. The rules are strict:

• Deduction allowed: cost of acquisition only
• No deduction for exchange fees, mining costs, or any other expense
• Losses from one VDA cannot be set off against gains in another
• VDA losses cannot be set off against any other income
• Section 194S requires 1% TDS by the exchange on transfers exceeding Rs. 50,000 per year (Rs. 10,000 for specified persons)

Reporting VDA in AY 2026-27 — step by step:

1. Download the complete transaction history from every exchange and wallet used in FY 2025-26.
2. Identify every disposal event: sale to INR, crypto-to-crypto swap, gifting, or use as payment.
3. Compute gain per transaction = Sale consideration minus cost of acquisition.
4. Aggregate all gains separately — no netting across coins.
5. Apply 30% tax + 4% cess = effective 31.2%.
6. Report in Schedule VDA in your ITR.
7. Cross-check TDS credit under Section 194S in Form 26AS and AIS — claim every rupee deducted.

Claiming Deductions Without a Paper Trail

Section 80C, 80D, HRA, and home loan claims are easy to overstate — and deceptively easy to have disallowed during scrutiny.

Minimum documentation to retain:

• 80C: Insurance premium receipts, PPF passbook printout with FY 2025-26 deposits, ELSS investment statement, children's school tuition fee receipts, home loan principal repayment certificate
• 80D: Health insurance premium receipt issued by an eligible insurer; for senior citizens, the limit is higher — verify per Section 80D sub-limits
• HRA: Monthly rent receipts, rent agreement, and landlord's PAN if annual rent exceeds Rs. 1 lakh. Note that HRA cannot be claimed under the new regime.
• Home loan interest — Section 24(b): Annual interest certificate from the lender; if the property was under construction before possession, retain the completion certificate and compute the pre-construction interest in five equal instalments from the year of completion

Documents are not attached to the return but must be produced within 30 days if demanded under Section 142(1). Keep them for at least six years from the end of the relevant assessment year.

The AIS cross-check trap: If your return claims HRA for a rented property in a city where AIS simultaneously shows EMI payments on a home loan for a self-occupied property, the data mismatch is automatic scrutiny bait. The department increasingly cross-links housing loan data (from bank SFTs) with HRA claims. If both are genuine and legally permissible, document both carefully. If one is an overreach, correct it before filing.

Bank Details, Aadhaar–PAN, and the E-Verification Window

An unclaimed refund is a self-inflicted loss. The most common causes:

• Wrong IFSC code or account number — refund is returned to CPC; you must manually raise a re-issue request on the portal
• Inactive or closed bank account — same outcome; re-issue takes additional processing time
• Inoperative PAN — if your Aadhaar is not linked to PAN, the PAN is inoperative; an inoperative PAN cannot be used to e-verify via Aadhaar OTP, and returns filed with it attract higher TDS on future transactions

Action checklist before you file:

1. Check Aadhaar–PAN linkage status on the NSDL or UTI portal. If unlinked, pay the applicable fee and initiate linking immediately — allow several days for processing before the filing deadline.
2. Pre-validate your bank account on the portal under Profile → My Bank Accounts. A pre-validated account enables direct refund credit and Demat OTP-based e-verification.
3. Confirm your registered mobile number and email on the portal are active — all Section 143, 148, and 156 notices go to these addresses only.

E-verification is mandatory within 30 days of filing. An unverified return has no legal standing — it is treated as if it was never filed. Modes available: Aadhaar OTP, net banking login, demat account OTP, or a signed physical ITR-V sent to CPC, Bengaluru. Aadhaar OTP is the fastest; use it unless your Aadhaar is not linked to your mobile.

Late Filing and the Losses You Cannot Recover

The due date for individual returns (non-audit) for AY 2026-27 is 31 July 2026. Missing it triggers a cascade of costs that cannot be undone:

• Section 234F late filing fee: Rs. 5,000 if your total income exceeds Rs. 5 lakh; Rs. 1,000 if Rs. 5 lakh or below. This is applied automatically at processing — no additional notice required.
• Section 234A interest: 1% per month (or part of month) on the net tax payable, from 31 July 2026 to the actual date of filing.
• Loss of carry-forward rights: Both short-term and long-term capital losses — and business losses under Section 72 — cannot be carried forward to future years if your return is filed late. You permanently forfeit up to 8 years of set-off benefit for those losses.
• Sections 234B and 234C: Additional interest if advance tax was not paid at the prescribed 15%/45%/75%/100% instalments during the year.

Belated return (Section 139(4)): Can be filed until 31 December 2026 for AY 2026-27. The late fee applies, loss carry-forward is gone, but the return is valid.

Updated return (Section 139(8A)): If you filed on time but missed an income head, you can file an updated return with additional tax:

• 25% additional tax on aggregate tax and interest due — if filed within 12 months of end of AY (i.e., by 31 March 2028 for AY 2026-27)
• 50% additional tax — if filed between 12 and 24 months from end of AY (i.e., by 31 March 2029)

An updated return is not available if a notice under Section 148 or 148A has already been issued for that year.

Responding to Notices: Not Optional

• Section 143(1) intimation is the summary assessment order. If CPC adjusted your return — added a mismatch, disallowed a deduction — the intimation sets out a demand or refund. Ignoring a demand results in interest at 1% per month under Section 220(2) from the demand date.
• Section 143(2) scrutiny notice requires you to produce books and documents. Missing the response window leads to ex-parte assessment, meaning the assessing officer decides without your input.
• Section 148A notice (pre-reassessment show-cause) must be replied to in writing within the time specified in the notice. If the officer proceeds, your reply is part of the record — but silence is not.
• Section 270A penalty is imposed during assessment. If you discover under-reported income before an assessment order is passed, filing a revised or updated return and paying the tax eliminates the penalty exposure. After the assessment order, penalty proceedings begin separately.

The operational rule: every email from the Income Tax Department with "Notice/Intimation" in the subject line for your PAN must be opened and actioned within 48 hours of receipt.

Pitfalls That Rarely Appear on Anyone's Checklist

These mistakes catch otherwise careful filers:

• Ignoring grandfathering on pre-2018 equity holdings: Long-term capital gains on listed shares and equity mutual funds acquired before 31 January 2018 are computed using the higher of cost or fair market value as on 31 January 2018 as the deemed cost. Filing without this step overstates taxable LTCG.
• Missing Schedule 112A: Scrip-wise reporting of LTCG on listed equity shares and equity mutual funds is mandatory in Schedule 112A. Filers with multiple redemptions often skip this schedule or submit it incomplete, causing processing errors.
• Treating debt mutual funds as LTCG-eligible: Debt mutual funds acquired after 1 April 2023 are taxed at slab rate regardless of holding period. There is no long-term capital gain rate or indexation benefit for these units.
• Omitting Schedule FA: If you hold a foreign bank account, foreign equity, or ESOPs in a listed overseas company — even with zero income — Schedule FA (Foreign Assets) disclosure is mandatory under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Penalties for non-disclosure are separate from income tax and substantial.
• Missing pre-construction home loan interest: Interest paid on a home loan during the construction period (before possession) is deductible in five equal instalments starting from the first year of possession, under Section 24(b). Many filers forget to claim this in years two through five after taking possession.
• Not checking TDS credit entry-by-entry: Every TDS deduction must appear in Form 26AS before you can claim it. If your employer's TRACES upload contains an error, the credit will be denied at processing. Verify each entry in Schedule TDS of your return against Form 26AS.

Worked Example: What a Careless Return Actually Costs

Scenario: Arjun is an IT professional with Rs. 22 lakh gross salary in FY 2025-26. He also earned Rs. 3 lakh in fixed deposit interest and Rs. 2 lakh in Bitcoin gains on a crypto exchange. His employer deducted TDS covering the salary tax fully. Arjun used the pre-filled ITR without downloading AIS, omitted the FD interest and VDA gains, and filed on 5 September 2026 — 36 days after the 31 July 2026 due date. The omissions are later detected during automated AIS reconciliation.

Had Arjun downloaded AIS on 20 July 2026, added both income heads to his return, and filed by 31 July 2026, his total additional tax would have been Rs. 1,37,400 — with nil penalty and nil late fee.

The Rs. 76,448 difference is the price of skipping a two-hour reconciliation exercise. The 270A penalties in this example are assessed on detection during processing or scrutiny — voluntary disclosure before assessment eliminates them entirely. That is the single most powerful argument for getting the return right the first time.

Key Takeaways

• Form before portal: List every income head first, then pick the ITR form. A single capital gain or business income entry disqualifies ITR-1.
• AIS is the real pre-fill: The portal pre-fill can miss entries that AIS contains. Download AIS, reconcile it against your records, submit feedback for errors, and include all confirmed income before filing.
• Compute both regimes: The new regime is default for AY 2026-27, but salaried employees with HRA, home loan interest, and NPS deductions can still pay less under the old regime — the crossover is real and worth five minutes of calculation.
• VDA is non-negotiable at 30%: No loss set-offs, no slab rates, no deductions except acquisition cost. Report every disposal in Schedule VDA and cross-check Section 194S TDS credit in Form 26AS.
• 31 July 2026 is the hard deadline: Missing it costs Rs. 5,000 in fees, eliminates loss carry-forward, and triggers monthly interest — none of which can be reversed retroactively.
• E-verify within 30 days: An unverified return does not legally exist.
• Respond to every notice within the stated deadline: A Section 143(1) intimation is an assessment order, not an advisory email. Treat it accordingly — act within 48 hours of receipt.