Short answer: if the deduction was genuine, gather the evidence and reply on the merits. If it was not, correcting it yourself through an updated return under Section 139(8A) is almost always better than waiting — because a claim with no evidence behind it is treated as misreporting, and that carries a 200% penalty rather than 50%.
Salaried taxpayers have been receiving advisories and notices about deductions claimed in earlier returns. This explains what is behind it and what the realistic options are.
What is actually happening
The Department has moved to a data-driven approach on deduction claims. Information from employers, banks, insurers, donee institutions and its own reporting systems is compared against what individual returns claim. Where the two do not reconcile, the case is flagged.
Rather than opening scrutiny immediately, the Department has been running advisory or "nudge" campaigns — SMS and email messages inviting taxpayers to review their returns and correct them voluntarily. Reporting on these campaigns indicates that claims exceeding ₹1,000 crore have been withdrawn by taxpayers after such advisories, and that search operations have been carried out at around 200 locations against intermediaries suspected of engineering false claims.
A recurring feature is the organised racket: an ITR preparer or agent offering unusually large refunds, taking a share of the refund as a fee, and populating returns with deductions the taxpayer never incurred. Employees of large companies, public sector undertakings, government bodies and academic institutions feature prominently, often because a single intermediary services many colleagues in the same organisation — which is precisely the pattern that makes the group visible in the data.
Which claims are being examined
| Provision (1961 Act) | Claim | Why it is easy to test |
|---|---|---|
| 10(13A) | HRA exemption | Rent claimed against no landlord PAN, no bank trail, or rent paid to a relative with no tenancy |
| 80GGC | Contribution to political parties | Donee reporting; unregistered or shell entities; round-sum amounts |
| 80G / 80GGA | Donations | Donee institution's own reporting and approval status |
| 80D / 80DDB | Health insurance, specified diseases | Insurer data; absence of a prescription or certificate |
| 80E | Education loan interest | Lender reporting; no sanctioned loan on record |
| 80EE / 80EEB | Housing / electric vehicle loan interest | Lender reporting; conditions on loan sanction dates |
The common thread is that each of these is now independently verifiable from a third party. A deduction that once rested on a receipt in a drawer is today matched against the donee's or lender's own filing.
Step one: is the claim actually wrong?
Do not assume the Department is right, and do not assume it is wrong. Three outcomes are possible, and they lead in different directions.
The claim is genuine and you hold the evidence. Reply on the merits with proof — rent agreement, bank transfers, landlord PAN, the donee's registration details and receipt, loan sanction letter and interest certificate. Flagging is a data mismatch, not a finding, and mismatches are frequently explained by a reporting error at the other end.
The claim is genuine but the evidence is thin. Common with cash rent, or a donation where the receipt has been lost. This needs a judgement call about what can be reconstructed and what can realistically be defended, and it is worth taking properly rather than guessing.
The claim was never yours. If you cannot identify the transaction — you do not recall the donation, there is no such loan, you were living in your own house — then it was very likely inserted into your return. In that case the question is not how to defend it but how to correct it fastest.
If the claim was wrong: the updated return route
Section 139(8A) allows an updated return within 48 months from the end of the relevant assessment year — extended from 24 months by the Finance Act 2025. The cost rises the longer you wait:
| Filed within | Additional tax |
|---|---|
| 12 months from end of AY | 25% |
| 12–24 months | 50% |
| 24–36 months | 60% |
| 36–48 months | 70% |
That percentage applies to the aggregate of the additional tax and interest payable — it sits on top of the tax and interest themselves, not instead of them.
Two conditions matter here. An updated return must increase your tax liability; it cannot be used to claim or increase a refund. Withdrawing an unsupported deduction increases liability, so it qualifies. And it is a return, not a letter — the tax, interest and additional tax have to be paid for it to be valid.
Why this route is usually better. Correcting voluntarily, before the Department completes its own enquiry, changes the character of the matter. It removes the refund exposure, stops interest running, and it is the clearest available evidence that the error was not a deliberate attempt to evade. Waiting until an assessment is framed forfeits all of that.
The penalty exposure, and why it is not 50%
Section 270A draws a line that matters enormously here:
| Penalty | |
|---|---|
| Under-reporting of income | 50% of tax on the under-reported income |
| Under-reporting as a consequence of misreporting | 200% |
Misreporting under Section 270A(9) includes misrepresentation or suppression of facts and a claim of expenditure not substantiated by any evidence. A fabricated donation receipt, or an HRA claim where no rent was paid, falls naturally within those words. That is why these cases are not treated as ordinary computational disputes — the Department's position will usually be that this is the 200% limb, not the 50% one.
Two points on the other side, which is why a considered reply matters:
- The Assessing Officer must specify which clause of Section 270A(9) is alleged. A penalty order asserting "misreporting" without identifying the limb has been held procedurally defective, and that is a real ground of challenge rather than a technicality.
- Section 270AA provides a route to immunity from penalty and prosecution where the tax and interest on an assessment are paid and no appeal is filed, subject to conditions and timelines. It is not available in every case, but it should be evaluated rather than overlooked.
Prosecution — in proportion
Section 276C deals with a wilful attempt to evade tax. It exists, and it is the reason these matters should not be ignored. But it is directed at serious, deliberate evasion rather than at every disallowed claim, and voluntary correction before the Department's enquiry concludes is the most relevant factor in keeping a matter civil.
The broader legislative direction has been toward reduced criminal exposure for smaller defaults, with recent reforms limiting maximum imprisonment and substituting monetary consequences below specified thresholds. Because that area has been actively amended, the current text should be checked in any case where prosecution is a genuine concern rather than relying on a general description.
"My agent filed it" is not a defence
This needs saying plainly, because it is the most common reaction.
The return is verified by you. The liability for what it contains is yours, regardless of who typed it. If an intermediary inflated your claims and took a share of the refund, that may well be an offence on their part and you may have a civil claim against them — but none of it moves your liability for tax, interest or penalty.
The practical consequence: if you used a preparer who promised a refund that seemed large, check what was actually claimed in your return before an advisory arrives. Your filed ITR and computation are downloadable from the e-filing portal, and comparing them against what you actually paid takes very little time.
What not to do
- Do not ignore an advisory. It is not a demand, but it means your return is flagged. Silence removes the voluntary-correction advantage while the matter stays open.
- Do not file a correction without checking the position first. Withdrawing a claim that was actually valid costs you real money for no reason.
- Do not go back to the intermediary who created the problem. A preparer who filed a fictitious claim has an interest in the position not being examined.
- Do not assume a refund already received is settled. Refunds are issued on summary processing under Section 143(1), which is not an assessment. The Department can, and in these cases does, revisit the position afterwards — and unpaid demands can be set off against later refunds under Section 245.
Where this sits under the Income-tax Act 2025
Returns for AY 2026-27 and earlier — which is what these notices concern — remain governed by the 1961 Act, including all assessment, penalty and rectification procedure for those years. The 2025 Act applies to tax year 2026-27 onward. The equivalents worth knowing:
| Concept | 1961 Act | 2025 Act |
|---|---|---|
| Return filing (incl. updated return) | 139 | 263 |
| Summary processing / intimation | 143(1) | 270(1)–(9) |
| Call for information | 133(6) | 252 |
| Reassessment show-cause / notice | 148A / 148 | 281 / 280 |
| Rectification | 154 | 287 |
| Set-off of refund against demand | 245 | 438 |
| Under-/mis-reporting penalty | 270A | 439 |
| Immunity | 270AA | 440 |
| Wilful attempt to evade | 276C | 478 |
| HRA and salary deductions | 10(13A), 16 | 19 |
| 80G / 80GGC / 80D / 80E | 80G, 80GGC, 80D, 80E | 133, 137, 126, 129 |
More on the transition is in Income Tax Act 2025 vs 1961 and the section mapping guide.
This note describes the general position for individuals who have received an advisory or notice concerning deductions claimed. The right course depends entirely on your own facts, evidence and the specific provision invoked, and should be confirmed against them before anything is filed.