Why More Taxpayers Are Getting ITR Notices in 2025 & How to Avoid Scrutiny

[Nanne Parmar]

India's income tax department and systems are evolving, and so are the methods used by the Income Tax Department (ITD) to monitor inconsistencies in tax filings by taxpayers.

With Today's advanced AI-powered monitoring and data cross-verification, taxpayers are facing increased scrutiny for errors — Is it intentional or not? 

Taxpayers who fail to report their high-value and large transactions, rental payments, claims like excessive deductions, or mismatched income or cashflow source details are now more likely to receive a tax notice under Section 143 (1) or Section 148. 

According to the latest tax compliance news report by Easemoney, the cases of ITR scrutiny, notices, and monitoring have grown since the start of Feb 2025. Also, notable among salaried individuals and business owners who fail to align their filings with Form 26AS and AIS data. \

So, what's usually causing this surge in tax notices? And more importantly, how can you avoid landing in trouble?

Why Tax Notices Have Increased in 2025

The Indian Tax department's acceptance of the tracking system has become more aggressive this year, flagging taxpayers or individuals who:

1. Forget to report all income and cashflow sources (salary, FD interest, portfolios, crypto, freelancing, etc.).

2. They fail to justify deductions & exemptions (HRA, 80C, home loan interest, etc.)

3. Don't disclose high-value transactions (real estate, stock trading, luxury purchases).

4. Filing ITR late, mismatched, wrong, or incorrectly, triggering an automatic investigation.

An IT officer professional speaking on the condition of anonymity said:

"Data analytics and real-time monitoring have strengthened scrutiny mechanisms. The department is now catching tax discrepancies much faster than before."

This means even minor filing mistakes can now trigger an automated alert and notices. The margin of error has gone down.

Top Mistakes That Lead to ITR Notices

Let's explore the top mistakes that lead to Scrutiny and also talk about how to avoid it

1. Undisclosed Income (Salary, Freelancing, Crypto, Stock Gains)

As per the analysis of data, Many taxpayers report only their primary salary income, ignoring side earnings such as :

1. Freelance projects

2. Dividend or capital gains from stocks

3. Interest on FDs or savings accounts

4. Crypto profits

5. income from outside 6. RDs and Real Estate Investment Trusts (REITs) 

Why it's risky: The ITD receives third-party transaction reports from banks, employers, stock exchanges, and crypto platforms. If your ITR doesn't match these records, you risk an inquiry under Section 143(2). 

Solution: 

• Download Form 26AS and AIS before filing.
• Also, always declare every rupee earned, even if the tax has already been deducted.

2. High-Value Transactions Not Matching ITR

The ITD, or I say The Income Tax Department, can easily track bank transactions, property deals, stock market activity, PAN card-linked cash flows, and luxury purchases. If you make big financial moves without reflecting them in your ITR, you may expect scrutiny soon. Let me share a few examples of flagged transactions:

• Cash deposits over ₹10 lakh in a year
• Buying property worth ₹30 lakh+
• Stock, reits, mutual fund transactions over ₹1 lakh
• Big purchases just using your credit card (₹1 lakh+ per month)

How to stay safe: 

• You must have to ensure your reported income can justify large expenses.
• Use PAN-linked transactions to maintain transparency.

3. Excessive or False Deduction Claims

Many taxpayers and professionals usually overclaim their deductions under Section 80C, 80D, and HRA, assuming they won't be checked and verified. What are the Common red flags for these mistakes?

1. Fake HRA rent receipts without a valid landlord PAN

2. Claiming medical insurance deductions without proof

3. Home loan interest deductions exceeding limits As per the business-standard.com tax compliance insights, one of the biggest reasons for ITR scrutiny in 2025 is a misuse of deduction claims. New AI-powered tax audits now cross-verify claims with employer, bank, and insurer data. 

How to face this: 

• Always keep proper documentation for all deductions and the next tax filings.
• Last but not least, please ensure your landlord's PAN is correct when claiming HRA.

4. Filing ITR Late or Choosing the Wrong ITR Form

There are thousands of taxpayers who wait until the last moment to file the ITR (Income Tax Return), which increases the risk of errors. Moreover, Others use the wrong ITR forms, triggering a notice and Scrutiny under Section 139(9).

Let's check a few errors:

1. By mistake, they filed an ITR-1 instead of an ITR-2 (if you have capital gains)

2. Using ITR-4 instead of ITR-3 (for business/professional income) 

Quick solution: 

• Always keep in mind to always file the ITR before July 31, 2025 (to avoid late fees).
• Use the correct form based on your income type.

5. Mismatch in TDS Claims & Refund Requests

If your TDS claim doesn't match with Form 26AS, the ITD (income tax department) may assume that you are claiming an excessive refund. Which can lead to a refund hold or an inquiry.

• Experts say to verify Form 26AS before filing and ensure TDS deductions reflect the actual tax paid.

How to Stay Off the Tax Department's Radar

1. Report all the sources of income and cash flow by filing ITRs. (salary, freelancing, stock gains, crypto, etc.)

2. Also, keep in mind to match your ITR details with Form 26AS and AIS before filing.

3. Only claim genuine deductions backed by document proof such as landlord PAN and other official documents.

4. Avoid last-minute filing, which increases the chance of errors.

5. Last but not least, maintain bank & financial records for any high-value transaction.

If you do receive a tax notice, respond within the deadline with correct documentation to avoid further action and investigations in future.

Small mistakes that were previously overlooked are now being flagged instantly. So, in 2025, the taxpayers need to focus while filing tax returns in 2025.

Discussions to this article

[Nanne Parmar]

This is my first article at taxmanagementindia