Filing your income tax return? Here are some major mistakes to avoid

Filing errors can result in tax notices, interest and penalty charges, not to mention delays in getting your refund

The tax filing season is underway. This is an exercise that should be undertaken with meticulous care. Mistakes in filing the income tax return (ITR) can have serious consequences for taxpayers, such as scrutiny notices, additional tax liability, and delayed refunds.

Missing documents

At the preparatory stage, taxpayers often fail to collect essential documents such as bank interest certificates, mutual fund and brokerage statements, rent receipts, and proofs for life insurance premiums paid and deposits made in the PPF account.

 

“For declaring their overseas holdings, taxpayers often miss details about their foreign assets to be filed under Schedule FA of the return form,” says Vishwas Panjiar, partner, Nangia Andersen.

 

“Taxpayers also tend to overlook documents such as TDS (tax deduction at source) certificates, receipts for deductions (for donations and tuition fees), and final housing loan interest certificates (instead of provisional ones),” says Sudhakar Sethuraman, partner, Deloitte India.

 

Missing documents can result in denial of deductions and lead to additional tax liability with interest.

Failure to reconcile tax forms

Form 26AS, Annual Information Statement (AIS), and Taxpayer Information Summary (TIS) contain crucial tax and transaction data.

 

Form 26AS captures details of TDS, TCS, and advance tax payments. “Claiming TDS or TCS credits is only valid if they appear in Form 26AS. Excess claims can lead to tax demands,” says Sethuraman.

 

Failure to match with Form 26AS can result in loss of TDS credit or underreporting of tax paid.

 

The AIS provides a summary of financial transactions, including interest, capital gains, dividends, rental income, and mutual fund activities. Overlooking it may lead to missed income disclosures.

 

The significance of TIS lies in its utility during the income tax return (ITR) filing. It helps taxpayers verify the accuracy of pre-filled data and cross-check the information declared in their returns with the records available with the tax authorities.

 

“Neglecting these reconciliations often triggers notices under Section 143(1), attracts interest under sections 234A and 234B, and penalties for underreporting or misreporting. It can also lead to delays in refund and unexpected tax demands,” says Panjiar.

Commonly missed income sources

Some commonly missed income sources include savings bank interest, small capital gains, rental income, clubbing of income from spouse or children, foreign income, and interest from overseas accounts. 

“All income must be reported — salary, house property, business or profession, capital gains, fixed deposit (FD) and savings bank interest, tax refunds, etc.,” says Abhishek Soni, co-founder, Tax2Win.

 

Bank accounts held individually, even if dormant, must be disclosed. “Failure to do so can lead to enquiries during scrutiny assessment if the return is picked up by the income tax authorities,” says Santhosh Shivaraj, partner, global employer services, tax and regulatory services, BDO India.

Omission of income from past employer

Taxpayers often miss disclosing income from previous employers after job changes. Salary data from all employers appears in Form 26AS and AIS. If income from both employers is not fully disclosed in the ITR, it may lead to a tax notice.

 

“Since both employers may provide tax benefits separately, it often results in lower overall TDS, leaving a tax shortfall,” says Panjiar.

Errors in capital gains reporting

Capital gains tax rules vary by asset type and holding period.

 

“Misclassification of gains can lead to incorrect tax calculations. For example, amendments in Finance Act 2024 (2), effective from July 23, 2024, impact tax rates and indexation eligibility based on the sale date,” says Sethuraman.

 

“Ignoring capital gains from equity mutual fund redemptions, assuming they are fully tax-free, is a frequent error,” says Panjiar.

 

Taxpayers often use incorrect cost of acquisition or forget indexation benefits that applied until July 24, 2024. Many also fail to apply the grandfathering rule for long-term capital gains up to January 31, 2018.

Mistakes related to foreign income and asset disclosure

Many fail to disclose foreign bank accounts, mutual funds, shares, and properties. “Even dormant accounts or those with a zero balance must be reported if you qualify as a resident and ordinarily resident (ROR),” says Panjiar.

Errors often arise due to incorrect determination of residential status (claiming to be non-resident when they are ROR).

 

“Many taxpayers miss out on disclosing foreign shares received via ESOPs or sweat equity, assets where they hold signatory authority, and cryptocurrencies or other digital assets,” says Sethuraman.

 

Schedule FA requires disclosure of all foreign assets and income. “Income must be reported in the correct schedule — for example, foreign salary in Schedule S and sale of foreign shares in Schedule CG,” says Sethuraman.

Incorrect, inflated Section 80G deductions

Deductions under Section 80G (which includes donations to charitable institutions) are often overclaimed. “Many individuals report donations that do not align with their income level or financial profile,” says Soni.

Shivaraj warns that the tax office can cross-verify the deductions claimed using various sources, resulting in a scrutiny assessment.

Improper claims on HRA and home loan interest

The income tax department can flag House Rent Allowance (HRA) claims, especially for large amounts where no TDS was deducted on rent paid to landlord. Taxpayers could be asked to file an updated return. They could even be slapped with interest charges and penalties.

Failure to disclose exempt income

In Schedule EI (exempt income),  taxpayers must mention all exempt income such as Public Provident Fund (PPF) interest and Employees Provident Fund (EPF) withdrawals.

 

“Many taxpayers wrongly assumed that exempt incomes do not need to be disclosed. Actually, all incomes, whether taxable or exempt, need to be reported,” says Shivaraj.

 

Soni adds that many fail to mention agricultural income in Schedule EI or skip it entirely despite the amount being significant.

Failure to verify ITR

An unverified return is considered invalid. “All the hard work done in filing your return goes in vain. It is treated as if you never file the return for that year,” says Soni.

Refund failures due to incorrect bank details

Refunds may fail if bank details are incorrect. The account number and the IFSC code should be correct. Any error in these details can lead to refund failure. “The bank account provided for a refund credit must be pre-validated with the income tax portal linked to the taxpayer’s PAN,” says Shivaraj. If bank details change after filing, taxpayers should update them with the income tax department.

Underreporting, misreporting income has dire consequences

 

Penalties under Section 270A and Section 271AAC of the Income Tax Act apply for underreporting or misreporting of income

Section 270A:

Penalty is 50 per cent of tax payable for underreporting, and 200 per cent for misreporting

Examples of underreporting:

Assessed income being higher than reported income

Failure to file a return despite income exceeding the basic exemption limit

Conversion of declared losses into income upon assessment

Examples of misreporting include:

Misrepresentation or suppression of facts

Failure to record investments or receipts

False entries in books of account

Claims of unsupported expenditure

 

Section 271AAC:

Deals with unexplained income, including cash credits, unexplained investments, money, or expenditures. Authorities such as the assessing officer, commissioner (appeals), principal commissioner, or commissioner may impose these penalties

Taxpayers can avoid penalties by filing revised or updated ITRs under Section 139(5) or Section 139(8A)

The intent behind non-compliance—whether it is wilful (misreporting) or unintentional (underreporting)—determines the severity of penalty

Non-compliance can lead to financial burden, interest, and legal consequences