Why Some Income Tax Returns Get Picked for Scrutiny

In a data-driven tax system, accurate reporting and complete disclosure matter far more than the amount of tax you pay.

Every year, crores of taxpayers file their income tax returns. In most cases, the return is processed, refund is issued wherever applicable, and the matter ends there. Only a very small percentage of returns are selected for scrutiny. In fact, scrutiny cases are generally far below one per cent of the total returns filed. Therefore, an ordinary taxpayer need not panic merely because he has filed a return.

Table Of Content

In a data-driven tax system, accurate reporting and complete disclosure matter far more than the amount of tax you pay.
The Client: Capable, but Unstructured
Criteria for Compulsory Scrutiny
Risk-Based Scrutiny: Common Reporting Mismatches
High-Value Transactions and Source of Income
Large Exemptions and Deduction Claims
Best Practices for Error-Free Filing
Notices vs. Scrutiny: Understanding the Difference
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The Client: Capable, but Unstructured

However, taxpayers should also understand that scrutiny selection is no longer based only on manual suspicion. The Income Tax Department today has access to large volumes of financial data. The return filed by the taxpayer is compared with information available in Form 26AS, AIS, TIS, TDS returns, SFT reports, bank data, property registration data, mutual fund and share transaction data, foreign remittance data and other information reported by third parties.

Broadly, scrutiny cases may arise in two ways. The first is compulsory scrutiny. The second is risk based scrutiny.

Criteria for Compulsory Scrutiny

CBDT has recently issued guidelines for compulsory selection of returns for complete scrutiny during FY 2026-27. These guidelines cover specific cases such as search, survey, reassessment, cancellation or non approval of registration of trusts and institutions where exemption is still claimed, recurring additions in earlier years above specified limits, and cases where specific information regarding tax evasion is received from investigation, intelligence, law enforcement or regulatory agencies.

Risk-Based Scrutiny: Common Reporting Mismatches

These are not ordinary cases. A normal salaried taxpayer, pensioner, investor, landlord, professional or small business owner fall under risk based scrutiny assessments. For them, the more common practical issue is mismatch or incomplete reporting.

For example, interest income appearing in AIS may not have been offered in the return. Dividend income may be missed because no tax was deducted. Capital gains from shares, mutual funds or property may not match with broker statements, AIS or Form 26AS. Property sale may be reported by the buyer through TDS, but the seller may not have properly disclosed capital gains. Foreign assets, ESOPs, RSUs, foreign bank accounts or foreign income may not have been reported in the relevant schedule.

High-Value Transactions and Source of Income

High value transactions can also attract attention, especially when they are not consistent with the income declared. Purchase or sale of property, large cash deposits, high credit card payments, foreign travel, overseas remittances, purchase of high value assets or large investments may raise questions if the source is not properly explained.

Large Exemptions and Deduction Claims

Another area which taxpayers should be careful about is exempt income. A large exempt income such as agricultural income, large gifts, inheritance, exempt capital gains, maturity proceeds, may trigger scrutiny assessments. larly, if a taxpayer claims deduction for donations, housing loan interest, HRA, insurance, medical expenditure or capital gains exemption under sections such as 54 or 54EC, if they are large in value, may lead to scrutiny. Claiming exempt income or deductions are not wrong as long it is genuine backed up by sale bills, mandi receipts, bank entries or supporting records etc.

Best Practices for Error-Free Filing

The best way to reduce unnecessary scrutiny risk is to file a complete and accurate return. Before filing, taxpayers should download AIS, TIS and Form 26AS. They should compare these with Form 16, bank statements, interest certificates, dividend statements, capital gains reports, property documents, rent details and foreign income records. If any entry in AIS is incorrect, feedback should be submitted on the portal and supporting documents should be preserved.

Scrutiny is not something to fear. At the same time, it should not be taken casually. In a data driven tax system, the department may already know many financial transactions of the taxpayer. A properly reconciled return, complete disclosure and proper documentation are the best protection against avoidable tax notices and scrutiny assessments.

Prevention is better than cure. This is the tax filing season, do it correctly!

Notices vs. Scrutiny: Understanding the Difference

It is also important to understand that a mismatch does not automatically mean scrutiny. Sometimes the taxpayer may receive only an intimation, compliance notice or clarification request. But large, repeated or unexplained mismatches can increase the risk of further verification.

Today scrutiny assessments are conducted through the faceless assessment system. This means the taxpayer may not physically meet the officer. Notices, replies, documents and explanations are generally handled through the income tax portal. Therefore, the quality of written reply and documentary evidence becomes very important.