The Income Tax Notice to Salaried Employees serves as a means of correspondence with the taxpayer, addressing aspects such as tax liability, discrepancies in the Income Tax Return (ITR), and related matters. Each notice conveys a specific issue or concern that has attracted the attention of tax authorities, potentially necessitating the recipient to furnish additional information, rectify errors, or address inconsistencies in their tax filings.
Income Tax Notice to Salaried Employees has intensified in Assessment Year (AY) 2023-24. Advanced technologies, such as AI scanners, are now employed by tax authorities to identify fraudulent deductions and undisclosed income arising from supplementary employment. Consequently, individuals who have not reported income or have claimed deductions without proper documentation are at an elevated risk of receiving a notice. It is imperative to acknowledge the increased likelihood of being scrutinized and to promptly respond to any notice received to uphold compliance with tax regulations and evade penalties.
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Why Department is Sending Income Tax Notice to Salaried Employees for AY 2023-24?
Potential reasons for Income Tax Notice to Salaried Employees in AY 2023-24 encompass a spectrum of circumstances, each warranting careful consideration:
Form 26AS Data Discrepancy:
Divergence between the income disclosed in the tax return and the information documented in Form 26AS, a comprehensive statement of all tax-related transactions linked to the PAN, might result in the issuance of Income Tax Notice to Salaried Employees.
High-Value Transactions Scrutiny:
Transactions of substantial value, such as significant cash deposits, property acquisitions, or investments, could act as triggers for tax authorities to scrutinize and ascertain the legitimacy of these financial activities.
Non-Filing or Delayed Filing of Returns:
Failure to file the income tax return within the stipulated timeframe or submitting it after the due date might prompt tax authorities to issue notices, demanding an explanation for the delay.
Discrepancies in Income Reporting:
Instances where variations arise between the income declared by the taxpayer and that reported by their employer, financial institutions, or other sources may prompt tax authorities to issue Income Tax Notice to Salaried Employees for seeking clarification.
Random Scrutiny Selection:
Some returns undergo random selection for meticulous scrutiny to ascertain adherence to tax regulations, ensuring both compliance and accuracy.
Gifts or Loans Non-Disclosure:
Non-reporting of gifts or loans, especially if surpassing a specified threshold, might capture the attention of tax authorities, leading to the issuance of notices seeking clarification.
Previous Notices Non-Response:
Neglecting or inadequately responding to preceding notices can escalate the situation, potentially resulting in more severe and consequential notices from tax authorities.
Foreign Income and Asset Disclosure:
Failure to disclose foreign income, assets, or financial interests as mandated by tax regulations could prompt the issuance of notices demanding an explanation for the non-disclosure.
Illegitimate Deductions and Exemptions
Incorrectly claiming deductions or exemptions without proper documentation or meeting eligibility criteria can result in receiving income tax notice for salaried employees. Notices may also be issued if the income tax department identifies fraudulent deductions. For instance, some salaried employees submit counterfeit rent receipts to claim HRA exemption, placing them under scrutiny and leading to HRA income tax notices. When filing your return and asserting deductions such as HRA and LTA, ensure you have valid payment proofs readily available, as the income tax department may request them. The AI scanner deployed by the income tax department can identify all types of fraudulent documents, prompting increased vigilance and the issuance of notices to those employing fake documents for deductions or exemptions under HRA, LTA, donations, etc.
Undisclosed and Moonlighting Income
The Income Tax Department is actively addressing undisclosed supplementary income in income tax returns (ITRs), including cases related to moonlighting. Moonlighting, the practice of earning income outside one’s primary job without reporting it in the ITR, is considered income misreporting and may lead to an income tax notice for salaried employees. In many instances, moonlighting income surpasses that of the primary source, often received through online channels. The AI technology utilized by the Income Tax Department effectively detects such unreported income. Moonlighting instances rose notably post-2019, initially resulting in notices for individuals with undisclosed income ranging between Rs. 5 lakhs and Rs. 10 lakhs. Presently, the income tax department identifies and issues notices to all such individuals for misreporting income. While moonlighting is legal in India, failure to report this income in the ITR and evading taxes prompts notices. If engaged in moonlighting without reporting it, individuals should be prepared to provide a valid explanation and may face penalties ranging from 50% to 200%.
Types of Income Tax Notice for Salaried Employees:
Notice under Section 156 (Demand Notice):
If any amount, such as tax liability, fees, penalty, or fine, is owed to the income tax department, the taxpayer might receive a notice under Section 156. Compliance requires payment within 30 days of receiving the notice.
Notice under Section 142(1):
Notice under Section 142(1) is issued under two circumstances:
- When the taxpayer has already filed the return, and the income tax officer requires additional information and documents.
- In cases where the taxpayer has not filed the ITR, but the income tax officer mandates its submission.
Failure to respond to this notice may result in penalties of up to Rs.10,000 and imprisonment for up to 1 year.
Notice under Section 143(2):
Issued to inform the taxpayer that their return has been selected for scrutiny or a detailed assessment. The objective of scrutiny is to verify that the income has not been understated, taxes paid are accurate, and losses claimed are within permissible limits.
Intimation under Section 143(1):
This notice is issued subsequent to the filing and processing of the Income Tax Return (ITR). It serves as a communication tool employed by the income tax department to convey the computed tax details to the taxpayer. Issuance of this notice may be prompted by pending tax liabilities or pending refunds.
Notice under Section 148:
If the income tax officer possesses evidence or has a reasonable belief that income has been inaccurately disclosed or taxes remain unpaid, an income escaping notice under Section 148 may be issued.
Notice under Section 245:
Issued when the income tax department suspects unpaid taxes from previous years and aims to offset this demand against the current year’s refund. Responding within 30 days is imperative, as failure to do so may be construed as consent, allowing the income tax officer to make the necessary adjustments.
Notice under Section 139(9):
This notice is issued by the tax department to rectify errors or discrepancies in the taxpayer’s filed return, commonly known as a defective return notice. Upon receiving this notice, the taxpayer must submit a revised return addressing the mentioned issues within 15 days.
What to reply to Income Tax Notice for Salaried Employees?
Effectively responding to income tax notice for salaried employees necessitates meticulous attention and adherence to procedures prescribed by tax authorities. Here’s a concise guide on responding to such notices:
Thorough Notice Examination:
Examine the notice thoroughly to grasp its purpose, specific concerns raised, and the required actions.
Prompt Response:
Note the response deadline mentioned in the notice and ensure timely submission to avoid complications.
Document Compilation:
Gather pertinent documents, including your income tax return, Form 16, Form 26AS, investment proofs, bank statements, and other relevant records related to the notice’s issues.
Submission of Supporting Documents:
Attach all relevant supporting documents that substantiate the information provided in your response. Organize the documents logically to facilitate verification.
Professional Guidance:
If the notice is complex or challenging, consider seeking advice from a tax advisor or chartered accountant who can offer expertise and guidance.
Regular Communication Monitoring:
Monitor communication channels regularly for updates or additional notices, enabling prompt responses when required.
Response Tracking:
If utilizing online methods, track the submission and any acknowledgments or responses received.
How to Prevent Income Tax Notice for Salaried Employees and Penalties Associated with It?
To mitigate the risk of incurring penalties and receiving income tax notice for salaried employees, adhere to the following guidelines:
Systematic Financial Record Maintenance:
Organize comprehensive records of all financial transactions, encompassing income, expenses, and relevant documentation. This meticulous record-keeping serves as crucial evidence to substantiate your claims in the event of an audit.
Timely and Accurate Filing:
Ensure the timely submission of your tax return by the specified deadline. If unable to meet the deadline, promptly file a belated return to minimize the likelihood of penalties and notices.
Engage Professional Tax Assistance:
In cases where tax management becomes intricate, seek the expertise of a qualified tax professional, such as a chartered accountant. Professional guidance ensures accurate filing, reducing the likelihood of notices and penalties.
Verification of Form 26AS:
Thoroughly cross-verify the details submitted in your Income Tax Return (ITR) with those outlined in Form 26AS. Discrepancies in this information are a key trigger for income tax notices.
Prompt Response to Notices:
Swiftly respond to any notices or communications received from tax authorities, adhering to their directives. Neglecting or delaying responses may result in more severe penalties.
Documentary Proof for Deductions:
Safeguard supporting documents and proofs for all deductions and exemptions claimed. The Income Tax Department may request these documents to validate the legitimacy of your claims, and having them readily available is essential.
Comprehensive Income Reporting: Thoroughly report income from all sources, leaving no significant income undisclosed. A comprehensive disclosure minimizes the risk of triggering alerts and subsequent notices.