Why Salaried Employees Get Tax Scrutiny / Defective ITR Notice

At a Glance

Salaried employees are no longer "safe" just because their income comes with a Form 16. The department's AI-driven matching of your ITR against AIS, TIS, Form 26AS, crypto exchange data and bank reporting has made even small salaried filers a common target for defective return notices under Section 139(9) and scrutiny notices under Section 143(2) of the Income Tax Act, 1961 — the Act that still governs the return you are filing for FY 2025-26 (AY 2026-27). Almost every case we see traces back to one of 13 avoidable mistakes made while filing — most of them made to "save" a small professional fee.

Which Act Applies to Your Return?

The Income Tax Act, 2025 has been notified but applies only from Tax Year 2026-27 onwards — that is, returns you will file in July 2027 for income earned in FY 2026-27. Your return for FY 2025-26, filed in July 2026, and any notice, intimation, or scrutiny relating to it, is governed by the Income Tax Act, 1961 and its existing section numbers. This article uses the 1961 Act numbering throughout, since that is what will actually appear on any notice you receive this year, with the corresponding 2025 Act reference noted for forward awareness.

Why Are Salaried Employees Suddenly on the Radar?

For years, salaried individuals assumed that scrutiny and notices were a "business owner problem." That assumption no longer holds. Your employer reports your salary in TDS returns, your bank reports interest and cash deposits, your mutual fund and broker report every transaction, and your insurer reports high-value premiums — all of this lands in your Annual Information Statement (AIS) and Taxpayer Information Summary (TIS) before you even sit down to file your return.

Most salaried taxpayers file their own return, or hand it to an unqualified filing shop, purely to save a few hundred to a couple of thousand rupees in professional fees. The return gets filed, the acknowledgement is generated, and everyone assumes the job is done. The trouble starts months later — an email from CPC, or a notice appearing quietly under "e-Proceedings" on the income tax portal, usually followed by panic.

Types of Notices Salaried Employees Commonly Receive

Notice (Income Tax Act, 1961)	Corresponding Provision, Income Tax Act 2025 (applicable from Tax Year 2026-27)	What It Means
Section 143(1)	Section 270	Intimation after processing — often shows a demand due to AIS/TDS mismatch
Section 139(9)	Section 263(7)	Defective return — wrong ITR form, missing schedule, or income/TDS mismatch
Section 142(1)	Renumbered under Chapter on Assessment	Preliminary inquiry — return not filed, or documents/clarification sought before scrutiny
Section 143(2)	Section 244	Scrutiny assessment — return picked for detailed examination
Section 148 (via 148A)	Section 280 (via 281)	Reassessment — department believes income has escaped assessment in a past year

A defective return notice is not a punishment — it is a warning that gives you a short window (usually 15 days) to fix the return. Ignoring it makes the return invalid, as if it was never filed, which then triggers late-filing consequences and loss of refund. A scrutiny or reassessment notice is far more serious and can result in additional tax demand, interest, and penalty.

Note: The Income Tax Act, 2025 section references above are based on the correspondence tables currently available; final numbering, rules, and forms may still be refined by the CBDT before Tax Year 2026-27 filings begin. Always verify the applicable section on the income tax portal at the time of filing or responding to a notice.

13 Reasons Salaried Employees Receive Tax Notices

1. You file without knowing the current rules. Tax rules change almost every year. Copying last year's return, or trusting a random YouTube video, often means missing something that changed.
2. You ignore your AIS and TIS. Your bank, employer, mutual fund, and even your credit card company already report your financial details to the tax department. If your return doesn't match what they've reported, a notice follows automatically.
3. You use the wrong ITR form. Filing the simple form (ITR-1) when you actually have shares, capital gains, or foreign income isn't allowed — the return gets rejected as "defective."
4. You show income under the wrong head. For example, showing freelance or side-income as "other income" instead of "business income" confuses the tax calculation and gets flagged.
5. You get your residential status wrong. If you worked abroad for part of the year, or recently moved back to India, using the wrong residency status changes your entire tax liability.
6. You claim deductions you can't prove. HRA without a rent agreement, or 80C without receipts, are among the most common reasons for a scrutiny notice.
7. You don't compare Old vs New tax regime. Picking a regime without actually comparing both means you either overpay tax, or file something the department later questions and corrects with a demand.
8. You skip filing thinking "my income is below ₹12 lakh." That ₹12 lakh figure is your net taxable income after deductions — where the Section 87A rebate (available to resident individuals only, not NRIs) brings tax to zero under the new regime. It doesn't apply to gains taxed at special rates, like profit from selling stocks. And it's not a filing threshold — if your gross income before deductions exceeds the basic exemption limit, you must still file. Skipping it when required brings a notice and blocks your refund.
9. You don't declare foreign bank accounts or shares. Even a small overseas account or an employee stock option from a foreign employer must be disclosed — whether or not you earned anything from it.
10. You don't declare foreign income. Interest, dividends, or salary earned abroad must still be reported in your Indian return, even if tax was already deducted overseas.
11. You don't know when foreign asset disclosure applies to you. Many people think it's only for bank accounts. It also covers foreign retirement funds, ESOPs or RSUs of a foreign company once they vest (even before you exercise or sell them), and signing authority on someone else's foreign account. Whether unvested options also need disclosure is a genuinely debated area among professionals — the safer practice is to disclose once vested and get specific advice for unvested grants.
12. You get crypto and other digital asset taxation wrong. Profits from Bitcoin, Ethereum, or any other cryptocurrency or NFT are taxed at a flat rate, with only the cost of acquisition allowed as a deduction — no other expenses, and no exemption slab. Losses can't be adjusted against gains from other crypto trades or any other income, and every single trade needs to be reported — not just the net profit. This is one of the fastest-growing reasons for notices today.
13. You ignore big-ticket transactions the department already knows about. Large cash deposits, credit card bill payments, property purchases, or high insurance premiums are all reported to the tax department by banks and other institutions. If these don't line up with your declared income, a notice follows.

A quick note on the legal detail behind a few of these, for anyone who wants it: wrong ITR form and wrong head of income lead to a notice under Section 139(9); foreign holdings and income are reported through Schedule FA, FSI and TR read with the Black Money Act, 2015; crypto gains are taxed under Section 115BBH at a flat 30% (only cost of acquisition deductible), with 1% TDS under Section 194S once transactions cross ₹50,000 in a year (₹10,000 for others); and the new regime is the default under Section 115BAC(1A), with Form 10-IEA needed only if you also have business or professional income and want to opt for the old regime.

"I Saved ₹1,500 in Fees" — What It Actually Costs

The pattern we see repeatedly: a taxpayer chooses a low-cost or free filing option to save a professional fee that would typically range from ₹1,000 to ₹5,000 for a salaried return. When a mismatch or wrong claim later surfaces, the actual cost is many times higher — in tax, interest, penalty, and the professional fee eventually paid anyway to fix the notice.

Filing Approach	Fee Saved	What Can Go Wrong	Typical Downstream Cost
Self-filing / unqualified filing shop	₹1,000 – ₹5,000	Wrong ITR form, missed AIS reconciliation, wrong deduction claims	Defective notice, revised filing, interest u/s 234A/B/C, possible penalty
Crypto/VDA gains reported incorrectly or netted off	Perceived as "same as stock market tax"	Flat-rate tax rule and no-loss-set-off rule applied wrongly, trade-wise reporting skipped	Recomputation of tax at flat rate, interest, and penalty for under-reported income
Ignoring foreign asset/income disclosure (above ₹20 lakh)	Perceived as "not applicable to me"	Schedule FA/FSI omission discovered via CRS/FATCA data	Penalty up to ₹10 lakh per year under Sections 42/43, Black Money Act, 2015, plus reassessment
Not filing return below "12 lakh" belief	Filing fee avoided entirely	Return not filed under Section 139(1) despite gross income exceeding exemption limit	Notice u/s 142(1), late fee u/s 234F, loss of refund, possible best judgment assessment u/s 144
Professional-assisted filing	Fee paid upfront	Return reconciled with AIS/26AS, correct form and head of income used	Negligible — issues resolved before filing, not after a notice

What a Qualified Professional Actually Checks

Full AIS/TIS and Form 26AS reconciliation before a single figure is entered in the return
Correct ITR form selection based on every source of income, not just salary
Correct head of income classification for freelance, rental, and investment income
Residential status determination based on actual day-count and prior years' status
Regime comparison — old vs new — with actual numbers, not assumptions
Deduction and exemption evidence checked before being claimed, not after being questioned
Schedule FA, FSI and TR reviewed for anyone with any foreign connection — account, ESOP, income, or signing authority
Crypto and Virtual Digital Asset (VDA) transactions reported trade-wise at the correct flat rate, without wrongly setting off losses
High-value transactions (cash deposits, credit card payments, property purchases) cross-checked against what banks and other institutions have already reported

Key Takeaways

Salaried employees are now regularly picked up for defective return and scrutiny notices — not just business owners
Most notices trace back to AIS/TIS mismatch, wrong ITR form, or wrong head of income
Crypto and other digital asset gains have their own flat tax rate and reporting rules — they can't be treated like regular stock market gains
The ₹12 lakh rebate under Section 87A applies only to resident individuals and only to regular income — not to NRIs or to gains taxed at special rates — and it does not remove the obligation to file a return under Section 139(1)
Foreign asset and foreign income disclosure applies even without any related tax liability, subject to the ₹20 lakh relief under the Black Money Act for non-immovable assets
A defective return notice under Section 139(9) must be resolved within the time given, or the return becomes invalid
Your FY 2025-26 return is governed by the Income Tax Act, 1961 — the Income Tax Act, 2025 applies only from Tax Year 2026-27 onwards
A small professional fee upfront is almost always cheaper than resolving a notice, interest, and penalty later

CA Jatin Karda

Chartered Accountant · LLB · DISA · AICA · CCA · B.Com
Founder, Jatin Karda & Co., Nagpur

Received a Notice — or Want to Avoid One?

Our team handles salaried ITR filing with full AIS/26AS reconciliation, as well as responses to defective return, scrutiny, and reassessment notices — end to end.

Frequently Asked Questions

Scrutiny is not only triggered by business income. Salaried employees are commonly flagged for large deductions relative to income, HRA or LTA claims without documentary proof, high-value bank transactions, or a mismatch between the ITR and AIS/TIS data reported by third parties like banks and employers.

A defective return notice under Section 139(9) of the Income Tax Act, 1961 means your return has an error or missing schedule that must be corrected within a given time, usually 15 days, or the return becomes invalid. A scrutiny notice under Section 143(2) means your filed return has been selected for a detailed examination of income, deductions, and disclosures. Under the Income Tax Act, 2025 (applicable from Tax Year 2026-27), these correspond to Sections 263(7) and 244 respectively.

Yes. ITR-1 is meant only for simple salary income, one house property, and limited other income. If you have capital gains, more than one house property, foreign assets, or business/professional income, ITR-1 is invalid for you and will result in a defective return notice.

Yes, in most cases. The Section 87A rebate — available only to resident individuals, not NRIs — reduces your tax liability to nil on regular income up to ₹12 lakh of net taxable income, but it doesn't apply to income taxed at special rates, such as capital gains from selling stocks or mutual funds. It also doesn't remove your obligation under Section 139(1) to file a return if your gross total income before deductions exceeds the basic exemption limit, or if specified high-value conditions (such as large foreign travel expenditure, high electricity consumption, or large deposits) apply to you. Not filing can attract a notice under Section 142(1) and a late fee under Section 234F, and blocks any TDS refund due to you.

Generally yes, if you qualify as Resident and Ordinarily Resident. Schedule FA disclosure is based on holding the asset, not on whether you earned income from it or actively used it. Since October 2024, non-disclosure of foreign assets other than immovable property with an aggregate value under ₹20 lakh does not attract the Section 42/43 penalty under the Black Money Act, 2015, but above that threshold the penalty of up to ₹10 lakh per year applies.

In most cases, yes, once they vest — Foreign ESOPs and RSUs of a foreign parent or group company are generally reported in Schedule FA from the date they vest, if you qualify as Resident and Ordinarily Resident, even before you exercise or sell them. Whether options that haven't yet vested also need disclosure is a genuinely debated point among tax professionals, so it's best to get specific advice for unvested grants rather than assume either way.

If you do not respond and correct the defect under Section 139(9) within the time allowed, your return is treated as if it was never filed. This can result in loss of certain benefits, applicability of late-filing consequences, and further action from the department to seek the return through other notices such as Section 142(1).

Yes. HRA claims without a genuine rent agreement, rent receipts, and (where applicable) the landlord's PAN are a well-known scrutiny trigger, especially where the claimed rent is unusually high relative to declared income.

This usually happens when figures in your return do not match your AIS, TIS, or Form 26AS — for example, interest income not fully reported, or a TDS claim that doesn't match what was actually deposited against your PAN. The system raises the demand automatically while processing your return under Section 143(1) of the Income Tax Act, 1961.

This depends on your actual eligible deductions and exemptions (like 80C, 80D, HRA, home loan interest) compared against the lower slab rates of the new regime. There is no one-size-fits-all answer — it needs an actual computation under both regimes for your specific numbers before filing.

Gains from cryptocurrency and other Virtual Digital Assets are taxed at a flat 30% under Section 115BBH, with only the cost of acquisition allowed as a deduction — no other expenses, and no benefit of the usual slab rates or basic exemption. Losses from one crypto trade cannot be set off against gains from another crypto trade or any other income. Exchanges also deduct 1% TDS under Section 194S once transactions cross ₹50,000 in a year (₹10,000 for non-specified persons). Because these rules are so different from regular stock market taxation, incorrect netting or under-reporting of crypto trades is now a common trigger for a notice.

Yes. Banks, credit card companies, mutual funds, and registrars are required to report specified high-value transactions — such as large cash deposits, credit card bill payments, property purchases, and high insurance premiums — to the tax department. This data flows into your AIS, and if it doesn't match the income and expenses shown in your ITR, it is a common reason for a notice or scrutiny.

No. A notice, particularly a defective return or a limited scrutiny notice, is often a verification step rather than an accusation. However, it must be responded to correctly and within the given time to avoid the return being treated as invalid or the matter escalating to reassessment.

Why Most Salaried Employees Get a Tax Scrutinyor Defective ITR Notice