In December 2025, numerous salaried individuals across India received emails and SMS alerts from the Income Tax Department. These communications highlighted discrepancies between the deductions and exemptions claimed in their filed Income Tax Returns (ITR) and the data available with the tax authorities.
Why Taxpayers Are Getting Flagged
The core issue, as explained by tax experts, is a mismatch. Most flagged cases involved returns where exemptions or deductions were claimed in the ITR but did not appear in the individual's Form 16, the certificate issued by the employer detailing salary and tax deducted.
Nemin Shah, Director at EQX Business Consultancy, clarified the common scenario. Often, an employer deducts Tax Deducted at Source (TDS) based on a conservative estimate of an employee's eligible deductions. If the employee later claims a significantly larger set of exemptions directly in their tax return, it results in a claim for a refund of excess TDS. "Seeking a big refund results in the system likely taking notice and flagging it," Shah stated.
This automated scrutiny is algorithm-driven, not manual. The system cross-references data from Form 16, Form 26AS, Annual Information Statement (AIS), Transaction Information Statement (TIS), employer filings, and third-party reports from banks and insurers.
The Critical Window: Investment Declaration & Proof Submission
This is where the annual ritual with employers becomes vital. Every January or February, companies ask employees to submit proof for the investments and expenses they declared at the start of the financial year (April). This step, often treated as a routine HR task, is crucial for smooth tax processing.
"It is advisable to disclose all the exemptions and deductions to the employer so that everything is included in Form 16," advised Nemin Shah. When proofs are submitted and verified, the employer factors eligible deductions into payroll calculations, adjusts TDS accordingly, and reflects it in Form 16. This alignment means the final Form 16 closely matches the eventual ITR claim, minimizing the chance of alerts.
Proofs That Demand Priority and Documentation
Himank Singla, Partner at S B H S & Associates, Chartered Accountants, noted that the tax department is focusing on high-value refunds and clear data mismatches. Key areas under scrutiny include:
- House Rent Allowance (HRA): Employers are strict, requiring rent receipts, landlord PAN (mandatory for annual rent over ₹1 lakh), and sometimes the rent agreement. Cash rent payments attract greater scrutiny.
- Deductions under Sections 80C, 80D, 80E: Proofs like insurance policy documents, PPF statements, and ELSS investment details are essential.
- Housing Loan Interest: An interest certificate from the lender and possession details are critical.
- Donations (Section 80G): Often not factored in by employers for TDS, but receipts with trust registration details must be kept for the ITR.
Singla emphasized that maintaining documentary evidence for all claims is non-negotiable, even if an employer doesn't insist on verification. "Absence of employer verification does not dilute the assessee’s burden of proof under the Income-tax Act," he warned.
Not Tax Evasion, But a Call for Reconciliation
It is important to understand that these alerts are not scrutiny notices or investigations into tax evasion. Claiming deductions directly in the ITR is legally permitted if they are accurate and disclosed. "The Income Tax Act does not mandate that deductions or exemptions must be claimed only through the employer," Singla clarified.
However, the consequence of not routing claims through the employer is additional follow-up. Taxpayers must reconcile the mismatch, often by filing a revised return (ITR-U), which can delay processing and any pending refunds.
For the current financial year 2025-26, proactively using the investment proof submission window with your employer is the simplest strategy to avoid the alerts that many faced for FY 2024-25. Ensuring your Form 16 and ITR tell the same story is the best way to stay off the tax department's automated radar.
