Scrutiny by IT Dept. for False Salaried Deductions

Scrutiny by IT Dept. for False Salaried Deductions

The Income Tax Department's data infrastructure in 2026 cross-references your ITR against at least six independent data sources before any human AO reads the file. Salaried taxpayers who claim HRA without paying rent, declare Section 80C investments that never appear in SFT data, or donate to unverified institutions are now routinely flagged within weeks of filing. This article walks you through exactly how the system identifies false claims, what notices follow, what they cost in tax, interest and penalty, and what you must do — and document — to stay clean.

How CBDT's Scrutiny Engine Identifies Your Return in 2026

The Central Board of Direct Taxes (CBDT) no longer relies on random sampling or Assessing Officer (AO) intuition. The current risk-profiling engine performs automated triangulation across six data streams:

1. Annual Information Statement (AIS) — aggregates rent payments, bank interest, capital gains, mutual fund redemptions, property transactions, GST turnover and high-value cash deposits from reporting entities. If you claim HRA but AIS shows no rent outflows from your linked accounts, the mismatch is flagged instantly.
2. Taxpayer Information Summary (TIS) — a processed, deduplicated version of AIS that forms the baseline for ITR pre-fill. If your ITR departs significantly from TIS pre-fill values, the deviation is scored.
3. Form 26AS — your tax credit ledger showing TDS deducted by your employer, banks and others. Discrepancies between Form 26AS and reported income are a primary filter.
4. Employer Form 16 / SFT filing — employers file Form 24Q quarterly and issue Form 16 reflecting only the deductions they actually accepted. If you claim Rs. 1,50,000 under Section 80C in your ITR but your Form 16 Part B shows only Rs. 50,000, that delta is an immediate red flag.
5. Statement of Financial Transactions (SFT) — banks, mutual funds, post offices, life insurers and registrars report high-value transactions. An ELSS investment that you claim did not appear in any SFT return is trivially detectable.
6. Peer-percentile profiling — the system compares your deduction-to-gross-salary ratio against anonymised peers in the same salary band, city and industry. A ratio that sits in the top 2% of the cohort triggers enhanced scrutiny.

AIS mismatches are the single biggest trigger in practice. Download your AIS from the e-filing portal (incometax.gov.in → Services → Annual Information Statement) before you file, and reconcile every line item. If AIS is wrong, file a feedback correction on the portal itself — do not simply ignore the discrepancy.

Common Deduction Claims That Trigger Notices

House Rent Allowance (HRA) Under Section 10(13A)

• Claiming full HRA exemption while living in a self-owned property.
• Claiming rent paid to a close relative with no actual bank transfer.
• Not quoting the landlord's PAN where annual rent exceeds Rs. 1,00,000 (i.e., Rs. 8,334/month).
• AIS shows no rent credits from your account but your ITR shows Rs. 2–3 lakh HRA exempt.

Section 80C (Up to Rs. 1,50,000)

• Declaring ELSS or PPF contributions that no mutual fund or bank has reported via SFT.
• Claiming life insurance premium on a policy that has lapsed or was surrendered.
• Tuition fees claimed for children who are not enrolled in the institution named.
• Showing the full Rs. 1,50,000 in ITR when Form 16 shows only Rs. 40,000 accepted by the employer.

Section 80G (Donations)

• Donating to an organisation whose 80G registration has expired or been cancelled — check the NGODARPAN and IT portal's registered institution list.
• Cash donations above Rs. 2,000: Section 80G(5D) disallows cash donations exceeding Rs. 2,000 entirely.
• Fabricated receipts from non-existent trusts — a cluster CBDT identified and prosecuted in multiple cities in 2024–25.

Sections 80D, 80E and 24(b)

• Health insurance premium claimed but no insurer SFT or AIS credit matches.
• Education loan interest claimed under Section 80E without a certificate from the lending institution.
• Home-loan interest deduction under Section 24(b) for a property registered in someone else's name, or for a loan not drawn from a notified lender.

The Six Scrutiny Notices You May Receive

Understanding which notice you received determines your response window and the seriousness of the situation.

Every notice now arrives on the e-filing portal under Pending Actions → Response to Outstanding Demand / Notices. Enabling the portal's email and SMS alerts is non-negotiable — a missed Section 143(2) response can turn a manageable demand into an ex-parte assessment.

Worked Example: What a Bogus HRA + 80C Claim Actually Costs

Consider Arjun, a software professional in Bengaluru earning a gross salary of Rs. 18,00,000 in FY 2025-26 (AY 2026-27). He files under the old tax regime and claims:

• HRA exemption: Rs. 2,80,000 — but he lives in his own flat. No rent is paid. AIS shows zero rent outflows.
• Section 80C: Rs. 1,50,000 — he has only Rs. 70,000 of genuine ELSS investments. The remaining Rs. 80,000 is a fabricated PPF declaration his employer's HR accepted without verifying.

False deductions total: Rs. 3,60,000

Tax computation at 30% slab (simplified, ignoring cess for clarity):

Arjun saved roughly Rs. 1,08,000 in tax. He now owes Rs. 3,49,920 — more than three times the tax he attempted to avoid — and faces the possibility of a prosecution referral under Section 276C if the AO concludes the evasion was wilful.

Even if the AO treats this as under-reporting (the lesser offence, at 50% penalty), the total demand is still Rs. 1,08,000 + Rs. 25,920 + Rs. 54,000 = Rs. 1,87,920 — nearly double the original tax saving.

Section 270A Penalty: Under-Reporting vs Misreporting

Section 270A is the engine that makes false deduction claims expensive. The distinction between the two categories matters enormously.

Under-reporting (Section 270A(1)/(2)) — penalty at 50% of the tax payable on the under-reported income. This applies where the return was filed but income was understated due to an error or omission.

Misreporting (Section 270A(9)) — penalty at 200% of the tax payable. The Explanation to Section 270A expressly includes "misrepresentation or suppression of facts" and "claim of expenditure not substantiated by any evidence" — both of which cover fabricated deductions. The AO can classify a false HRA or 80C claim here.

A few critical points practitioners see routinely:

• No penalty if tax on under-reported income is less than Rs. 10,000 — but this rarely helps a salaried employee with meaningful false claims.
• Immunity via Section 270AA — if you pay the tax and interest demand in full and do not file an appeal, you can apply to the AO for immunity from penalty and prosecution. The application must be filed within one month of the order. This is the fastest exit from a bad situation.
• Section 273A — reduction or waiver — the Commissioner of Income Tax (Appeals) can reduce or waive the penalty where you have made full and true disclosure and cooperated. Prior clean compliance record matters here.

Faceless Assessment: How the Notice-to-Order Workflow Runs

Since the Faceless Assessment Scheme was notified under Section 144B, the physical AO is out of the picture for most salaried scrutiny cases. Here is exactly what the process looks like today:

1. Notice issued by National Faceless Assessment Centre (NFAC) — lands on your e-filing portal inbox. The notice may originate from any Assessment Unit (AU) in India, not necessarily your home jurisdiction.
2. You upload your response — all submissions are through the e-filing portal under Pending Actions → e-Proceedings. Attach scanned documents, a written explanation, and any computation sheet.
3. Show Cause Notice (SCN) — before any adverse addition is made, NFAC must issue an SCN. You have at least seven days to reply, though requesting 15–30 days is standard practice.
4. Draft Assessment Order — NFAC sends you a draft order proposing additions or disallowances. You may file objections within 30 days.
5. Final Assessment Order — issued after considering objections. Demand notice (Section 156) follows immediately.
6. Appeal to CIT(A) — must be filed within 30 days of receiving the assessment order, along with payment of admitted tax.

Because there is no in-person hearing, your written submissions and supporting documents carry full evidential weight. A one-line "rent was paid in cash" explanation with no backup will fail. A submission containing the rent agreement, bank transfer screenshots, landlord's PAN card copy and the landlord's ITR acknowledgement (if available) will not.

Documentation You Must Retain — and for How Long

The limitation period for assessment is generally three assessment years from the end of the relevant AY (for income below the Rs. 50 lakh escape-income threshold) and ten years for serious evasion cases. Retain the following for at least seven years from the end of the relevant assessment year as a safe rule:

For HRA:

• Rent agreement stamped and registered (preferable) or at minimum notarised.
• Monthly bank transfer records showing rent credited to landlord's account.
• Landlord's PAN (mandatory if annual rent > Rs. 1,00,000).
• Landlord's address proof where rent agreement is not available.

For Section 80C:

• ELSS account statement from the AMC or Demat account.
• PPF passbook (original or e-passbook download with date stamps).
• Life insurance premium receipts and policy document first page.
• Term-plan premium payment receipt.
• School fee receipts with child's name, for tuition-fee claims.

For Section 80G:

• Donation receipt with the institution's 80G registration certificate number and its validity date.
• Bank transfer or cheque proof — cash payments above Rs. 2,000 are fully disallowed.
• Cross-check the institution's registration status on the IT portal's approved-institution search.

For Section 24(b) and Home Loan:

• Annual interest certificate from the lender.
• Proof of possession / completion certificate for under-construction property.
• Sale deed or property registration documents confirming ownership in your name (or joint ownership).

For Section 80D:

• Premium-paid receipt from the insurer with policy number.
• AIS will generally reflect insurer SFT; if it does not, a premium payment certificate helps.

For Section 80E:

• Certificate from the lending bank or NBFC specifying interest paid during the year. This is non-negotiable — the deduction is available only for loans from specified financial institutions.

Pitfalls to Avoid

1. Claiming HRA and home-loan interest deduction simultaneously without the correct setup. You can claim both only if you live in a rented house and own a separate property (that is either self-occupied, let-out or under construction). Living in your own home and claiming HRA is a textbook misreporting case.

2. Relying on employer acceptance as proof. Many employers accept investment declarations at face value in January and adjust Form 16 only after receiving actual proofs in March. If you declared investments you never made, Form 16 may still show the full Rs. 1,50,000 — but the mismatch with SFT data will catch you at the ITR level.

3. Donating to Section 80G trusts without verifying current registration. The IT portal's search tool (incometax.gov.in → Tax Information → Registered Trusts) is real-time. A trust's 80G registration can lapse without notice to donors. Verify before every donation, not just at filing time.

4. Filing ITR in a hurry after the AIS pre-fill and ignoring feedback. If your AIS shows a financial transaction you cannot explain — say, a large cash deposit or a property purchase — file a feedback to mark it as incorrect before filing the ITR. If you file while an unexplained AIS entry sits open, you invite Section 143(2).

5. Missing the Section 148A show-cause notice deadline. This is a seven-day window. Many taxpayers mistake it for a routine communication. Missing it means the reopening proceeds without your input, and the AO's version of events becomes the default.

6. Paying the demand and ignoring the penalty proceedings. A Section 270A penalty order is separate from the assessment order. Apply for immunity under Section 270AA within one month of the assessment order — do not let this window lapse while you focus only on paying the tax demand.

New Regime vs Old Regime: The Scrutiny Risk Calculus for FY 2026-27

For FY 2026-27 (AY 2027-28), the default tax regime remains the new concessional regime introduced under Section 115BAC. If you have not actively opted for the old regime, you are in the new regime.

The new regime eliminates most deductions — including HRA exemption, Section 80C, Section 80D, Section 80G, Section 24(b) interest and Section 80E — in exchange for lower slab rates, a standard deduction of Rs. 75,000 and (as notified for the relevant year) a Section 87A rebate. This is not a consolation prize; for many salaried taxpayers it is the better deal and the lower-risk filing path.

Run this comparison every year before filing:

1. Compute tax under the old regime with verified, documentable deductions only — not everything you think you might be entitled to.
2. Compute tax under the new regime with just the standard deduction and applicable slabs.
3. Choose whichever is lower.

If the delta is less than Rs. 30,000–40,000 in the old regime's favour, the documentation burden and scrutiny risk of the old regime often outweigh the saving. If you have a large genuine HRA exemption (say, Rs. 3–4 lakh on a Mumbai or Delhi salary) and full Section 80C investments and a significant home-loan interest deduction, the old regime may still win — but every rupee of those deductions must be bulletproof.

If you opt for the old regime, do not mix old-regime deduction claims with new-regime-level sloppiness in documentation. The two do not go together.

Key Takeaways

• AIS is the primary trigger. Download and reconcile your AIS with your intended ITR before you file, not after you receive a notice.
• Form 16 must match your ITR. Any deduction you claim in the ITR beyond what your employer has accepted in Form 16 Part B needs independent documentary proof — not just a declaration.
• Section 270A misreporting attracts 200% penalty. A false HRA or 80C claim is not a clerical error; it meets the statutory definition of misreporting and can triple your total outgo.
• The Section 148A show-cause is only seven days. Mark it and respond in writing, even if briefly, to preserve your right to be heard before reopening.
• Section 270AA immunity is your fastest exit. If you are assessed and the tax demand is genuine, pay it in full with interest and apply for immunity from penalty and prosecution within one month — do not let that window close.
• Faceless means written submissions are everything. No personal hearing is available; your documents and written explanation are the entire case.
• New regime removes scrutiny risk on deductions entirely. If your old-regime advantage is modest, the clean filing of the new regime is worth more than the marginal tax saving.
• Retain all proofs for seven years from the end of the relevant assessment year — the time bar for serious evasion cases extends to ten years.