5 Reasons Income Tax Notice for FY 2025-26 ITR Filing

You filed your Income Tax Return (ITR) for FY 2025-26 in July 2026, expecting a refund of ₹35,000. Instead, three weeks later, you receive a demand notice for ₹87,500 under Section 143(1) citing TDS mismatch and unreported interest income. This nightmare is becoming increasingly common as the Income Tax Department deploys AI-driven scrutiny systems that cross-verify every rupee reported in your ITR against Form 26AS and the Annual Information Statement (AIS). With automated CPC processing now flagging discrepancies within 7-10 days of filing, even small errors trigger notices, penalties, and interest charges.

For taxpayers filing returns for Assessment Year 2026-27 (covering income earned in FY 2025-26), understanding what triggers these notices is critical. From salary mismatches to capital gains reporting errors, this comprehensive guide reveals the 5 major reasons you can receive an income tax notice—and exactly how to prevent them.

Reason 1: Salary Income Mismatch Between Form 16, Form 26AS, and AIS

Salary income discrepancies are the most common reason salaried employees receive income tax notices for FY 2025-26, despite having straightforward tax profiles. The Income Tax Department now cross-verifies salary reported in your ITR against three sources: Form 16 issued by your employer, TDS returns filed quarterly by the employer (now called Form 138 under the new Income Tax Act 2025 for future years), and the Annual Information Statement (AIS).

Why Salary Mismatches Occur

Where salary income reported in the ITR differs from the salary disclosed in Form 16, TDS returns filed by the employer, or reflected in AIS, the department may seek clarification regarding any under-reporting of income. Common scenarios include:

• Multiple employers in FY 2025-26: If you changed jobs during the financial year, you must report total salary from both employers. Many taxpayers mistakenly report only the salary from the current employer, omitting income from the previous employer. AIS captures salary reported by all employers against your PAN.
• Arrear salary payments: Arrears paid in FY 2025-26 for previous years appear in AIS and Form 26AS but are sometimes missed in ITR filing.
• Perquisites and allowances: HRA, LTA, standard deduction claims must match employer's TDS calculations. Over-claiming exemptions compared to Form 16 data triggers notices.
• Employer TDS filing errors: If your employer incorrectly reported your PAN or salary amount in their quarterly TDS return, the mismatch appears in Form 26AS and AIS.

How to Avoid Salary Mismatch Notices

Before filing your ITR for AY 2026-27, download Form 26AS and AIS from the e-filing portal. Taxpayers should carefully reconcile the details appearing in the AIS with their books of accounts, bank statements, Form 26AS, Form 16/16A, investment records, and other supporting financial documents before filing the return. If you had multiple employers, collect Form 16 from each and ensure total salary reported in ITR matches the sum of all salaries shown in AIS.

Use the Income Tax Calculator to verify your tax liability calculation matches your actual income from all sources. If you find errors in AIS, submit feedback through the AIS portal on the e-filing website to flag incorrect entries before filing your return.

Reason 2: TDS Credit Claim Exceeding Form 26AS Data

Tax Deducted at Source (TDS) is your biggest tax credit, but claiming TDS amounts that don't match Form 26AS is the fastest way to receive a demand notice under Section 143(1). TDS mismatches are the #1 cause of automated demand notices under the new compliance framework, with the Income Tax Department's CPC system processing returns within 7-10 days and instantly flagging any discrepancy between claimed TDS and Form 26AS data.

Common TDS Mismatch Scenarios

Claiming excess Tax Deducted at Source (TDS) or Tax Collected at Source (TCS) credit that does not reconcile with Form 26AS or AIS may lead to adjustment of refund claims or issuance of a notice seeking justification. Real-world examples include:

• Form 16 vs Form 26AS difference: Your Form 16 shows TDS of ₹1,85,000, but Form 26AS reflects only ₹1,65,000. This happens when employers file correction statements after issuing Form 16, or due to delayed quarterly TDS return filing.
• TDS on interest income: Banks deduct TDS on FD interest, but if the bank reported your PAN incorrectly, the TDS won't appear in your Form 26AS. Claiming this TDS based on bank certificates alone triggers mismatch notices.
• Professional fees TDS (Section 194J): Freelancers and consultants often receive TDS certificates (Form 16A) from clients, but if the client hasn't filed their TDS return with the department or made errors in PAN/amount, Form 26AS won't show the credit.
• Rental TDS (Section 194-IB): Tenants deduct TDS on rent exceeding ₹50,000 per month. If they fail to deposit the TDS with the government or quote wrong PAN, landlords cannot claim this credit.

The Golden Rule: Claim Only What's in Form 26AS

If Form 26AS shows less TDS than AIS, rely on Form 26AS for claiming TDS credit since the portal uses Form 26AS for credit matching. Never claim TDS based solely on certificates from deductors. Always verify through the official Form 26AS / TDS Fetch Tool before filing your ITR.

From the deductor side, TDS mismatch can occur due to factors like incorrect PAN, wrong TDS amount, delayed filing of TDS returns, error in challan deposit or CIN (Challan Identification Number), and failure to file correction/revised TDS return. If you identify a mismatch, contact the deductor immediately to file a correction statement. Allow 2-3 weeks for Form 26AS to update before filing your ITR.

Reason 3: Unreported or Under-Reported Income from AIS Data

The Annual Information Statement (AIS) is the Income Tax Department's most powerful compliance tool for FY 2025-26 filings. Information in AIS may at times contain errors, and relying entirely on AIS as the sole source of information while filing ITR could lead to an income-tax notice, but ignoring AIS data is even more dangerous.

What Income Sources Appear in AIS?

AIS is a broader statement that shows everything the tax department knows about your financial activity during the year, including salary, interest income, dividends, mutual fund transactions, property purchases and sales, foreign remittances, GST turnover, and more. For FY 2025-26, AIS captures:

• Interest income: Interest earned on savings bank accounts, fixed deposits (FDs), recurring deposits (RDs), income tax refunds, etc., often appear in AIS based on reporting by banks and financial institutions. Even small amounts like ₹2,500 interest on savings accounts must be reported.
• Dividend income: Dividends from equity shares, mutual funds, and preference shares are reported by depositories and RTAs.
• Capital gains transactions: Sale of shares, mutual funds, bonds, and property appear in AIS through broker/depository reporting. Failing to report capital gains is a major scrutiny trigger.
• High-value transactions: Transactions such as large mutual fund investments, purchase or sale of immovable property, substantial credit card payments, foreign remittances, or securities transactions reflected in AIS but not aligned with declared sources of income may attract scrutiny.

Why AIS Mismatches Trigger More Notices Than Form 26AS

ITR is increasingly matched with AIS, not just Form 26AS, and today's assessments are AIS-driven, not TDS-driven, so do not ignore AIS just because Form 26AS matches your return. The automated system compares every income entry in AIS with your ITR schedules. Non-disclosure or partial disclosure of such income in the ITR may result in a mismatch notice.

Example: Your AIS shows ₹45,000 interest from fixed deposits across three banks. You report only ₹28,000 (from two banks) in your ITR, forgetting the third FD. The CPC system flags this ₹17,000 under-reporting and issues a Section 143(1) notice with demand for tax on the unreported amount plus interest.

How to Reconcile AIS Before Filing ITR

Individuals filing ITR for salary should start reconciliation at least 2-3 weeks before the 31 July 2026 deadline to allow time for corrections, using Form 26AS as the authoritative source for TDS credits and AIS as the authoritative source for income completeness. Follow this process:

1. Log in to the e-filing portal and download AIS for FY 2025-26 under the 'Services' tab.
2. Review each section: salary, interest, dividends, capital gains, and specified financial transactions (SFT).
3. If you find transactions you do not recognize, use the feedback mechanism to dispute them through the AIS portal, as the source gets notified.
4. Compare AIS income with your bank statements, demat account statements, and Form 16 to identify any missed income.
5. Report all income shown in AIS in appropriate ITR schedules, even if you believe some entries are incorrect. Use the feedback option for corrections but don't omit reporting.

The Bank Statement Analyser can help you cross-verify interest income and large transactions against AIS data before filing.

Reason 4: Defective Return Notice Under Section 139(9)

Unlike Section 143(1) which is a post-processing intimation, a notice under Section 139(9) indicates that the filed return contains defects, with authorities specifying the nature of the defect and providing a time window to correct it. This is a pre-processing notice that treats your ITR as incomplete or invalid until rectified.

Common Defects That Trigger Section 139(9) Notices

Common reasons include selection of an incorrect ITR form, non-furnishing of mandatory schedules, mismatch between income reported and audit report figures, failure to report balance sheet or profit and loss details where required, and non-payment or incorrect reporting of self-assessment tax. Specific examples for FY 2025-26 filers:

• Wrong ITR form selected: Filing ITR-1 when you have capital gains income (requiring ITR-2) or business income (requiring ITR-3).
• Missing schedules: Not filling Schedule AL (Assets and Liabilities) when total income exceeds ₹50 lakh, or omitting Schedule 112A for LTCG on equity.
• Unverified ITR: Filing the return but not completing e-verification within 30 days through Aadhaar OTP, net banking, or sending signed ITR-V to CPC Bangalore.
• Tax payment details missing: Paid self-assessment tax before filing but didn't enter challan details (BSR code, date, serial number) in the ITR.
• Mismatch with Form 16: If you claim TDS but do not include the corresponding income in the ITR, such as earning interest from term deposits where the bank deducts TDS but the interest income and TDS amount are not both reported.

Timeline and Consequences

Upon receiving a Section 139(9) notice, it is imperative to rectify the return within 15 days from the notice date, though a taxpayer can seek an extension by submitting a written application, and generally even if a taxpayer rectifies the defect after the initial 15-day period, the Assessing Officer may exercise discretion to condone the delay and validate the return.

If the defect is not rectified within the prescribed time, the return is treated as invalid, and the consequences are the same as if no return had been filed, which may expose the taxpayer to further proceedings, including assessment, interest, and penalty. This means you lose the benefit of having filed a return—no loss carry-forward, no refund processing, and potential penalty under Section 271F for not filing return.

How to Respond to Section 139(9) Notice

Log in to the e-filing portal → Go to 'Pending Actions' → Click 'E-Proceedings' → Select the defective return notice → Download the notice PDF to understand specific defects → Click 'Submit Response'. You can either agree and upload a corrected JSON/XML file addressing all defects, or disagree with reasons if the defects mentioned are incorrect. Allow time for corrections by starting reconciliation 2-3 weeks before your filing date to avoid last-minute panic.

Reason 5: Capital Gains and Investment Income Under-Reporting

Capital gains mismatches are increasingly common as the Income Tax Department receives real-time data from stock exchanges, depositories (NSDL, CDSL), mutual fund RTAs, and property registrars. For FY 2025-26, several capital gains taxation rules apply that taxpayers often get wrong.

Equity and Mutual Fund Capital Gains Reporting

LTCG on equity is taxed at 12.5% above ₹1.25 lakh exemption limit; STCG at 20%; property LTCG at 12.5% (or 20% with indexation if bought before 23rd July 2024). Common mistakes include:

• Not reporting tax-exempt LTCG: Even though LTCG up to ₹1.25 lakh on equity is tax-free, you must still report all equity sale transactions in Schedule 112A and Schedule CG. Many taxpayers think exempt income need not be reported—wrong! AIS shows all equity sale transactions.
• Intra-day and F&O trading income: Speculative business income from intraday equity trading and F&O must be reported under 'Income from Business' (not capital gains). AIS captures turnover from stock brokers, and mismatches trigger notices.
• Debt mutual fund capital gains: All debt fund gains are now taxed as per your income tax slab (no LTCG benefit). Reporting these under wrong schedules causes defective return notices.
• Cryptocurrency and VDA: Virtual Digital Assets (crypto, NFTs) must be reported in Schedule VDA with 30% tax rate (Section 115BBH). Accurate reporting of crypto transactions in the Schedule VDA section is essential to avoid notices under Section 139(9).

Property Sale Capital Gains Compliance

When you sell property in FY 2025-26, the sub-registrar reports the transaction to the Income Tax Department through AIS with details of sale value, stamp duty value, and parties' PANs. Buyers also deduct TDS under Section 194-IA (1% of sale value if exceeding ₹50 lakh). Common issues:

• Not reporting the entire sale: You sold a property for ₹85 lakh but claimed LTCG exemption under Section 54 (new house purchase). You must still report the full sale transaction and show exemption claim separately. Simply omitting the transaction triggers AIS mismatch.
• Indexation calculation errors: For property bought before 23rd July 2024, you have the option to pay 12.5% tax without indexation or 20% with indexation. Calculation errors in Cost Inflation Index lead to wrong tax computation and CPC adjustments.
• Ignoring TDS deducted by buyer: If the buyer deducted TDS on property sale, that TDS appears in Form 26AS. You must report the corresponding capital gain income; otherwise, the system flags income suppression.

Use the Capital Gain Calculator to accurately compute your tax liability on property and equity sales before filing ITR. For stock market transactions, the Stock Profit Calculator helps reconcile broker statements with ITR reporting requirements.

Understanding Section 143(1) Intimation vs Scrutiny Notices

Section 143(1) represents a system-generated intimation after return processing that compares declared income with available data and recalculates tax liability, and taxpayers must review the intimation carefully and compare figures with the filed return and tax credit statements. This is different from scrutiny assessments.

If the intimation matches the filed return, no action remains necessary, but timely action prevents interest accumulation and recovery proceedings. Always verify Section 143(1) intimations within 30 days of receipt.

Compliance Checklist to Avoid Income Tax Notices for FY 2025-26

Follow this systematic checklist at least 2-3 weeks before the ITR filing deadline of 31st July 2026:

Pre-Filing Document Collection

• Download Form 26AS from e-filing portal for FY 2025-26 (AY 2026-27)
• Download AIS (Annual Information Statement) and TIS (Taxpayer Information Summary)
• Collect Form 16 from all employers if you changed jobs during FY 2025-26
• Gather Form 16A for TDS on interest, professional fees, rent, commission
• Download interest certificates from all banks for savings accounts and FDs
• Obtain capital gains statement from stock brokers and demat accounts
• Collect mutual fund capital gains statement from RTAs or consolidated account statement
• Keep property sale deed and purchase documents ready if sold/bought property

Data Reconciliation Steps

Mismatches between AIS and Form 26AS must be investigated before filing, using Form 26AS as the authoritative source for TDS credits and AIS as the authoritative source for income completeness. Specifically:

• Compare Form 16 salary with AIS salary data—report the higher amount or all sources if multiple employers
• Match TDS claimed with Form 26AS Part A (TDS deducted)—claim only what's in 26AS, not certificates
• Cross-verify interest income: AIS data vs bank certificates—report all interest even if TDS not deducted
• Check dividend income in AIS vs your records—include all dividends from equity and mutual funds
• Reconcile capital gains: broker statement vs AIS SFT data—report all transactions including exempt LTCG
• Verify high-value transactions in AIS (property, foreign remittance, cash deposits)—ensure source of funds is explained in ITR
• Use AIS feedback option to dispute incorrect entries before filing

ITR Form Selection and Filing

• Select correct ITR form: ITR-1 for salary up to ₹50 lakh with one house property; ITR-2 for capital gains; ITR-3 for business/profession
• Fill all mandatory schedules: Schedule AL if income exceeds ₹50 lakh, Schedule FA for foreign assets, Schedule VDA for crypto
• Claim deductions only if you have proofs: 80C investments, 80D health insurance, 80E education loan interest
• For HRA exemption claims, use the HRA Calculator to ensure accurate calculation matching employer's Form 16 computation
• Double-check tax payment details: enter correct challan BSR code, date, and serial number for advance tax/self-assessment tax
• Review tax computation: use Income Tax Calculator to verify your tax liability before filing
• E-verify within 30 days using Aadhaar OTP, net banking, or by sending signed ITR-V to CPC Bangalore

What to Do If You Receive an Income Tax Notice

If you receive a notice for FY 2025-26 filing despite taking precautions, follow this action plan:

Step 1: Identify Notice Type and Deadline

Check the subject line and notice PDF: Section 143(1) intimation (usually 30 days to respond via rectification), Section 139(9) defective return (15 days to correct), Section 143(2) scrutiny (respond as per dates mentioned in notice), or Section 148 reassessment (reply to show cause notice within specified time). Each notice specifies a deadline, often ranging from 7 to 30 days.

Step 2: Analyze the Issue

The Income Tax Department uses automated systems to compare AIS, Form 26AS, and filed ITR, and if inconsistencies are detected, the system may automatically generate notices. Common notice reasons: TDS credit claimed exceeds Form 26AS, income shown in AIS not reported in ITR, mathematical errors in tax computation, wrong ITR form selected, or missing mandatory schedules.

Step 3: Gather Supporting Documents

Compile: original Form 26AS and AIS for the relevant year, Form 16/16A certificates from all deductors, bank statements showing interest credited, broker statements for capital gains, investment proofs for deduction claims, and property documents if capital gains involved.

Step 4: Respond Through Proper Channel

For Section 143(1): If demand is incorrect, file rectification request under Section 154 through e-filing portal → Services → Rectification Request. Upload supporting documents proving your calculation is correct. If demand is correct, pay immediately to avoid interest accumulation.

For Section 139(9): Log in to e-filing portal → Pending Actions → E-Proceedings → Submit corrected return with all defects addressed within 15 days.

Accurate response protects against additional tax demands, so never ignore notices. If you fail to respond to a scrutiny notice, authorities may complete assessment based on available information, which often results in higher tax liability, penalties, and interest, and non-response weakens your position during appeals.

Step 5: Seek Professional Help if Needed

For complex notices involving business income, international transactions, high-value investments, or reassessment proceedings, consult a Chartered Accountant or tax professional. With the Income Tax Department using advanced data analytics and AI-driven compliance checks, taxpayers can no longer afford to ignore financial reporting discrepancies, and reviewing AIS and Form 26AS carefully before filing ITR helps prevent notices, penalties, and compliance complications.

Frequently Asked Questions

What is the difference between Section 143(1) and Section 139(9) income tax notices?

Section 143(1) is an automated intimation issued after your ITR is processed by CPC, which may adjust your tax liability or refund based on mismatches with Form 26AS or AIS data. Section 139(9) is a defective return notice issued when your filed ITR has missing information, incomplete schedules, or technical errors that need correction within 15 days to validate the return.

Can I receive an income tax notice even if my Form 26AS matches my ITR?

Yes, absolutely. The Income Tax Department now cross-verifies ITR with AIS (Annual Information Statement), which contains broader financial data including bank interest, dividend income, mutual fund transactions, and property purchases. Even if Form 26AS matches, unreported income visible in AIS can trigger scrutiny notices under Section 143(1) or reassessment proceedings.

What happens if I ignore a Section 143(1) income tax demand notice for FY 2025-26?

Ignoring a Section 143(1) demand notice leads to serious consequences: the demand amount will accrue interest under Section 234A, 234B, or 234C at rates up to 1% per month. The department may adjust future refunds, initiate recovery proceedings, or impose penalties under Section 270A for underreporting (50-200% of tax evaded). Always respond within 30 days through the e-filing portal rectification mechanism.

How do I fix a TDS mismatch between Form 16 and Form 26AS before filing ITR for AY 2026-27?

First, download both Form 16 from your employer and Form 26AS from the e-filing portal for FY 2025-26. Compare TDS amounts line-by-line. If Form 26AS shows less TDS, contact your employer's accounts department to file a revised TDS return (correction statement) with TRACES. Wait 7-10 days for Form 26AS to update. Always claim TDS only as per Form 26AS, as the CPC system relies solely on this for credit matching.

What is the deadline to respond to a defective return notice under Section 139(9)?

You have 15 days from the date of receiving the Section 139(9) notice to rectify the defects and re-submit your ITR through the e-filing portal. You can request an extension by submitting a written application to the Assessing Officer. If you fail to rectify within the timeframe, your original return is treated as invalid, which can lead to penalties, interest under Section 234A, and potential assessment based on best judgment.

Conclusion: File Smart, Not Just Fast for FY 2025-26

Income tax notices for FY 2025-26 ITR filing are no longer rare exceptions—they're becoming the norm for taxpayers who rush through filing without proper reconciliation. The five major triggers we've covered—salary mismatches, TDS credit errors, unreported AIS income, defective return issues, and capital gains under-reporting—account for over 80% of all automated notices issued by CPC Bangalore.

The key to avoiding these notices lies in three principles: reconcile before you file (compare Form 26AS, AIS, and all source documents 2-3 weeks before deadline), report everything the department already knows (AIS captures all financial transactions—missing income triggers scrutiny), and claim only what you can prove (TDS claims must match Form 26AS exactly; deductions need documentary support).

Remember, the Income Tax Act 2025 has brought simplified compliance but stricter automated monitoring. With automated CPC processing, AI-driven scrutiny, and zero tolerance for errors, even small compliance mistakes now trigger hefty penalties within days of filing. Don't let preventable errors cost you thousands in penalties and interest.

Ready to file your ITR for FY 2025-26 error-free? TaxFetch India offers comprehensive tax tools to help you reconcile TDS, calculate tax liability accurately, and file with confidence. From our advanced Form 26AS fetch tool to specialized calculators for HRA, capital gains, and stock profits, we've got your complete ITR filing journey covered. Start your hassle-free filing today!