Use a revised or updated income tax return to correct bogus deductions

Once scrutiny, surveys, or raids begin, correction options are no longer available

The Income Tax (I-T) Department has uncovered a large-scale racket involving return preparers and intermediaries who helped clients file fraudulent income tax returns (ITRs). These returns falsely claimed deductions and exemptions. Following department outreach, around 40,000 taxpayers have revised their filings, withdrawing bogus deductions totalling ₹1,045 crore over the past four months.

 

HRA and LTA: Heavily Misused

 

One of the most exploited provisions is Section 10(13A), which permits exemption on house rent allowance (HRA). “Taxpayers often submit fabricated rent receipts or falsely declare parents or relatives as landlords to their employers to claim HRA exemptions,” says Preeti Sharma, partner, tax and regulatory services, BDO India.

 

“A false lease deed may be prepared by putting a random landlord’s name. It may be claimed that payment was made in cash so that there is no bank trail,” says Arvind Rao, founder, Arvind Rao & Associates. 

 

Leave travel allowance (LTA) is also misused through forged tickets and boarding passes. “At times, individuals forge tickets themselves by changing the date on an old ticket. And sometimes they work with agencies that provide forged tickets and boarding passes,” says Rao.

 

Bogus Donations and Premium Receipts

 

Donations to charities (Sections 80G), political parties (80GGC), and scientific research institutions (80GGA) are another source of fraud. “Sometimes, these donations are made by cheque, the donor gets a receipt, and later the money finds its way back to the donor,” says Rao.

 

“In some cases, political parties registered but inactive on the ground are used as conduits for bogus donations,” says Shefali Mundra, tax expert, Cleartax.

 

Fake receipts are also used to claim deductions under Section 80D (medical insurance) for relatives who are not covered, or to claim insurance and investment-based deductions under Section 80C without actual transactions.

 

“Loan-related deductions are sometimes claimed even when the loan is from a non-eligible lender (e.g., personal loan from a friend), or interest is claimed twice under different sections,” says Sharma.

 

Medical deductions under Section 80DDB are often backed by forged certificates. “For medical deductions, forged Form 10-I certificates from doctors are most common,” says Sharma.

 

Rogue agents and unregistered intermediaries are central to these scams. “They manufacture fake documentation, including rent agreements, medical bills, and donation receipts, and then mass-file ITRs using temporary email IDs,” says Mundra.

 

Stronger Checks and Reporting Requirements

 

For HRA claims exceeding ₹1 lakh, quoting the landlord’s PAN is now mandatory. “If rent has been paid, the landlord would have to report that income. If he doesn’t, the claimant could be questioned,” says Rao. Mundra informs that discrepancies in HRA claims are also detected if no rent is reflected in the annual information statement (AIS) or Form 26AS.

 

Rent above ₹50,000 per month attracts 2 per cent annual TDS. “In cases where HRA claims exceeded ₹6 lakh, non-deduction of TDS acts as a red flag,” says Rao.

 

Charitable trusts must now report donations to the department and issue PAN-linked receipts. “This allows for cross-verification. If a donor claims to have made a donation, the department can check whether the trust has reported the corresponding receipt with the donor’s PAN. Any mismatch may indicate possible fraud,” says Rao.

 

Sharma adds that non-genuine institutions are periodically blacklisted, and data from these entities is retroactively matched to taxpayers’ claims.

 

The department cross-verifies claims against AIS data, TDS filings, and bank records. “If a taxpayer claims a ₹80,000 donation under Section 80G but has no matching bank transaction, or if the claimed organisation is not listed in the approved 80G database, the case is flagged,” says Mundra.

 

“High-value deductions, or a spike in claims compared to prior years, are automatically flagged for review or scrutiny,” says Sharma. 

 

Heavy Penalties

 

Under Section 270A, underreporting attracts a penalty of 50 per cent of the tax payable, and misreporting attracts a penalty of 200 per cent of the tax payable on the misreported income. “If the act is deemed wilful, Section 276C provides for prosecution, with jail terms ranging from three months to seven years, along with fines,” says Mundra.

 

Some cases could result in imprisonment as well. “If the evaded tax exceeds ₹25 lakh, the offender faces rigorous imprisonment ranging from six months to seven years, along with a fine. For other cases, the imprisonment of three months to two years, accompanied by a fine, may be imposed,” says Sharma.

 

Interest under Sections 234A, 234B, and 234C is levied for delayed or insufficient payments. Refunds are withheld and, in extreme cases, assets may be seized or accounts frozen.

 

Opt for Voluntary Correction

 

Taxpayers can rectify false claims before penalties kick in. “Filing a revised return under Section 139(5) is allowed if the original return was filed on time, or a belated return was filed. It must be submitted three months prior to the end of the relevant assessment year, that is, by December 31, 2025 for FY 2024–25, or before the completion of assessment, whichever is earlier,” says Suresh Surana, a Mumbai-based chartered accountant.

 

If assessment is completed before the deadline, a revised return cannot be filed. “A revised return replaces the original and is not an add-on,” says Amit Baid, head of tax, BTG Advaya.

 

Taxpayers who miss this deadline can file an updated return under Section 139(8A). “An updated return can be filed within 48 months from the end of the relevant assessment year. Also note that an updated return cannot be filed to lower the tax liability. It should result in payment of additional taxes over and above the regular tax and interest,” says S.R. Patnaik, partner (head – taxation), Cyril Amarchand Mangaldas.

 

Depending on timing, the additional tax payable ranges from 25 per cent to 70 per cent of the tax and interest. 

 

“Once actions like a raid, survey, or scrutiny are initiated, these correction routes are largely blocked. Harsher consequences like penalties, fines, or prosecution may then follow,” says Baid.

 

Responding to a Tax Notice

 

Taxpayers must log into the income tax e-filing portal to view notices under the ‘e-Proceedings’ or ‘View Notices/Orders’ section and respond within the deadline. “Verify the PAN, name, and assessment year on the notice to ensure it is meant for you,” says Patnaik.

 

Gather relevant evidence, including Form 16, bank statements, and investment and insurance proofs. “Based on the gathered evidence, prepare a covering letter addressing the tax officer to explain the basis on which the said deductions were claimed. The cover letter, along with the evidence, may be uploaded on the income tax e-filing portal,” says Patnaik.

 

Surana warns that failure to respond within the stipulated time or submission of incomplete information may lead to adverse consequences, including ex parte assessment, penalties, or prosecution in serious cases.

 

 

Checklist for Staying Compliant

• Maintain accurate records of all income, deductions, investments, and financial transactions
• Maintain documents like donation and rent receipts, TDS certificates, bank statements, insurance premium receipts, investment proofs, capital gain statements, Form 16, Form 26AS, and AIS
• Avoid claiming deductions or exemptions without being eligible
• Do not submit fabricated or inflated claims (using fake documents)
• Avoid intermediaries who promise inflated refunds or fictitious deductions
• If errors or misreporting occur, correct them proactively through legal means
• Do not ignore emails or notices from the Income Tax Department; respond professionally and on time

The writer is a Mumbai-based freelance financial journalist