Sep 59 min read

A Detailed Guide on Income Tax Notice to Salaried Employees

Q: What happens after you receive a notice from the Income Tax Department?

If someone gets a notice for failing to file an ITR, they have the option to file a late return and reply to the notice with a justification for their failure to file. If the notice was received for a different cause, the recipient must take the appropriate action and reply to it within the allotted time.

Tax-Free Income in India: What Every Taxpayer Should Know in 2024-25

An income tax notice from the Tax Department denotes the need for more information, revisions, or clarification regarding your tax returns. Income tax notices have become more significant for those with salaried income in the current fiscal year. Tax authorities are now scrutinising differences including false claims, concealed incomes, failure to file tax returns, inconsistent filings, and notifications of high-value transactions utilising modern technology, like AI-powered systems. As such, your likelihood of obtaining a notification has greatly increased if any income or unwarranted deductions are included in your tax returns. Everything you need to know about salaried employees' Income tax notices, including how to respond to them appropriately, is covered in this article.

What is an Income Tax Notice?

Why Salaried Employees May Receive an Income Tax Notice?

Types of Income Tax Notices Received by Salaried Employees

How Should Salaried Employees Respond to an Income Tax Notice?

How to Prevent Notices and Penalties as a Salaried Employee?

Recent Issues Leading to Income Tax Notices for Salaried Employees

Conclusion

Most Asked Questions

What is an Income Tax Notice?

An income tax notice is a formal communication on tax matters from tax authorities to taxpayers, whether they be people or organisations. It serves as a channel of communication between the tax department and taxpayers regarding issues like unpaid taxes, inconsistencies in tax filings, or the requirement for an audit. Unreported earnings, erroneous claims for refunds or deductions, and discrepancies in the information submitted can all serve as catalysts for the receipt of an income tax notice. The notice's objective is to notify the taxpayer of a specific problem or inconsistency that the tax authorities have found. The notice might request more supporting evidence, error corrections, or an explanation of any discrepancies in the tax returns. To maintain tax compliance and prevent any fines, it is crucial to respond to the notice in a timely and precise manner within the allotted time frame.

Why Salaried Employees May Receive an Income Tax Notice?

A salaried person may receive an income tax notification for a number of reasons, such as:

The tax authorities may send you a notice to request clarification if there are differences in the income you report and the income recorded by your employer, financial institutions, or other sources.

You may receive a notice if you make deductions or exemption claims that are not substantiated by the required paperwork or do not match the eligibility requirements. If the income tax department finds any fraudulent deductions claimed, you may also receive a notice. For instance, a lot of paid workers claim HRA exemption by using fictitious rent invoices. These people are being monitored by the IT department and are getting income tax notices from HRA.

You risk receiving notice for underreporting income if you don't disclose all of your revenue sources, including interest, rental income, and freelancing profits. For instance, revenue from side gigs or money from social networking.

Tax authorities may issue notices in response to unusual high-value transactions, such as investments, big cash deposits, or property acquisitions, to verify their authenticity.

A combined statement of all tax-related transactions connected to your PAN is found on Form 26AS. You may receive a notification if the income reported on your return and the information in Form 26AS differ.

If gifts or loans are not reported, especially if they are above a specific amount, tax authorities may become involved.

Ignoring or failing to appropriately respond to prior notices may result in receiving more severe notices in the future.

To verify correctness and conformity, a random selection of returns is made for close scrutiny

You may receive a notice requesting an explanation if you file your income tax return after the deadline or fail to file it at all.

Tax requirements require you to disclose foreign income, assets, and financial interests; if you haven't, you may receive a notice.

Types of Income Tax Notices Received by Salaried Employees

section 139(9): The tax department may issue this notice to the taxpayer in order to provide them with an opportunity to correct any errors or discrepancies in their filed tax return. Another name for it is a faulty return notification. Should you receive this notice, you have 15 days from the date of receipt to file an amended return that addresses the concerns listed in the notice.

Section 142(1): A notice under this section is given in two situations. Firstly, the income tax officer requires additional information and documentation after you have already filed the return. In the other case, it is given if the income tax officer requests that you file your ITR even though you haven't yet. You could be fined up to Rs. 10,000 and imprisoned for up to a year if you ignore the notification.

section 143 (1): This notification is sent out following the filing and processing of the ITR. It serves as a channel for informing the taxpayer of the tax that the income tax department has calculated. This notification may be sent out if there is an unpaid refund or any outstanding tax due.

section 143(2): The purpose of this notice is to inform the taxpayer that their return has been selected for examination or a more thorough evaluation. This kind of investigation is done to make sure you haven't overstated your losses, paid less in taxes, or undervalued your income.

Section 156 (Demand Notice): The taxpayer may receive notice u/s 156 if there is any amount—such as tax liability, fees, penalties, or fines—that must be paid to the income tax department. After getting the letter, the taxpayers have 30 days to pay the needed sum.

Section 245: The income tax department may issue a notice under Section 245 if it feels that taxes from prior years have not been paid and wishes to offset that demand with the current year's refund. Within 30 days after receiving this notice, you must reply to it. If you don't reply within the allotted period, the income tax officer may use this as your approval and continue with the adjustment of your refund against the outstanding demand.

How Should Salaried Employees Respond to an Income Tax Notice?

Effectively responding to income tax notices necessitates close attention to detail and following the guidelines provided by the tax authorities. The following is how you reply to income tax notices:

Step 1: Read the notice carefully to learn the purpose behind its issuance, the specific issues brought up, and the necessary steps to take.

Step 2: Gather any and all pertinent evidence pertaining to the issues stated in the notification, such as your income tax return, Form 16, Form 26AS, investment proofs, bank statements, and any other data.

Step 3: Take note of the notice's stated deadline for replying. Make sure you reply within the allotted time range to prevent issues.

Step 4: Enclose all pertinent documents that attest to the accuracy of the data you have included in your response. Arrange the documents in a sensible order to make verification easier.

Step 5: You might want to speak with a tax advisor or a chartered accountant if you find the notice difficult or complex to answer.

Step 6: If utilising online techniques, record the submission along with any acknowledgement or reply you get.

Step 7: Keep an eye out on your communication channels for any notices or updates so that you can react quickly.

How to Prevent Notices and Penalties as a Salaried Employee?

Besides knowing how to deal with notices and penalties as a salaried employee, it is important to avoid them in the first place. Here are a few ways salaried employees can do so:

Make sure to submit your tax return by the due date. If you can't submit before the deadline, you should think about filing your return as late as possible. By doing this, you can be sure that you avoid receiving needless fines and notifications.

Since this is one of the main sources of income tax notices, make sure the data provided in the ITR matches the information stated in Form 26AS.

Ensure that you report money from all sources, and remember to report any substantial income as well.

Save all of the supporting documentation and evidence for the deductions and exemptions you have claimed. You may be asked to provide documentation by the Income Tax Department to support your claims.

Maintain meticulous records of all your financial dealings, including earnings, outlays, and any corroborating paperwork. This will assist you in supporting your claims in the event of an audit.

Speak with a Tax Expert: Seeking professional assistance is the best course of action if your tax position is complex, as tax management can be scary. To ensure appropriate filing and prevent notifications and penalties, speak with a professional accountant.
If you get any correspondence or notices from tax authorities, get back to them as soon as possible and do as they say. Penalties might get worse if notices are ignored.

Recent Issues Leading to Income Tax Notices for Salaried Employees

In Assessment Year 2023-24, several serious issues led to Income Tax notices for salaried employees. Here are a few to be conscious about:

Fake Exemptions and Deductions

Salaried individuals received income tax letters for a variety of reasons other than the ones listed above, such as filing incorrect deductions and exclusions. Many salaried workers who claimed rent deductions using fictitious rent receipts received notices for HRA income tax as well as other notices. Under the previous tax system, people may claim a number of deductions and exemptions according to the income tax legislation. For instance, a person may be eligible to receive exemptions from interest deductions, leave travel allowance, and house rent allowance (HRA).

Nevertheless, a lot of people file these deductions by providing fictitious rent receipts and other paperwork. With the use of potent AI technology, the government has begun to identify these people. The AI detectors assist in identifying paid individuals who are making bogus deduction claims and identify any use of forged documents. The income tax department implemented these AI detectors in AY 2023–2024 of last year. Therefore, if you are claiming deductions such as HRA and LTA on your tax return this year for FY 2023–24, be sure to have your payment proofs available in case the income tax agency requests them.

Moonlighting Income

Additionally, the Income Tax Department is stepping up its enforcement of income from side gigs that are not disclosed in ITRs. The act of generating money outside of your normal employment or principal source of income and keeping it hidden from the government on your income tax return is known as moonlighting. It is regarded as a false income report, and it may result in notifications.

The money made from moonlighting frequently exceeds that from the main source. These revenues were mostly obtained online. The Income Tax Department's AI system proved effective in locating this kind of undeclared revenue. If you additionally work a second job and haven't declared this income on your income tax return (ITR), be ready to pay a penalty of between 50% and 200% in addition to having to give a good cause or explanation.

Conclusion

In summary, for salaried employees to safely navigate the tax landscape, they must remain aware, organised, and proactive in their tax filing and documentation. Taxpayers can guarantee compliance, reduce the possibility of conflicts with tax authorities, and have peace of mind about their financial commitments by following these procedures.

FAQ

Q1. What happens after you receive a notice from the Income Tax Department?

If someone gets a notice for failing to file an ITR, they have the option to file a late return and reply to the notice with a justification for their failure to file. If the notice was received for a different cause, the recipient must take the appropriate action and reply to it within the allotted time.

Q2. What happens if you don’t respond to an Income Tax Notice?

The tax department may impose a minimum penalty of 1% of the tax liability every month and a maximum penalty of 100% of the tax amount if you do not reply to the Income Tax Notice within the allotted time.

Q3. Can income tax returns be rejected?

Yes, there are circumstances in which income tax returns may be rejected, such as late filing, non-signature, receipt of a low-quality ITR, etc.

Q4. What is income tax scrutiny for salaried employees?

The purpose of this notice is to inform the taxpayer that their return has been selected for examination or in-depth analysis. This kind of investigation is done to make sure you haven't overstated your losses, paid less in taxes, or undervalued your income.

Q5. What is the time limit for income tax scrutiny notice?

If the Income Tax Department chooses to examine the taxpayer's ITR, it is required to notify the taxpayer within three months of the end of the relevant fiscal year, which is the year the return is submitted.

Q6. What is an income tax notice for HRA?

False rent receipts are frequently used by salaried workers to obtain HRA exemptions. These people are being monitored by the IT department and are getting income tax notices from HRA.

Q7. Why did the ITD recently issue a clarification on notices sent to taxpayers?

In 2023, many taxpayers who had already properly submitted their income tax returns received notice from the Department earlier. As a corrective action, the Income Tax Department clarified X in response to concerns expressed by truthful taxpayers who got letters from the agency after properly filing their income tax returns within the allotted time frames.