Taxonomy

What is a Section 142(1) Income Tax Notice?

Definition and Purpose of the Notice

A Section 142(1) notice under the Income Tax Act is a communication issued by the Income Tax Department to gather more information from the taxpayer. The notice is issued in two situations:

1. When the taxpayer has not filed their income tax return (ITR), the AO can ask the taxpayer to submit the ITR for the specified financial year.
2. When the taxpayer has filed the ITR, the AO may ask for additional documents, explanations, or clarifications regarding specific income or transactions.

A 142(1) notice is a tool for tax authorities to ensure accurate tax assessment. It helps the AO:

• Verify the income declared in the ITR.
• Cross-check financial transactions with third-party data
• Obtain additional information if the return is not filed or is incomplete.
• Confirm the accuracy of income disclosed from various sources, such as salary, investments, or business income.

Types of Information Requested in the Notice

Depending on the nature of the inquiry, the AO may request:

• Financial Records: 

Bank statements, salary slips, Form 16, tax audit reports, and balance sheets.

• Supporting Documents: 

Evidence of capital gains, stock trading reports, and tax-saving investments.

• Clarifications and Explanations: 

Justifications for high-value transactions, significant cash deposits, or discrepancies between reported and observed income.

Who Can Issue a Section 142(1) Notice?

Authority of the Assessing Officer (AO)

Only the Assessing Officer (AO) has the authority to issue a notice under Section 142(1) of Income Tax Act for the following:

• Verify the accuracy of income disclosed in the ITR, including income from salary, interest, mutual funds, or stock investments, ensuring accurate income tax calculation on salary and other income.
• Ensure all income sources, such as salary, interest, mutual fund gains, or stock income, are declared.
• Gather further evidence in cases of suspected tax evasion or underreporting.

Circumstances Leading to Notice Issuance

The AO may issue a 142(1) notice in the following scenarios:

• Discrepancies in Tax Returns: 

If your ITR shows income of ₹15 lakh, but the bank reports cash deposits of ₹25 lakh, the AO may seek clarification.

• Information Received from Other Sources: 

Data from a stock market advisory company may reveal capital gains not declared in the ITR.

• Suspected Tax Evasion:

If the AO suspects undeclared income or excessive deductions, a 142(1) notice may be issued.

When is a Section 142(1) Notice Issued?

Time Limits for Issuing Notices

A Section 142(1) notice can be issued anytime during the assessment year or ongoing proceedings. If the taxpayer hasn’t filed the ITR by the due date, the AO may issue a notice requiring its submission. If the ITR has already been filed, the notice can be issued anytime before the assessment is completed.

The AO can demand information for documents or financial records for up to 3 financial years before the notice date. However, there is no fixed time limit for issuing a notice if the ITR hasn’t been filed, but the assessment must be completed within 12 months from the end of the relevant assessment year.

Pre-Assessment Inquiry

During the assessment, the AO may issue a Section 142(1) notice to:

• Seek Clarifications: Request explanations for discrepancies or unusual transactions.
• Verify Claims: Request supporting documents for deductions claimed, such as interest certificates for home loans or proofs of investment.
• Request Additional Information: Demand specific documents, such as bank statements, Form 16, or tax audit reports, to verify the accuracy of the income declared.

During the Assessment Process

A 142(1) notice can be issued during the assessment to verify information, request additional documents, or seek explanations for specific transactions.

Objective of Issuing a Section 142(1) Notice

Gathering Information for Accurate Assessment

The Assessing Officer (AO) issues a Section 142(1) notice to collect additional information and ensure accurate tax assessment, including:

• Income from salary and the applicable income tax calculation on salary.
• Professional tax details and their implications on overall income.
• Earnings from investments and other savings instruments..

Verifying Information Provided by Taxpayers

The AO may verify the information submitted by the taxpayer against third-party data, such as:

• TDS certificates, Form 16, and salary slips.
• Bank statements and financial records.
• Employer records related to professional tax deductions.

In case of discrepancies, the taxpayer must provide clarifications and supporting documents to validate the information and ensure compliance with direct tax regulations.

Compliance with Section 142(1) Notice: A Mandatory Requirement

Legal Obligations of Taxpayers

Taxpayers are legally required to respond to a 142(1) notice by:

• Submitting the requested documents within the specified deadline.
• Providing accurate and complete information.
• Ensuring that income from all sources is accurately reported.

Penalties for Non-Compliance

Non-compliance with a Section 142(1) notice can result in severe penalties, including:

• Penalty Under Section 271(1)(b): If the taxpayer fails to respond as required, a fine of Rs 10,000 may be imposed.
• Best Judgment Assessment: Under Section 144, the case could be subject to a “Best Judgement Assessment,” where the AO assesses the tax liability based on available information rather than relying on the taxpayer’s return.
• Prosecution Under Section 276D: Non-compliance may lead to prosecution, which can result in imprisonment for up to one year, with or without a fine.

Issuance of a Warrant: In some instances, authorities may issue a warrant under Section 132 to search, complicating the matter further.

Safeguarding Your Rights as a Taxpayer

Understanding Your Rights

As a taxpayer, knowing your rights is essential when responding to any notice under the Income Tax Act. The Section 142(1) notice, for instance, grants you the right to:

• Request clarification on any part of the notice that is unclear.
• Access information on the necessary documents you need to submit.
• Seek an extension for the submission if you cannot meet the deadline.

Time Limits and Legal Recourse

You must respond to the Income Tax 142(1) notice within the specified time limit, usually 30 days. Failure to meet the deadline can lead to severe consequences, including a best judgment assessment under Section 144. If you believe the notice is unjust or incorrect, you have the legal right to:

• Request an extension of the submission time frame.
• If you feel your case has been unfairly assessed, under the prescribed legal provisions, file an appeal.

Seeking Professional Assistance

Like you consult a stock market advisory company for guidance in stock investments, you can seek a tax expert’s help to stay compliant with such notices.

• Consult a tax expert: Engaging a professional ensures that you respond correctly.
• Take proactive measures: A tax expert can help you file your taxes promptly, keep records, and ensure compliance with the Income Tax Act.

Steps to Respond to a Section 142(1) Notice

Gathering Required Documents

• Bank statements, tax-saving investment proofs, and salary slips.
• Tax audit reports and capital gains statements.
• Interest certificates from FDs, mutual funds, and other investments.

Preparing a Comprehensive Response

Once you have all the necessary documents, prepare your response:

• Review the notice carefully to understand the specific information requested by the AO.
• Choose Partial Response if you need more time to gather additional information, or Full Response to submit all requested details and documents based on your readiness.
• Before attaching your documents, organize them and ensure they are correctly formatted (PDF, Excel, or CSV).

Submitting the Response within the Deadline

The next step is to submit your response within the specified deadline. Follow these steps:

• Log in to the Income Tax Portal and access your e-filing account.
• Navigate to ‘Pending Actions’ and select ‘E-Proceedings’.
• Click ‘View Notices’ and select the Section 142(1) notice.
• Choose between ‘Partial Response’ or ‘Full Response’.
• Upload the required supporting documents (PDF, Excel, CSV).
• Review your response, check the declaration box, and click ‘Submit’.

You will receive a confirmation message indicating successful submission. Be sure to download the acknowledgment for your records. 

Following up on Your Response

After submitting your response, monitor the status:

• Check for any updates or further communication from the Assessing Officer.
• If additional information is requested, be prepared to provide it promptly.
• Keep track of all submissions and acknowledgments in case further follow-up is needed.
  

Sample Section 142(1) Notice

Suppose you submitted your tax return for the financial year [YYYY-YY]. Based on the review of your filed return, you may get the following notice:

Dear [Taxpayer’s Name],

Subject: Notice under Section 142(1) of the Income Tax Act, 1961

This is to inform you that your income tax return for the financial year [YYYY-YY] has been reviewed. To complete the assessment process, the following documents/information is required from you:

Required Information/Documents:

1. Please provide a brief note on the business activities carried out during the previous year relevant to A.Y. 2023-24.
2. Please provide the computation of total income head-wise.
3. Please provide details of all bank accounts maintained during FY 2022-23, including account number, MICR code, account type, branch address, etc.
4. During FY 2022-23, you made a significant property investment considerably higher than the income declared in the ITR. Please provide the sources of investment made for the property purchase along with documentary evidence.
5. Please provide the depreciation chart for the previous year relevant to A.Y. 2023-24, as well as for the two preceding years.
6. In the Schedule DOA of the ITR, a large addition in land & building has been shown where no addition was made. Please provide the details of additions made to fixed assets shown in the Schedule DOA of the ITR.
7. Please provide invoices/documentary evidence for assets added to fixed assets during the year under consideration.
8. You have made large contract payments to persons who have not filed their income tax returns for the relevant assessment year. Please provide the details of the persons to whom contract payments have been made in the following format:

S.No.	Name & Address of the Persons	PAN of the Persons	Gross Amount	TDS Deducted	Amount Paid After TDS	Nature of Work Done

9. Please provide copies of agreements/MOUs executed with the persons to whom contract payments were made.
10. It has been found that during the previous year relevant to A.Y. 2023-24, a large amount of cash (including bearer cheques) was deposited into the current account. Please provide the sources of these cash deposits along with documentary evidence.
11. Please provide a copy of GSTR-3B and GSTR-9C, and reconcile the turnover declared in GSTR and the ITR.

Assessing Officer:

[Officer’s Name]

[Designation]

[Contact Information]

Date of Issue: [DD/MM/YYYY]Note: To know the originator Unit of this Communication, kindly see the Digital Signature.

FAQs

Understanding Section 194Q

What is Section 194Q?

When discussing TDS, it is usually seen as a concept related to salary and perquisites deduction. However, the applicability and the rule also extend to a company’s purchase of goods in a certain context under Sec 194Q. 

Section 194Q of the Income Tax Act was introduced through the Finance Act 2021 to regulate high-value transactions. It requires buyers to deduct TDS (Tax Deducted at Source) on purchases of goods if their turnover or gross receipts exceed ₹10 crore in the previous financial year. The provision applies to purchase amounts in excess of ₹50 lakh in a financial year.

Purpose and Applicability of Section 194Q

The purpose of Section 194Q is to track and bring high-value purchase transactions under the tax net. The provision applies to:

• Businesses with turnover/gross receipts exceeding ₹10 crore in the previous financial year, regardless of whether they opt for the new or old tax regime.
• Transactions where the aggregate value of goods a seller purchases exceeds ₹50 lakh in a financial year.

The provision also broadens the scope of TDS collection, expands the tax base, and ensures tax compliance on purchasing goods. It aims to address the tax gap by compelling buyers to report transactions and maintain proper records. This helps curb tax evasion by making businesses more transparent in their dealings. 

Applicability of TDS Under Section 194Q

Eligibility Criteria

Specific Examples of Who Deducts TDS

• Large Corporations and Businesses:

Companies engaged in wholesale or retail business, such as FMCG distributors or electronic goods retailers, must deduct TDS under Section 194Q on purchases exceeding ₹50 lakh.

• Government Agencies:

Public sector undertakings or government entities making bulk purchases must also comply with the TDS deduction in this section.

• Importers and Exporters:

While Section 194Q does not apply to imports, businesses involved in domestic sales exceeding ₹50 lakh to a single seller must deduct TDS.

Businesses Falling Under Section 194Q

• Businesses like large retailers, wholesalers, and manufacturers whose procurement exceeds ₹50 lakh will need to comply with Section 194Q.
• Companies involved in the import/export of goods will also be subject to this provision.

Exceptions to TDS Deduction

TDS under Section 194Q is not applicable in the following situations:

1. Import of Goods:

Purchases of goods from non-resident sellers are not subject to TDS under Section 194Q.

2. Transactions Covered by Other Sections:

If TDS is already deducted under another section, such as Section 194O (for e-commerce transactions), then Section 194Q will not apply.

3. Transactions Covered Under Section 206C(1H):

Before FY 2025-26, if TDS under Section 194Q and TCS under Section 206C(1H) applied, TDS under Section 194Q would take priority. However, from FY 2025-26, TCS under Section 206C(1H) no longer applies to goods purchases. This change removes the overlap, so only TDS under Section 194Q will apply now.

This update will make it easier for businesses and taxpayers during ITR filing, as they only need to focus on the TDS deducted under Section 194Q. Nevertheless, while filing your ITR, ensure the correct TDS details are included. If you’re unfamiliar with how to file an ITR online, taking time to verify the information can help avoid issues.

4. Personal Purchases:

TDS under Section 194Q does not apply to personal purchases or transactions unrelated to business or profession.

Threshold Limit Calculation

The deduction threshold is ₹50 lakh. It means that TDS is applicable only when the total purchases from a seller exceed ₹50 lakh in a financial year. Purchases below this threshold are exempt from TDS under Section 194Q.

TDS Rate and Calculation

TDS Rates

Under Section 194Q, the TDS rate is set at 0.1% of the purchase value exceeding ₹50 lakh. The rate may differ depending on the nature of the seller (for example, if the seller is a resident or non-resident).

• For a resident seller: 0.1% on purchases above ₹50 lakh.
• For a non-resident seller, the applicable TDS rate may differ according to other relevant sections (section 195 of the Income Tax Act).

Calculation of TDS with Examples

For instance, say a company purchases goods worth ₹60 lakh from a seller in a year, TDS will be deducted on the ₹10 lakh exceeding the ₹50 lakh threshold. So, the deductible TDS will be 0.1% of ₹10 lakh, which is ₹10,000.

Time of TDS Deduction and Deposit

Due Dates for TDS Deposit

The TDS deducted under Section 194Q must be deposited by the 7th of the following month in which the deduction was made. For example, if TDS is deducted in April, it must be deposited by 7th May.

TDS Return: Form 26Q

The TDS deducted under Section 194Q is reported in Form 26Q. This is a quarterly return and must be filed by the 31st of the month following the end of each quarter. So the filing for Q1 (April to June) will be done by 31st July, and so on. 

Impact of GST on Section 194Q

GST has specific implications on how TDS under Section 194Q is calculated. When determining whether the ₹50 lakh threshold is met, the turnover or gross receipts should be calculated excluding the GST component. This means only the value of goods is considered for the threshold limit. 

So, TDS under Section 194Q will be deducted at 0.1% on the purchase value, excluding GST. For instance, if a buyer purchases goods worth ₹60 lakh, where the GST component is ₹10 lakh, the calculation will be as follows:

• Purchase Value: ₹60 lakh
• GST Component: ₹10 lakh
• Value for TDS Calculation: ₹50 lakh (₹60 lakh – ₹10 lakh)

Since the purchase value after excluding GST is ₹50 lakh, no TDS will be deducted as the threshold has not been exceeded. Had it exceeded ₹50 lakh, TDS would apply on the excess amount.

Penalties and Consequences of Non-Compliance

Failure to deduct TDS under Section 194Q or deposit it with the government can lead to:

• Under Section 234E, a late filing fee of ₹200 per day is levied for delayed TDS return filing, capped at the TDS/TCS amount deductible or collectible.
• Failure to file or inaccurate filing of TDS returns attracts a penalty under Section 271H, ranging from ₹10,000 to ₹1,00,000.
• If TDS is not deducted, interest at 1% per month is charged on the unpaid amount until the deduction is made.
• If TDS is deducted but not deposited, interest at 1.5% per month is charged on the unpaid amount until it is deposited.
• The deductor is treated as an assessee-in-default if TDS is not deducted or deposited as required.

Exemptions and Important Considerations

• Non-applicability for payments less than ₹50 lakh: No TDS deduction is required on purchases below ₹50 lakh.
• Harmonization with other sections: Businesses must ensure they are not double-taxed by considering provisions of other relevant sections, like 195 (for non-resident transactions).

Conclusion

Section 194Q significantly impacts businesses involved in high-value transactions, making it a crucial compliance requirement. While traditionally seen as a tax regulation for businesses, it also draws the attention of investors and shares advisory services, as non-compliance can affect a company’s financials and tax liability.Additionally, understanding the distinction between TCS vs TDS is important in Section 194Q, especially with the removal of TCS (Tax Collected at Source) under Section 206C(1H) for goods purchases, streamlining the process for businesses.

FAQs on Section 194Q

Introduction

What is Section 194R?

Picture this: you successfully reached the target sales, and the company declared ₹30,000 as a sales incentive. But while receiving, you get ₹27,000. The amount here got reduced due to the mandate of deducting TDS as per a direct tax rule.  

Section 194R of the Income Tax Act requires the deduction of TDS (Tax Deducted at Source) on any benefits or perquisites offered in the course of business or profession. These benefits can be gifts, incentives, travel perks, or other non-cash payments from agents, distributors, or partners.

Purpose and Importance of Section 194R

Section 194R of the Income Tax Act was introduced to prevent tax evasion on non-cash benefits provided by businesses. Previously, companies offered dealers gifts or incentives, claiming these as business expenses, while recipients didn’t report them as income. Section 194R ensures that any benefit, whether cash or kind, is taxed properly, similar to how income tax calculation on salary ensures that earnings are taxed accurately.

Applicability of Section 194R

Who Needs to Deduct TDS Under Section 194R?

Any entity – whether a business, firm, or professional – must deduct TDS under Section 194R if it provides benefits or perquisites exceeding ₹20,000 to a resident in a financial year. This includes gifts, incentives, or rewards from employees, agents, distributors, or consultants. 

Applicability of Gifts, Perquisites, and Non-Cash Benefits

The types of benefits covered under the 194R Income Tax Act include:

• Gift vouchers, electronic gadgets, or other incentives given to distributors or agents.
• Free trips or hotel stays offered as incentives.
• Free products given to business partners or influencers.
• Tickets for events or entertainment shows.
• Free medical samples to medical practitioners or access to training programs.

For example, if a company provides ₹30,000 worth of stock advisory services to a consultant, TDS of 10% (₹3,000) will be deducted under Section 194R. The company then deposits this amount with the government. The recipient can claim ₹3,000 as a tax credit when filing their return, reducing their tax liability. The company can then deduct the ₹3,000 from its business income, as an expense, lowering its taxable income for the year.

Persons Covered Under Section 194R

Section 194R applies to:

• Businesses and companies with gross receipts exceeding ₹1 crore in the previous financial year.
• Professionals with gross receipts exceeding ₹50 lakh in the previous financial year.
• Any person or entity providing benefits or perquisites exceeding ₹20,000 to a resident in a financial year.

TDS Rate and Threshold Limit Under Section 194R

Applicable TDS Rate

Under Section 194R of the Income Tax Act, the TDS rate is 10% on the value of any benefit or perquisite provided. However, according to Section 206AA, if the recipient fails to provide their PAN, the TDS rate is increased to 20%. 

Additionally, if the individual has not filed their return of income, Section 206AB comes into play, and the TDS rate could be higher, either twice the rate specified in the applicable provision or 5% of the benefit amount, whichever is higher.

Threshold Limit for Deduction

The threshold limit for TDS deduction under 194R is ₹20,000 in a financial year. If the total value of benefits provided exceeds this limit, TDS is applicable.

Exceptions to TDS Deduction Under Section 194R

Nature of Exempt Transactions

Certain transactions are exempt from TDS deduction under 194R, including:

• Benefits provided to employees by their employers (these are taxed under Section 192).
• Benefits given to non-residents are not taxable in India (tax is deducted under Section 195).
• Benefits where the total value does not exceed ₹20,000 in a financial year.
• Benefits are when there is no business relationship between the two parties.

Cases Where 194R Does Not Apply

• Discounts, rebates, and sales promotions offered to customers.
• Cashbacks provided under consumer loyalty programs.
• Free products or services offered in promotional offers (e.g., “buy one, get one free”).
• Reimbursement of out-of-pocket expenses, as long as the original expenses were paid by the individual and reimbursed later by the business (e.g., travel expenses reimbursed by a client to a consultant).
• Charitable institutions that are not involved in business or a profession provide benefits.

Compliance Requirements for Section 194R

Timing of TDS Deduction

TDS under 194R must be deducted when providing the benefit or when crediting the amount, whichever is earlier.

Deposit of TDS with the Government

The deducted TDS must be deposited with the government by the 7th of the following month. For example, TDS deducted in April must be deposited by May 7th. However, TDS payment for March can be deposited with the government by the end of April. 

Issuance of TDS Certificate (Form 16A)

A TDS certificate in Form 16A must be issued to the recipient, indicating the amount deducted and deposited. This helps maintain transparency and assists the recipient in filing their income tax return.

Reporting in TDS Returns (Form 26Q)

All deductions under 194R must be reported in the quarterly TDS returns filed using Form 26Q. The due dates for filing these returns are:

• July 31st for Q1 (April to June)
• October 31st for Q2 (July to September)
• January 31st for Q3 (October to December)
• May 31st for Q4 (January to March)

Implementation Guidelines Issued by CBDT

Clarifications on Valuation of Benefits

The CBDT has clarified that the value of benefits or perquisites under Section 194R should be the fair market value, not the book value. In cases where the benefit is provided at a concessional rate, the fair market value must be used for TDS calculation.

An exception to this is when the valuation of benefits will be based on the purchase price in the following cases:

• If the benefit provider has purchased or paid consideration for the benefit. For instance, a marketing firm purchases a premium smartwatch worth ₹25,000 to gift to its top-performing consultant. Since the firm bought the watch for ₹25,000, the TDS will be calculated based on this purchase price. Thus, the TDS will be ₹2,500 (10% of ₹25,000)
• In the case of manufacturers, the price charged to the customer will be considered the value of the benefit. Say a smartphone manufacturer gives a Rs. 15000 handset to a retailer as a promotional incentive. Though the company’s manufacturing cost is ₹8,000, the TDS will be calculated at ₹15,000, the price charged to the customer.

Responsibility of Deductors

Businesses must maintain records of all benefits or perquisites provided, including their fair market value, date of issuance, and recipient details. This data will serve as a basis for TDS calculation and reporting.

Examples Provided by CBDT

• Say a company sponsors a vacation package for its top distributor. The package’s fair market value is ₹50,000, but the company acquired it at a discounted rate of ₹30,000. For the TDS calculation, the FMV will be considered, and a TDS of ₹5,000 (10% of ₹50,000) will be deducted.
• For a consultant receiving free stock advisory services valued at ₹30,000, TDS of 10% (₹3,000) applies.

Penalties for Non-Compliance with Section 194R

Interest for Late Deduction or Payment

If the company didn’t deduct TDS, the interest will be calculated at 1% per month from the date it was supposed to be deducted until the date of actual deduction. And if the company deducted TDS but didn’t deposit it on time, the interest will be calculated at 1.5% per month from the date of deduction until the date of deposit.

Penalty Provisions for Failure to Deduct or Deposit TDS

Non-compliance with section 194R of the Income Tax Act attracts two sections-

• Under Section 271C, if a company fails to deduct or deposit TDS, a penalty equal to the TDS amount not deducted or not paid may be imposed.
• Under Section 40(a)(ia), the expense (on which TDS was not deducted) may be disallowed as a business expense.

So, say a company failed to deduct TDS on a ₹30,000 gift to an employee, the penalty will be

• Interest for non-dedication of 1% of the ₹3000 TDS = ₹300
• Penalty under Section 271C: Up to ₹3,000
• Disallowance of ₹30,000 as a business expense (increasing taxable income)

Conclusion

Importance of Proper Compliance with Section 194R

Unlike state-specific obligations like professional tax, which apply to salaries, TDS under Section 194R targets benefits or perquisites in business or profession. Complying with Section 194R ensures accurate TDS deduction and deposit, minimizing the risk of penalties and tax scrutiny.

Impact of 194R on Businesses and Professionals

Adhering to the provisions of the 194R Income Tax Act is important for businesses and professionals as it affects cash flow management, financial planning, and income tax calculation on salary and other earnings. Staying updated with 194R guidelines helps mitigate potential legal and financial repercussions.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

If you’re like most people, the term “income tax act section 148” might sound a bit intimidating. And that’s understandable – not everyone is expected to be a tax expert. But here’s the thing: this section is important because it deals with situations where the Income Tax Department believes some income might have been left out of your returns. 

It’s helpful to understand how this section works, whether you’re a salaried professional, a small business owner, or someone investing in stocks or property.

This guide’ll break it down in the simplest way possible. By the end, you’ll know precisely what Section 148 means, when it applies, and what steps to take if you ever receive a notice under this section.

What is Income Tax Act Section 148?

Imagine you’ve filed your taxes, and everything seems fine. But later, the Income Tax Department thinks you might have missed reporting some income. What happens next? That’s where Income Tax Act section 148 comes into play.

Under Section 148, the tax officer can issue a notice asking you to reassess your income if they believe you’ve underreported it. Simply put, they allow you to explain or correct what you might have missed.

This provision is crucial because it keeps the tax system fair for everyone. After all, no one likes to pay more taxes than needed, but fairness matters too.

Why Might You Receive an Income Tax Act Section 148 Notice?

Here are some common reasons for receiving a notice of Income Tax Act Section 148:

• You missed declaring some income (like stock market profits, foreign income, or rental income).
  
• Significant transactions (like property purchases and heavy share market advisory investments) get flagged.
  
• The tax department received information about undisclosed assets or earnings.
  
• Differences between your TDS (tax deducted at source) and income filed.

Example:

Suppose you earned ₹5 lakh from selling stocks but forgot to declare it while filing. Later, the department will match your broker’s data and notice the gap. That’s when the Income Tax Act section 148 notice is sent to you.

Step-by-Step Process of Income Tax Act Section 148 Notice

Here’s precisely what happens when a case is reopened under Income Tax Act section 148:

Step 1: Information Gathering

First, the Assessing Officer must have some real information (not just a guess) that suggests you escaped some income.

Step 2: Prior Inquiry – Section 148A

Before issuing the notice under Income Tax Act section 148, the officer must now follow sec 148A of the Income Tax Act. This means:

• Conducting a basic inquiry.
• Giving you a chance to explain through a show-cause notice.
• Passing an order with reasons for reopening (a 148A(d) Order).

Good news: This step ensures that notices aren’t sent randomly anymore.

Step 3: Issuance of Section 148 Notice

If the officer still believes there’s an issue after your reply, they can issue an official 148 Income Tax Act notice.

This notice will ask you to file your return again for the concerned year, even if it’s 2, 3, or up to 10 years old!

Step 4: Filing Your Response

You need to either:

• File the return for that year afresh, or
• Submit reasons if you think reopening is not valid.

Step 5: Assessment

After you respond, the officer can:

• Accept your explanation and close the matter.
• Pass an assessment order, demanding extra tax, interest, and possibly a penalty.

Important Points to Remember

• Time Limit: Generally, a notice can be issued up to 3 years from the end of the assessment year. In severe cases (where escaped income is above Rs. 50 lakh), it can go up to 10 years.
• Approval: The AO often needs higher authorities’ approval before issuing a notice.

Example for Better Understanding

Let’s say you earned ₹10 lakh from selling shares using a share market advisory service but forgot to report it in your ITR. Later, the Income Tax Department picks this up from your Demat account records. They can issue a notice under the Income Tax Act section 148 asking you to reassess and pay any due taxes and penalties.

Time Limits You Should Know

• Reopening can happen within 3 years from the end of the relevant assessment year.
• In serious cases (where income escaped is ₹50 lakh or more), it can go back up to 10 years.

So, if you filed returns for FY 2020-21, the department can issue notices until March 31, 2025, or even until 2031 if the amount involved is huge.

New vs Old Tax Regime under Section 148

Aspect	Old Procedure (Before Sec 148A)	New Procedure (Post Sec 148A Introduction)
Trigger for Notice	Based on “reason to believe” without prior inquiry	Based on “information with AO,” and must be supported by a preliminary inquiry
Pre-notice Inquiry	Not required	Mandatory inquiry under Section 148A(a) before issuing a notice
Opportunity to Respond	No opportunity was given before sending the notice	Taxpayer must be given a chance to respond/explain under Sec 148A(b)
Transparency Level	Limited transparency; sudden notices	More transparent and structured process
Approval Needed	Often didn’t require senior approval	Higher authority approval is mandatory before issuing a final notice under 148
Taxpayer-Friendly?	Less taxpayer-friendly	More taxpayer-friendly and fair

How to Respond to a Section 148 Notice

Here’s a simple action plan:

• Stay Calm: Receiving a notice is not the end of the world.
• Consult a Professional: Ideally, talk to a tax consultant.
• Gather Documents: Collect all relevant papers like bank statements, transaction records, investment proofs, etc.
• Draft a Proper Reply: Stick to facts and avoid emotional arguments.
• File Revised Return: If needed, file the updated return, mentioning the notice details.
• Attend Hearings: If called for a hearing, cooperate fully.

Conclusion

While receiving a notice under the Income Tax Act section 148 might feel stressful, it’s just the tax department’s way of keeping everything transparent and fair. As with indirect tax or windfall tax matters, being proactive and staying compliant goes a long way.

And remember – the tax authorities are not out to get you. They’re simply ensuring everyone pays their fair share. So, if you ever receive a Section 148 notice, take a deep breath, follow the steps we discussed, and get expert help if needed.

FAQs about Income Tax Act Section 148

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

When paying income tax in India, your residential status plays a vital role under the Residential Status Income Tax Act. It doesn’t matter whether you are an Indian citizen or a foreign national. How long you have stayed in India during a financial year and in the past few years matters.

Under Section 6 of the Income Tax Act, the Indian government has laid out specific rules to determine whether you are a Resident and Ordinarily Resident (ROR), a Resident but Not Ordinarily Resident (RNOR), or a Non-Resident (NR). Each category is treated differently regarding tax liability and tax on mutual funds or other investments.

Defining Residential Status

Your residential status income tax defines how your income will be taxed in India. Even if you earn or live abroad, you can still be liable to pay tax here, depending on how many days you have spent in the country.

Importance of Determining Residential Status

Why is residential status important?

Because your tax obligations depend on it. The government uses residential status to decide:

• Whether your global income will be taxed in India.
• Which deductions or exemptions apply to you?
• How TDS in India is applied.
• Whether you need to file an income tax return in India.

Key Factors Determining Residential Status

To determine your resident status as per income tax, Section 6 uses the number of days you stay in India during a financial year (1st April to 31st March) and the past four years.

You are a Resident if:

• You’ve stayed in India for 182 days or more during the financial year OR
  
• You’ve stayed in India for 60 days or more in the financial year and 365 days or more in the past 4 years.
  

Exceptions:

• For Indian citizens or Persons of Indian Origin (PIO) who visit India, the 60-day condition is replaced with 182 days.
  
• For an Indian citizen leaving India for employment abroad, the 182-day rule applies.
  

Categories of Residential Status

Once you know you’re a resident or not, it’s time to classify further. As per the Residential Status Income Tax Act, a person can be:

1. Resident and Ordinarily Resident (ROR)
   
2. Resident but Not Ordinarily Resident (RNOR)
   
3. Non-Resident (NR)
   

Resident and Ordinarily Resident (ROR)

You are classified as a Resident and Ordinarily Resident (ROR) if you meet certain conditions under the Residential Status Income Tax Act. First, you must qualify as a resident in the current financial year. Additionally, you should have been a resident in at least 2 out of the last 10 financial years preceding the current year. Finally, you must have stayed in India for 730 days or more during the last 7 financial years. Meeting all three conditions confirms your ROR status for income tax purposes.

Tax Implications

• Your global income is taxable in India.
  
• All income must be reported, whether earned in India or abroad (like foreign salary, interest on overseas bank accounts, etc.).
  
• TDS rules and slabs apply as per usual Indian resident rates.
  
• You are eligible for all tax deductions and exemptions under Indian law.
  

Resident but Not Ordinarily Resident (RNOR)

You are classified as a Resident but Not Ordinarily Resident (RNOR) under the Residential Status Income Tax Act if you meet the basic criteria for residency—either staying in India for 182 days or more during the current financial year, or 60 days in the current year along with 365 days in the last four years—but do not satisfy the additional conditions for being an ordinarily resident. 

Specifically, you are considered RNOR if you were not a resident in at least 2 out of the last 10 financial years, or if your stay in India during the last 7 financial years was less than 730 days.

Tax Implications

• Only income earned or received in India is taxable.
  
• Foreign income is not taxable unless derived from a business controlled or a profession set up in India.
  
• Some foreign assets and income can remain tax-free.
  

This status is useful for returning NRIs, who are gradually transitioning to being fully taxable in India.

Non-Resident (NR)

You are considered a Non-Resident (NR) under the Residential Status Income Tax Act if you do not meet any of the conditions required to qualify as a resident. This typically means you have stayed in India for less than 182 days during the current financial year and have not fulfilled the alternative condition of staying 60 days in the current year, along with 365 days in the preceding four years. 

As a non-resident, your tax liability in India is limited to income earned or received within the country.

Tax Implications

• Only income earned or received in India is taxable.
  
• Income earned abroad is not taxed in India.
  
• TDS in India is often deducted at higher rates.
  
• You may not be eligible for some deductions or exemptions.
  

Tax Implications for Each Residential Status 

Let’s look at how taxes differ based on your residential status.

Tax Rates for ROR

• Taxed as per normal slab rates.
  
• Global income is included.
  
• Full exemptions vs deductions under Sections like 80C, 80D, etc. can be claimed.
  

Tax Rates for RNOR

1. Income earned or received in India is taxed as per slab rates:
   Any income you earn or receive in India is subject to taxation based on the applicable income tax slab rates for individuals.
   
2. Foreign income is exempt, unless linked to an Indian business/profession:
   Foreign income is generally not taxable in India unless earned through a business or profession controlled or set up in India.
   
3. Eligible for some deductions but not all:
   Under the new tax regime, only a few deductions, such as NPS or EPF, are allowed; popular ones like 80C, 80D, and HRA are not permitted.
   

Tax Rates for NR

1. Only Indian income is taxable:
   Non-residents are taxed only on income that is earned or received in India. Foreign income is not taxable unless it arises from a business connection in India.
   
2. No benefit of basic exemption limit in certain cases:
   In some cases, especially for NRO accounts or special incomes like dividends and capital gains, NRs do not get the ₹2.5 lakh basic exemption limit applicable to residents.
   
3. TDS is higher, especially on interest, rent, or capital gains:
   Tax Deducted at Source (TDS) for NRs is often at higher rates—ranging from 20% to 30%—on earnings like interest, rental income, or capital gains from Indian assets.
   

Tax Deduction and Exemptions

• ROR: Can claim full deductions like 80C (PF, LIC), 80D (health insurance), etc.
  
• RNOR and NR: Some deductions may not be available, especially on foreign income.
  
• Tax on mutual funds for NRIs is subject to special rules—long-term and short-term gains are taxed differently, and TDS is auto-deducted.
  

Determining Your Residential Status: A Step-by-Step Guide

Step-by-Step Calculation Process

First, calculate the days you have stayed in India during the current financial year.

Next, check if you meet either of the following conditions:

• You have stayed in India for 182 days or more, or
  
• You have stayed in India for 60 days or more in the current year and at least 365 days over the last 4 financial years.
  

If you meet either of these conditions, you qualify as a Resident under the Residential Status Income Tax Act.

Then, verify if you were a resident in at least 2 out of the last 10 financial years. Also, check whether you have stayed in India for 730 days or more during the last 7 years.

• If both conditions are met, you are classified as a Resident and Ordinarily Resident (ROR).
  
• If not, you are a Resident but Not Ordinarily Resident (RNOR).
  

If you do not meet the initial residency conditions, you are considered a Non-Resident (NR).

Examples

Example 1:

Ravi stayed in India for 200 days during the financial year 2024–25 and had spent 400 days in India over the last four financial years. Based on this, he qualifies as a Resident under the Residential Status Income Tax Act. Furthermore, if he were a resident in at least 2 out of the past 10 financial years and has stayed in India for 800 days or more during the last 7 years, he would be classified as a Resident and Ordinarily Resident (ROR) for income tax purposes.

Example 2:

Priya, who has been working in Dubai for the past eight years, visited India for 150 days during the current financial year. Since she does not meet either of the basic residency conditions under the Residential Status Income Tax Act—namely, staying in India for 182 days or more, or fulfilling the 60-day plus 365-day rule—she is classified as a Non-Resident (NR) for income tax purposes.

Common Scenarios and Clarifications

• NRI returning to India permanently: Will be RNOR for 2-3 years. 
• Students studying abroad: If they visit India for short periods, still NR. 
• Seafarers: Special rules apply based on ship logs and port of calls.
  

Seeking Professional Advice

Even with simple rules, the residential status income tax act can get complex in real-life situations. It’s best to consult a chartered accountant or tax advisor, especially if you:

• Earn from multiple countries. 
• Own assets or mutual funds abroad. 
• Have recently changed employment status.

Changes in Residential Status and their Tax Implications

Switching between Residential Statuses

You might change from:

• NR to RNOR when you return to India. 
• RNOR to ROR after spending more time in India. 
• ROR to NR if you move abroad.
  

Tax implications of changes in status

• Your foreign income might become taxable once you’re ROR.
  
• You may lose access to DTAA (Double Taxation Avoidance Agreement) benefits as a resident.
  
• Mutual fund taxation changes depending on whether you are ROR or NR.
  
• TDS may be lower once you become an ROR.

Conclusion

Understanding your residential status under Section 6 of the Income Tax Act is essential to manage your taxes smartly. Whether you’re an NRI, a returning resident, or planning to move abroad, being aware of these rules helps you stay compliant, avoid double taxation, and make smarter investment decisions. 

Additionally, consulting a stock market advisory can help you understand how your residential status impacts investments, capital gains, and tax liabilities, ensuring your financial strategy aligns with tax laws and market trends.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

One small but powerful tool salaried individuals often overlook when saving money on taxes is the Income Tax Rebate Section 87A. If you’re confused about tax-saving options, whether you’re exploring the old or new tax regime or even if you’re just learning how to file ITR online, understanding Section 87A can help you lower your tax liability smartly.

In this article, we’ll break down what Section 87A is, how much rebate you can claim, and its impact under different tax regimes. 

What is Section 87A of the Income Tax Act?

Section 87A of the Income Tax Act offers a rebate to taxpayers whose total taxable income is within a certain limit. Think of it as a direct discount on your tax payable — if you meet the income condition, you can get a certain amount reduced from your final tax amount.

It’s important to note that the rebate is not a deduction from your income but a reduction in the tax you must pay after calculating it on your total income.

Budget 2025 Update

• For FY 2025-26, the rebate under the new tax regime has been increased to ₹60,000.

• The ₹60,000 rebate is not available on income taxed at special rates. 
• Under the new tax regime, individuals with an annual income of up to ₹12 lakh are now eligible for a higher tax rebate, effectively making them tax-exempt. This change benefits salaried taxpayers even further, raising the exemption limit to ₹12.75 lakh with the standard deduction.
• Marginal relief under Section 87A of the Income Tax Act ensures that those slightly exceeding the ₹12 lakh income limit don’t face an excessive tax burden. This provision prevents a situation where a minor increase in income results in a disproportionately higher tax liability.
• For FY 2024-25, the rebate is applicable for income up to ₹7 lakh (new tax regime) and ₹5 lakh (old tax regime).

Who Can Avail the 87A Rebate?

To claim the rebate under Section 87A:

• You must be a resident individual (not applicable to firms, HUFs, companies, etc.).
  
• After claiming deductions under Chapter VI-A (such as Sections 80C, 80D, etc.), your total income should not exceed ₹5 lakh in a financial year under the old tax regime and ₹7 lakh under the new tax regime.
• The rebate is available under both the old tax regime and the new.
  

Rebate under Section 87A for FY 2024-25 (AY 2025-26)

Individual taxpayers whose total income falls within the prescribed limits can claim the Section 87A rebate. For FY 2024-25, the income threshold is ₹7 lakh under the new tax regime and ₹5 lakh under the old regime. If your income stays within these limits, your tax liability becomes zero.

How Much Rebate is Allowed under Section 87A?

If an individual’s total taxable income is up to ₹7 lakh and they opt for the new tax regime, they are eligible for: 

• For FY 2024-25 (AY 2025-26), the rebate limit under the new tax regime will continue to be ₹7 lakhs. It means a resident individual with taxable income up to ₹7 lakhs will receive a tax rebate of ₹25,000 or the actual tax payable, whichever is lower. Source: cleartax

Meanwhile, a resident individual who chooses the optional old tax regime (opting out of the new regime) and has a taxable income of less than ₹5 lakh can claim a rebate equal to: 

• An amount equivalent to the income tax payable on his total income or Rs 12,500, whichever is lower.

Additionally, under the new tax regime, an extra rebate benefit is available for individuals whose total income slightly exceeds ₹7 lakh. Thus, many middle-class taxpayers find the 87A rebate particularly attractive.

Example to Understand Section 87A Better

Suppose your total taxable income (after all deductions) is ₹4.9 lakh under the old tax regime. Your calculated tax is around ₹12,000.

Under the Old Tax Regime:

• Income Tax Calculation:
  
  • Up to ₹2.5 lakh: Nil
    
  • ₹2.5 lakh to ₹5 lakh: 5% of ₹2.4 lakh = ₹12,000
    

Your total tax payable = ₹12,000.

Since your income is below ₹5 lakh, you are eligible for a rebate under Section 87A of up to ₹12,500 or the actual tax payable, whichever is lower.
Here, you get a rebate of ₹12,000.

Final Tax Payable = ₹12,000 – ₹12,000 = ₹0

Under the New Tax Regime:

Suppose your taxable income is ₹6.8 lakh (no deductions allowed except standard deduction, if salaried).

• Income Tax Slabs (New Regime):
  
  • 0 – ₹3 lakh: Nil
    
  • ₹3 – ₹6 lakh: 5% of ₹3 lakh = ₹15,000
    
  • ₹6 – ₹6.8 lakh: 10% of ₹80,000 = ₹8,000
    

Total tax = ₹15,000 + ₹8,000 = ₹23,000
(plus cess @ 4%: ₹920)
Total tax payable = ₹23,920

Since your income is below ₹7 lakh, you’re eligible for a rebate under Section 87A up to ₹25,000 or the actual tax, whichever is lower.

Rebate = ₹23,920

Final Tax Payable = ₹23,920 – ₹23,920 = ₹0

This ensures low-income earners have zero tax liability under both options if their income falls within the eligible limit.

Key Points You Must Remember About Section 87A

Here are some important things to note:

• The rebate applies only after deductions and exemptions are considered (for the old regime).
  
• Citizens under the age of 60 can claim the benefit under 87A. Seniors above 60 but less than 80 can claim the same benefits. However, those above 80 cannot claim this rebate.
  
• No carry-forward: If your rebate amount exceeds your tax liability, the extra rebate amount won’t be refunded.
  
• It applies only to individual residents, not companies or firms.
  
• The rebate is granted before adding the health and education cess.
  

How do you claim the rebate while filing ITR?

If you’re wondering how to file ITR online and claim the rebate under Section 87A, here’s a quick guide:

1. Log in to the Income Tax e-filing portal(https://www.incometax.gov.in/iec/foportal/).
2. Select the correct ITR form based on your income (for most salaried individuals, it’s ITR-1).
3. Fill your income details correctly, choosing the right regime (old/new). 
4. The system automatically calculates your rebate under Section 87A if you qualify. 
5. Review your Tax Computation before submission to ensure the rebate is reflected. 
6. Verify and submit your return.
   

Section 87A Rebate and Investment Planning

While saving taxes is great, smart individuals also think about wealth creation.
Many experts suggest that if you get maximum benefits under Section 87A and save taxes, you should invest the saved amount wisely.

• Investing in the stock market through a good stock market advisory can help you create long-term wealth.
  
• If you’re comfortable with some risk, you can use those savings to start a SIP (Systematic Investment Plan) in mutual funds or direct equity.
  
• Even safer options like tax-free bonds or public provident funds (PPF) can be good choices if you want assured returns.
  

TCS vs TDS: Does It Affect the 87A Rebate?

A common confusion among taxpayers is about TCS vs TDS (Tax Collected at Source vs Tax Deducted at Source) and whether it impacts their eligibility for the 87A rebate.

Here’s the short answer:

• TDS is the tax your employer or any other deductor deducts on your behalf.
  
• TCS is the tax that sellers collect (e.g., on the sale of a car above a certain amount or foreign remittance) when you purchase certain items.
  

Both TDS and TCS are credits against your final tax liability.  When you file your ITR, you adjust these amounts and check whether your final taxable income is below the threshold to claim the 87A rebate.

Thus, TCS and TDS do not affect your eligibility for the rebate, but you must account for them correctly while filing your returns.

Should You Choose the Old Tax Regime or the New?

If you are specifically planning around the 87A rebate, here’s a quick thought process:

• The old tax regime might still be better if you have many deductions and exemptions (like HRA, 80C, 80D, education loan interest, etc.).
  
• The new tax regime could be a better option if you have minimal deductions and want to benefit from a higher rebate limit (₹7 lakh income level).

Conclusion

Section 87A of the Income Tax Act is a simple but highly effective tool for tax planning, especially for low and middle-income individuals. Whether you choose the old or new tax regime, understanding the 87A rebate rules can save you thousands of rupees annually.

And don’t stop at just saving taxes — take that extra money and invest wisely. Whether it’s the stock market, mutual funds, or safe government-backed instruments, building wealth over time is the key to achieving your financial goals.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

Paying your taxes is essential, but receiving an income tax notice can feel nerve-wracking even if you’ve done everything right. If you’ve recently received a communication from the Income Tax Department, don’t panic! Most notices are routine, and with the latest income tax notification, checking and authenticating have become much simpler. In this article, we’ll guide you through what an income tax notice is, common reasons why notices are issued, and steps to authenticate an income tax notice.

What is an Income Tax Notice?

An income tax notice is a formal communication from the Income Tax Department. It could be for various reasons: seeking additional information, clarifying discrepancies, informing about a refund adjustment, or initiating scrutiny.

According to the latest income tax notification, the government has made it mandatory that all notices be sent electronically through the e-filing portal, email, or SMS to your registered mobile number.

Why Do You Receive an Income Tax Notice?

Here are a few common reasons:

• Mismatch in Income: If your declared income doesn’t match Form 26AS, AIS (Annual Information Statement), or TIS (Taxpayer Information Summary).
  
• Unreported Income: Missing out rental income, bank interest, or capital gains.
  
• High-Value Transactions: Big investments, property purchases, or large stock market trades are caught under direct tax rules.
  
• Wrong Income Tax Calculation on Salary: Errors in salary declaration, especially missing deductions like HRA or 80C benefits.
  
• Delay or Non-filing of Return: Not filing your ITR by the due date can prompt an automatic notice.
  
• Professional Tax Issues: Professionals and freelancers who fail to pay professional tax or underreport their income can also expect to receive notices.
  

Types of Income Tax Notices

Based on the income tax new notification guidelines, here are the common types of notices:

• Intimation under Section 143(1): Just a basic communication about processing your return, sometimes pointing out minor errors.
  
• Notice under Section 139(9): Your filed return is defective. Minor corrections can fix this.
  
• Notice under Section 142(1): Asking for documents and details before starting the assessment.
  
• Scrutiny Notice under Section 143(2): A detailed check into your income, deductions, and other claims.
  
• Notice under Section 148: Income escaping assessment — if the department believes you’ve hidden income.
  

How do you check if the income tax notice is genuine?

Worried if the notice is real or a scam?

Thanks to the latest income tax notification, every genuine notice from the department must now carry a DIN (Document Identification Number).

Here’s how to verify:

• Visit the Income Tax e-filing portal: https://www.incometax.gov.in/iec/foportal/.
• Select the “Authenticate Notice/Order issued by ITD” option.
  
• Enter the DIN mentioned on your notice and other required details.
  
• Click Submit to check if the notice matches the department’s records.
  

Alternatively, you can log in to your e-filing account and check under the ‘e-Proceedings’ or ‘View Notices’ section. It could be a fake if the DIN does not match or if you have never received any intimation about such a notice via email/SMS.

How to Authenticate an Income Tax Notice?

If you’ve confirmed your notice is genuine, the next step is to authenticate it properly. Here’s what to do:

1. Read the Notice Carefully

Check the section where the notice has been issued. It will tell you what kind of response is needed—just documentation, explanation, or a correction in your return.

2. Match it with your E-Filing Account

Your online account updates every notice issued by the Income Tax Department. Compare the notice you received with the one uploaded to your portal.

3. Confirm DIN

Again, the new income tax notification emphasizes the importance of DIN. Verify it using the steps we discussed earlier.

4. Look for Valid Communication Channels

Genuine notices are sent through:

• Registered email ID
  
• SMS from “ITDEFL” or official income tax sender IDs
  
• Uploaded on the Income Tax portal
  

If the communication method seems odd (like WhatsApp or unofficial numbers), raise an alert immediately.

What To Do After Authenticating the Notice?

Once you’ve authenticated it, act quickly:

• If It’s an Intimation: Usually, no action is needed unless there’s a discrepancy.
  
• If It’s a Request for Information: Prepare your documents and submit them through your e-filing portal.
  
• If it’s a Scrutiny Notice, you may want to seek professional help from a stock market advisor or tax consultant, especially if the notice concerns share transactions or capital gains.
  

Latest Notification of Income Tax You Must Know

As per the income tax new notification, here are some recent changes to keep in mind:

• All communication must have DIN: Any notice without it is invalid.
  
• E-verification: Simple cases can now be closed through online e-verification without personal appearances.
  
• Increased Use of Technology: Notices are more automated and based on matching third-party data, like bank accounts, credit card spending, stock market advisor reports, etc.
  

Importance of Income Tax Calculation on Salary

One of the primary triggers for notices is errors in income tax calculation on salary. People often:

• Forget to include allowances
  
• Skip declaring other incomes.
  
• Fail to claim deductions properly.
  

Using salary slips, Form 16, and consulting tools like income tax calculators can help you avoid such mistakes. Always cross-verify your salary-related income against AIS/TIS reports.

Professional Tax and Income Tax – Know the Difference

Many people confuse professional tax and income tax. Here’s the difference:

• Professional Tax: A state-level tax deducted by your employer every month. Very small amount — capped at Rs. 2500 per annum in most states.
  
• Income Tax: A central government direct tax based on your annual income.
  

Missing professional tax payments (for freelancers or consultants) can sometimes cause issues, especially in states such as Maharashtra, Karnataka, and Tamil Nadu, where enforcement is strict.

Conclusion

Receiving an income tax notice is not as stressful as it may seem. Thanks to the latest notification of income tax, the entire process has become more streamlined and transparent. It’s important to stay calm, understand the reason behind the notice, and verify its authenticity using the DIN. Responding promptly within the given timeline is crucial, and seeking professional help can make a big difference, especially in complex situations.

FAQs

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

As March closed this year, many businesses nationwide fulfilled a familiar annual obligation: paying their income taxes. For some, it was a routine they’ve followed for years; for others, it marked a first step into financial responsibility. 

What stands out in this process is the structured clarity: specific rules determine how much one must pay, which exemptions apply, and by when payments must be made. These well-defined provisions are rooted in the foundational document of India’s taxation framework, the Bare Act of Income Tax Act of 1961. But was uniformity the only goal behind its creation? How does it help the taxpayers and clarify income tax basics? Let’s understand. 

What Is Income Tax Act 1961?

The Income Tax Act, 1961, is the primary legislation governing the levy and collection of income tax in India. It took effect on 1 April 1962 and provides a comprehensive legal framework that guides how individuals, companies, and other entities are taxed on the income they earn.

The Act holds 23 chapters and 298 sections, covering various income tax concepts, rules, definitions, and procedures related to the Income Tax Rules 1961. It is the primary document used by the Income Tax Department to assess income, determine tax liability, process returns, and conduct audits. In simpler terms, the Act outlines:

• What income is taxable? 
• Who needs to pay tax?
• What are the procedures for filing returns, paying taxes, and resolving tax-related issues?
• How is the tax to be calculated and paid? 

Features Of The Income Tax Act 1961:

The Income Tax Act, 1961, has several essential features that define how income tax is levied and administered in India. These include-

• Direct Tax: Income tax is a direct tax, which means it must be paid directly by the person or entity earning the income. The tax burden cannot be shifted to another person.
• Governed by the Central Government: The income tax system in India is administered and regulated by the Central Government.
• Applies to Income Earned in the Previous Year: The Act taxes income earned in the preceding financial year, also known as the “previous year,” and the tax is assessed in the “assessment year” that follows. This means you pay taxes for the year, say, 2023-24, in the assessment year 2024-25. 
• Progressive Tax System: The Act follows a progressive tax structure, where tax rates increase with income. This ensures a higher contribution from those with greater earning capacity.
• Deductions and Exemptions: The Act provides various deductions and exemptions, allowing taxpayers to legally reduce their taxable income. However, these benefits are subject to specified limits for each financial year.

Objectives Of The Income Tax Act, 1961:

The Income Tax Act of 1961 was designed to collect revenue and support India’s broader economic goals. The major objectives behind introducing the Income Tax Act 1961 are:

• Generating Revenue for National Development

The core purpose of imposing taxes is to raise funds for the government’s various social welfare initiatives and developments. These include developing public infrastructure, improving healthcare and education, offering subsidies, and strengthening national defense, all of which contribute to society’s broader development.

• Responding to Economic Conditions

Tax policies under the Act are designed to be flexible. During economic slowdowns, lower tax rates can help boost spending and investment, while higher rates in times of growth can help curb excess demand. This helps maintain financial stability through changing cycles.

• Encouraging Domestic Growth

The Act includes provisions for import duties on specific goods to support local industries. This discourages excessive imports and creates a more favorable environment for domestic production and job creation.

• Stabilizing Prices and Inflation

The Act helps manage inflation and maintain price stability by influencing spending patterns through direct taxation. Setting tax rates and rules helps control excessive private spending, reducing the chances of commodity prices rising.

• Boosting Employment Opportunities

When taxation is reduced in specific sectors or income brackets, it can increase demand for goods and services. This growth in demand encourages businesses to expand and hire, indirectly contributing to employment generation.

Structure Of The Income Tax Act, 1961:

The Income Tax Act of 1961 comprises various chapters, provisions, and rules that govern the imposition and collection of taxes in India. These elements are as follows:

A] Chapters Of The Income Tax Act:

The Income Tax Act is divided into 23 chapters, each focusing on a different aspect of taxation in India.

Chapter	What It Defines
Chapter I	Overview of the Income Tax Act
Chapter II	Scope and applicability of the Income Tax Act
Chapter III	Provisions for income not considered part of the total income
Chapter IV	Method of calculating total income
Chapter V	Income sources like salary, capital gains, business profits, etc.
Chapter VI	Provisions for set-off and carry forward of losses and determination of aggregate income
Chapter VIA	Deductions available to assessees (individuals and entities) for calculating total income
Chapter VIB	Deductions and exceptions available specifically for companies
Chapter VII	Income not subject to income tax or exempt from tax
Chapter VIII	Rebates and reliefs applicable to specific incomes when calculating tax
Chapter IX	Double taxation relief for international income
Chapter X	Special exemptions and cases where assessees are exempt from income tax
Chapter XA	General anti-avoidance rules for income tax
Chapter XI	Tax implications on undistributed profits
Chapter XII	Tax calculation rules for special cases
Chapter XIIA	Special rules for taxation of Non-Resident Indian (NRI) income
Chapter XIIB	Special tax provisions for certain companies
Chapter XIIBA	Special provisions for limited liability partnerships (LLPs)
Chapter XIIBB	Tax rules for foreign banks’ Indian branches converting to subsidiaries
Chapter XIIBC	Special tax rules for Indian Resident companies
Chapter XIIC	Special tax rules for the retail trade sector
Chapter XIID	Special rules for the distributed profits of domestic companies
Chapter XII DA	Tax rules for the income of companies involved in share buybacks
Chapter XIIE	Tax rules for distributed income
Chapter XIIEA	Special tax rules for income distributed by securitization trusts
Chapter XIIEB	Tax rules for income of accredited institutions and trusts
Chapter XIIF	Special tax rules for income from venture capital funds and companies
Chapter XIIFA	Special tax rules for business trusts
Chapter XIIFB	Tax rules for investment fund schemes
Chapter XIIG	Special tax rules for shipping organizations
Chapter XIIH	Tax implications on fringe benefits
Chapter XIII	Information on Income Tax Authorities
Chapter XIV	Procedures for income tax assessment
Chapter XIVA	Special rules to avoid repeated appeals
Chapter XIVB	Special rules for assessing search cases
Chapter XV	Tax liabilities in special cases
Chapter XVI	Special tax rules applicable to firms
Chapter XVII	Rules for tax collection and recovery
Chapter XVIII	Tax relief on dividend income in specific cases
Chapter XIX	Tax Refunds
Chapter XIXA	Settling tax disputes through case settlements
Chapter XIX-AA	Role of the Dispute Resolution Committee in specific tax cases
Chapter XIXB	Rules for advance tax rulings
Chapter XX	Appeals and revisions in tax cases
Chapter XXA	Rules for immovable property acquisition to prevent tax evasion
Chapter XXB	Modes of accepting payments in special tax evasion cases
Chapter XXC	Rules for the central government to buy immovable property in certain transfer cases
Chapter XXI	Penalties for tax evasion
Chapter XXI	Punishable offences and prosecutions
Chapter XXIB	Certificates of tax credit
Chapter XXIII	Miscellaneous provisions related to income tax assessments and other cases

B] Provisions Of The Income Tax Act, 1961:

The provisions of the Income Tax Act outline the specific rules and guidelines for calculating, collecting, and enforcing taxes. These provisions ensure taxpayers are clear about their obligations and the processes they must follow. These provisions include:

• Tax appeals and litigation: Provisions for appealing tax assessments in higher courts (Section 260A to the High Court, Section 261 to the Supreme Court).
• Information disclosure: Requirements for filing annual financial transaction statements.
• Representation: Guidelines for authorized representatives who can act on behalf of taxpayers.
• Taxability: Specifies which income is subject to tax and which is exempt.
• Assessment procedure: Outlines the steps taken by income tax officers for tax assessment and the process for disputes and appeals.

C] Schedules to the Income Tax Act

Apart from its chapters and provisions, the Income Tax Act also includes Schedules, which serve as annexures to the main Act. These schedules have been added and updated over time to address areas and scenarios not initially covered within the legislation’s main body.

They aim to ensure the Act remains comprehensive and adaptable, accommodating evolving tax-related requirements and exceptional cases. With these, the IT Act becomes better equipped to handle complex or unique situations that arise in taxation, making the law more inclusive and practical in its application.

Scope Of The Income Tax Act 1961:

The applicability of income tax under the Income Tax Act, 1961, is determined by an individual’s residential status. The Act classifies taxpayers into three categories:

• Resident and Ordinarily Resident (ROR)
• Resident but Not Ordinarily Resident (RNOR)
• Non-Resident (NR)

Each category is taxed differently based on the source and nature of the income, as shown below:

Type of Income	Resident and Ordinarily Resident (ROR)	Resident but Not Ordinarily Resident (RNOR)	Non-Resident (NR)
Income received or deemed to be received in India	Taxable	Taxable	Taxable
Income accrued or deemed to accrue in India	Taxable	Taxable	Taxable
Income earned abroad from a business or profession controlled from India	Taxable	Taxable	Non-taxable
Income earned abroad from a business or profession managed and operated outside India	Taxable	Non-taxable	Non-taxable
Past foreign income that was not taxed earlier but later brought into India	Non-taxable	Non-taxable	Non-taxable

Bottomline:

The Income Tax Act of 1961 has helped the government and taxpayers by creating a structured income assessment and tax collection system. It also supports investors by defining tax rules around capital gains, dividends, and other income sources. These provisions help investors plan better and understand the tax implications of their financial decisions. A share market advisor often refers to these rules while guiding clients on investments.

Overall, the Act has helped improve tax compliance, reduce disputes, and bring consistency to India’s taxation system. It continues to evolve with the economy, ensuring it stays relevant for policy-makers and taxpayers.

FAQs:

Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

Let’s return to school and look at a familiar example—test scores. Suppose you scored 85 out of 100 while your friend from another class got 65 out of 70. At first glance, 85 seems higher than 65, but can we say you performed better? Not necessarily, because factors like total marks, difficulty level, and subjects differ. To make a fair comparison, we convert both scores into percentages.

Now, let’s pan out and look at a bigger scale- comparing a nation’s tax revenue and tax systems. Since countries vary in size, economy, and population, tax revenue alone isn’t enough for comparison. 

That’s where the tax-to-GDP ratio comes in—offering a standardized way to assess a country’s taxation efficiency. Let’s dive deeper into what this ratio means and how it connects with different income tax concepts.

What is the Tax-to-GDP ratio?

The tax-to-GDP ratio measures the proportion of a country’s tax revenue relative to its total economic output (GDP). It reflects how effectively a government collects taxes and whether it has sufficient funds to meet public expenditures. A higher ratio suggests a well-funded government capable of investing in infrastructure, public services, and economic development, while a lower ratio may indicate revenue constraints and reliance on borrowing.

This ratio also serves as a benchmark for comparing tax policies across countries. Developed nations usually have higher tax-to-GDP ratios, supporting extensive public services, whereas developing economies may struggle with lower tax collections. In India, the Direct Tax-to-GDP ratio reached 6.6% in 2023-24, the highest in 15 years.

How Is Tax-to-GDP Ratio Calculated?

The tax-to-GDP ratio is calculated using the following formula-

Tax-to-GDP Ratio = (Total Tax Revenue Gross Domestic Product)* 100. Here, 

• Tax revenue is the total amount a government collects in taxes within a specific period.
• Gross Domestic Product (GDP) represents the total value of goods and services produced in the country during the same period.

For instance, say there are two countries- M and N

	Country M	Country N
Tax Revenue	Rs.7 lakh crore	Rs.5.5 lakh crore
GDP	Rs.21 lakh crore	Rs.25 lakh crore

The tax-to-GDP ratio by country would be

• Country M = (7 lakh crore / 21 lakh crore) x 100 = 16.67%
• Country N = (5.5 lakh crore / 25 lakh crore) x 100 = 22%

Even though Country N collects more tax revenue, its higher tax-to-GDP ratio suggests a more efficient tax collection system than Country M. This is why economists, investors, and stock advisory firms use the metric to assess a country’s financial strength and economic structure.

What Is The Optimal Tax-to-GDP Ratio?

The World Bank identifies 15% as the ideal tax-to-GDP ratio for sustainable economic growth and development. This threshold is crucial for countries transitioning from low-income to middle-income status, allowing governments to invest in essential public services, reduce economic volatility, and foster inclusive growth.

Why is 15% considered optimal? Research suggests that:

• A tax-to-GDP ratio of at least 12.5% is linked to a noticeable acceleration in economic growth over the next decade.
• 13% is associated with stronger inclusive growth, reducing income inequality, and enabling better access to public services.
• At 15%, countries usually transition from low to middle-income status. Data shows that in the decade leading up to this transition, nations experienced a 3-4% increase in their tax collection relative to GDP.

While crossing the 15% threshold can significantly impact a country’s growth and stability, increasing tax revenues is challenging. Most countries raise their tax-to-GDP ratio by only 3 percentage points over a decade, making the jump from 7% (common in weaker economies) to 15% a long-term effort.  (Source: World Bank )

What is India’s Tax-to-GDP Ratio?

India’s tax-to-GDP ratio has fluctuated over the years, reflecting economic shifts, policy changes, and structural challenges. The ratio dropped from 11% in FY19 to 9.9% in FY20, largely due to the economic slowdown. It improved slightly to 10.2% in FY21, aided by post-pandemic recovery. In FY 2024-25, India’s tax-to-GDP ratio stands at 11.8%, marking progress but still trailing behind global benchmarks.

India’s figures remain modest compared to developed nations, where tax-to-GDP ratios exceed 30%. Even similar-sized economies like the UK (24.9%), France (24.6%), and Italy (24.6%) have significantly higher tax collections relative to GDP. South Africa, with a smaller economy, maintains a ratio of 24.2%—more than double India’s.

Several factors contribute to India’s lower tax-to-GDP ratio:

• Large informal sector – A significant portion of economic activity remains outside the formal tax system.
• Tax evasion & narrow base – Despite a population of over 140 crore, only 6.5 crore individuals filed income tax returns in FY 2023-24.
• Heavy reliance on indirect taxes – India’s tax structure leans on indirect taxes (5.6%) rather than direct taxes (6.1%), which can be regressive. (Source: PWC)

Know More:  SEBI Registered investment advisory |  Stock investment advisory

How Does the Tax-to-GDP Ratio Affect the Economy?

Public Services & Infrastructure

A higher tax-to-GDP ratio allows governments to invest more in essential public services like healthcare, education, and infrastructure. This improves quality of life and supports long-term economic growth.

Fiscal Stability & Debt Management

A healthy tax-to-GDP ratio reduces reliance on borrowing, ensuring the government can meet its financial obligations without excessive debt accumulation. Low ratios may lead to fiscal deficits and higher public debt.

Income Distribution & Social Welfare

A progressive tax system with a high tax-to-GDP ratio enables better wealth distribution. If used effectively, tax revenues can support social welfare programs, reducing income inequality.

Investment & Economic Growth

The impact on investment depends on tax policies. Excessively high tax rates can discourage private investment, while a moderate tax-to-GDP ratio with stable policies fosters investor confidence and economic expansion.

Bottomline:

The tax-to-GDP ratio is a vital indicator of a country’s fiscal strength, influencing economic stability, public investment, and business confidence. While a higher ratio enables better infrastructure and social spending, excessive taxation can deter investment and economic growth. Conversely, a lower ratio may indicate limited government revenue, affecting essential services and long-term development.

Navigating these dynamics is important for investors as it affects business confidence and long-term financial security. Tools like a retirement planning calculator can help individuals assess tax implications and plan effectively for future financial goals, ensuring stability amid changing tax policies.

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Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & certification from NISM in no way guarantee the performance of the intermediary or provide any assurance of returns to investors.

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