Income Tax Notice to Salaried Employees: A Complete Guide

An Income Tax Notice to salaried employees is sent by the Income Tax Department to individuals requesting information, asking them to explain discrepancies, or demanding corrective action on their tax returns. Receiving one can be understandably stressful, but it’s essential to understand what notice you’ve received and why.

In this guide to Income Tax Notices to salaried employees, we will explore the various underlying reasons that can lead to receiving an ITN, how to respond to them and how to avoid them. Read on to learn in detail!

What is an Income Tax Notice?

An Income Tax Notice is an official IT notice that brings with it certain specifications regarding information, explanations, or rectifications. These notices are sent under different sections of the Income Tax Act and for different purposes, ranging from normal processing adjustments to detailed scrutiny of tax returns.

For salaried employees, receiving such a notice doesn’t necessarily indicate wrongdoing. It can often arise due to minor discrepancies between your filed returns and third-party information available with the department or be erroneous in nature as well. Understanding why you've received the notice is the first step to knowing what action to take.

Also Read: A Guide to Basic Concepts of Income Tax

Reasons for Income Tax Notice to Salaried Employees

Not Filing ITR

Most salaried workers believe that they do not have to file Income Tax Returns (ITR) in cases where TDS (Tax Deducted at Source) is applicable. However, even if deductions have been made through TDS, you must still file your returns if your entire income crosses the basic exemption slab. The department sends these notices when they receive records of your income in the form of Form 16 or certificates of TDS but have no associated ITR on their records.

Mismatch of ITR with Form 26AS

Form 26AS is your annual tax statement, and it reflects all TDS deducted and deposited in your name. Discrepancies could arise if the data submitted by your employer or bank shows a difference between what you’ve claimed in your ITR and what appears in Form 26AS. This triggers automatic notices. Common mismatches include:

• Incorrect PAN details provided to employers
• Different spellings of names across documents
• Wrong TDS amounts claimed
• Missing income sources reflected in Form 26AS

Also Read: Everything You Need to Know About Income Tax Returns Filing

Non-disclosure of Foreign Assets

Salaried employees having foreign investments must disclose these assets. Failure to report foreign bank accounts, property, or investments can result in notices, especially as the department has access to international financial data through various agreements.

Undisclosed Income

Any income not reported in your ITR but available with the department through third-party sources leads to notices. This could include:

• Sudden, unexplained credit in an account
• Investment returns not accounted for

Excess Deductions Claimed

While salaried employees have limited scope for claiming deductions under the New Tax Regime, the Old Regime still allows for a range of tax benefits. Incorrect claims for professional expenses, medical reimbursements, loans, or other deductions can trigger scrutiny notices.

The Indian government has already introduced stringent rules in an attempt to crack down on false claims. This was recently seen in the Tax Department announcement that claims made under specific sections for loan deductions now need to include detailed information; this serves as a method to cross-verify claims against records in the Annual Information Statement (AIS).

Failure to Respond to Previous Notices

Not responding to earlier Income Tax Notices or providing incomplete responses often results in fresh notices with stricter timelines and potential penalty implications.

Also Read: Maximise Your Tax Deductions Under Section 80D

Types of Income Tax Notices for Salaried Employees

Income Tax Notice under Section 143(1)

This is the most common type of ITN received by taxpayers, including salaried employees, who have already filed their returns. It’s issued after processing your ITR and typically indicates:

• Acknowledgement of the ITR filed
• Unpaid tax liability
• Tax refund due

The notice shows the original return filed versus the processed return, highlighting differences if they exist. Most issues under this section are minor and can be resolved through online responses.

Income Tax Notice under Section 142(1)

Section 142 regards enquiries before assessments, and these notices require you to produce additional information to help with the assessment process. It could also be sent as a notice for you to file your returns if you haven’t done so yet. For salaried employees, it’s usually issued when:

• There are significant discrepancies requiring clarification
• Additional income sources need verification
• Supporting documents for claimed deductions are required

Income Tax Notice under Section 148

A reopening notice (since the officer is reopening a previous assessment) is issued when the department believes income has escaped accurate assessment in previous years. For salaried employees, this might occur due to:

• Unreported income discovered through third-party information
• Underreporting of income or excessive claim of deductions
• Sudden large cash deposits with no income attached to them

Respond to this notice within 30 days, either by submitting all required documents via the Income Tax e-portal or by providing a written reply that contains all required proof.

Income Tax Notice under Section 139(9)

This notice, also known as a defective return notice, is issued when you need to file a belated or revised return. Common scenarios include:

• Incomplete ITR
• Mismatches in information submitted
• TDS claimed without income mentioned

You get 15 days from the date of receiving the notice to rectify the defects, either by filing a fresh/revised return or responding to the notice.

Income Tax Notice under Section 143(2)

This notice initiates detailed scrutiny assessment and is more serious than routine processing notices. It’s issued when the department wants to examine your return thoroughly, often due to:

• High-value transactions not matching reported income
• Substantial claims requiring verification
• Mismatch in reported income

Respond to the notice by logging into your income tax portal, clicking ‘Agree’, and uploading the documentation asked of you in the notice. You may also be required to appear before an Assessing Officer with relevant documents.

Income Tax Notice under Section 156

This notice demands payment of outstanding tax dues as a result of any order passed under the Income Tax Act. It’s issued when:

• Previous notices have an established additional tax liability
• Self-assessment tax remains unpaid
• Interest and penalties have accrued on unpaid amounts

The notice typically provides 30 days to make the payment before recovery proceedings begin.

Income Tax Notice under Section 245

The intimation under this section relates to set-off and refund adjustments. It’s issued when the department adjusts your current year’s refund against outstanding demands from current or previous years. While not demanding additional payment, it explains why your expected refund has been adjusted or withheld.

Again, responding is crucial: once logged in, go to the “Pending Actions” tab, and click “Response to Outstanding Demand”. Submit your response by clicking “Demand is correct” if the information in the notice checks out.

Also Read: Personal Loan Tax Benefit: Maximise Your Savings

How to Respond to an Income Tax Notice

Responding to income tax notices promptly and accurately is crucial to avoid escalation and penalties:

• Read carefully: Understand exactly what the notice requires and the timeline for response
• Gather documents: Collect all relevant supporting documents, including Form 16, bank statements, investment proofs, and previous ITRs
• Use online portals: Most notices can be responded to through the e-filing portal, which provides a clear audit trail and will show you the relevant options depending on the notice you’ve received
• Be precise: Provide specific, factual responses with proper documentation rather than generic explanations
• Seek professional help: For complex notices or significant discrepancies, consider consulting a Chartered Accountant or tax advisor
• Follow up: After submitting your response, monitor the case status through the e-filing portal
• Keep records: Maintain copies of all communications and supporting documents for future reference

How to Avoid Income Tax Notices for Salaried Employees

Here are some tips to help you avoid discrepancies in income reporting and prevent receiving a notice from the Income Tax Department (ITD) of India:

• File returns on time: Always file your ITR by the due date, even if no tax is payable
• Verify Form 26AS: Regularly check Form 26AS and ensure all TDS credits are properly reflected in your return
• Report all income: Declare all sources of income, including interest, dividends, and other earnings
• Maintain accurate records: Keep proper documentation for all income sources and claimed deductions
• Update personal information: Ensure your PAN details, address, and contact information are consistent across all financial institutions
• Review before filing: Double-check all calculations and entries before submitting your ITR
• Respond to communications: Always respond to any communication from the tax department within prescribed timelines

To Conclude

An Income Tax Notice to salaried employees should not be a cause of panic. As a standard procedure of the Income Tax Department, these notices often help ensure compliance with tax laws in India. The most important thing to do is understand the specific requirements of the notice issued and then respond appropriately.

Frequently Asked Questions

What should I do if I receive multiple Income Tax Notices for the same issue?

If you receive multiple notices from the Income Tax department regarding the same issue, don’t respond to each notice separately. Contact the jurisdiction assessing officer or use the e-filing portal to clarify which notice requires action. Multiple notices often occur due to system delays or miscommunication.

Can I ignore a notice if I believe it's incorrect?

Never ignore any income tax notice, even if you believe it’s wrong. Always respond within the stipulated timeframe, clearly explaining your position with supporting documents. Ignoring notices can lead to best judgement assessments and penalties.

How long do I have to respond to different type of Income Tax Notices?

The response time ideally vary by notice type. For instance, Section 143(1) and Section 142(1) notices typically allow 30 days, while Section 148 notices generally provide only 15 days to respond. Always check the specific deadline mentioned in your notice.

What happens if I miss the deadline to respond?

Missing deadlines can result in adverse consequences, including best judgement assessment, where the department estimates your tax liability without your input, leading to higher demands and penalties. If you’ve missed a deadline, respond immediately with an explanation for the delay.

Can I authorise someone else to respond to the notice on my behalf?

Yes, you can authorise a Chartered Accountant, advocate, or tax practitioner to represent you. This requires proper authorisation through Form 2 or e-authorisation on the income tax portal.

Do I need to pay immediately when I receive a demand notice?

Not necessarily. First, verify if the demand is correct by reviewing the notice details. If you disagree, you can file an appeal or rectification application. However, if the demand is correct, it’s advisable to pay promptly to avoid interest and penalty charges.

Will receiving an Income Tax Notice affect my credit score or loan applications?

Simply receiving a notice doesn't directly impact your credit score. However, if the notice results in significant outstanding tax dues that remain unpaid, it could potentially affect your creditworthiness when lenders conduct due diligence checks.