How can traders avoid income tax notices?

November 23, 2023

Imagine you have diligently filed your Income Tax Return (ITR), well before the deadline, but still receive an income tax notice from the Income Tax Department (ITD).

A lot of investors and traders face this situation every year. So we decided to highlight common mistakes that people make while filing their ITR, knowingly or unknowingly.

In this article, we’ll understand everything about income tax notices and what to do when you receive one. If you prefer a video, you can watch it below.

What is an income tax notice?

To begin, let’s clarify what an income tax notice is. In simple terms, it is a written communication sent by the ITD to a taxpayer, alerting them to an issue with their income tax return.

It’s important not to confuse a notice with an intimation. An intimation serves to provide an update on the status of your ITR and typically requires no action. Conversely, a notice necessitates a response.

Six common types of income tax notices

i) Inquiry Notice before Assessment of Tax u/s 142(1): This notice is sent when a taxpayer has not filed an ITR or when the tax authorities require additional documents, such as proof of deductions.

ii) Notice for Defective Return u/s 139(9): The AO sends this notice if they deem your return defective due to missing or inaccurate information.

iii) Assessment or Reassessment Notice u/s 148: This notice is issued when the AO believes you’ve underreported your income.

iv) Notice for Demand u/s 156: Under this notice, the tax authorities may ask you to make additional payments for taxes, interest, penalties, or fines you owe.

v) Notice u/s 143(2) for Scrutiny Assessment u/s 143(3): This notice is issued when your ITR is selected for a scrutiny assessment or a thorough examination to confirm the correctness of claims and deductions.

vi) Intimation u/s 245: This notice informs you that the ITD is adjusting your previous year’s outstanding tax liability with the current year’s refund.

Common scenarios when people get a tax notice

Here are some common scenarios when investors and traders can receive a tax notice:

  • Not reporting transactions mentioned in the AIS: The Annual Information Statement (AIS) provides a comprehensive overview of your financial details, and it’s essential to ensure the information in the AIS aligns with your ITR.
  • Improper classification of capital gains: Investors may incorrectly calculate the tax liability on capital gains, leading to discrepancies. For example, reporting short-term capital gains as long-term capital gains.
  • Incorrectly categorising intraday and F&O trading profits: Profits from intraday and futures & options (F&O) trading should be categorised as business income, not as Income From Other Sources (IFOS).
  • Not declaring referral income or commission: Failure to declare referral income earned from your broker may result in a notice, as these details are recorded in Form 26AS or AIS.
  • Not reporting foreign assets: If you’ve invested in foreign equity shares or received ESOPs while working at an MNC not listed in India, you must disclose these assets in your ITR, or face potential penalties.
  • Wrongly adjusting losses under improper income heads: It’s crucial to correctly offset losses based on the type of loss and the type of income you’ve earned. For instance, long-term capital losses can only be offset against long-term capital gains while short-term capital losses can be offset against both short-term and long-term capital gains. You can refer to this table below for more details.

  • Not doing audit when applicable: Since profits from F&O and intraday trading are considered as business income, you may be required to conduct an audit based on turnover and profits. Check the table below to understand in what cases you are required to do an audit.

  • Not filing ITR when you have incurred losses: Filing your ITR, even when you’ve incurred losses, not only helps you remain tax compliant but also allows you to carry forward and offset these losses against future gains, reducing your tax liability.

What to do if you receive a tax notice?

Receiving a tax notice can be unsettling, but responding to it is essential.

The ITD will notify you via your registered email and mobile number. You can respond to the notice by either agreeing with it, disagreeing (fully or partially), and filing a revised ITR with updated information if required.

In conclusion, remember that promptly responding to income tax notices is crucial to avoid further complexities and ensure that you remain compliant with tax regulations.

And if you ever receive a tax notice and need assistance, don’t hesitate consulting a qualified professional for guidance. You can visit Quicko, India’s leading tax filing platform in case you have any questions about income tax notices and intimations.

India's leading tax platform

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