If you have invested in mutual funds and redeemed or switched units during FY 2025-26, capital gains taxation is something you cannot afford to ignore at ITR filing time.

The rules around mutual fund capital gains tax in India have changed significantly over the last two years. The Finance Act 2023 removed the indexation benefit for debt mutual funds. The Finance Act 2024 revised LTCG and STCG rates for equity funds. For AY 2026-27, understanding these updated rules is critical to accurate filing and avoiding income tax notices.

This guide explains the complete taxation framework for mutual fund capital gains covering equity funds, debt funds, hybrid funds, international funds, tax harvesting strategies, ITR reporting, and AIS compliance in plain, practical terms.

What Are Capital Gains on Mutual Funds?

When you redeem, switch, or sell mutual fund units, any profit you earn over your purchase cost (cost of acquisition) is called a capital gain. This gain is taxable under the head ‘Capital Gains’ as per the Income Tax Act, 1961.

Capital gains from mutual funds are classified based on two factors:

• Type of fund : equity-oriented or non-equity (debt, international, hybrid)
• Holding period : duration from purchase date to redemption date

Importantly, switching between schemes even within the same fund house is treated as a redemption and triggers capital gains. Similarly, receiving units via dividend reinvestment can have cost and holding period implications.

Common misconception: Many investors believe that switching from a growth plan to a direct plan, or from regular to direct, is not taxable. It is. Any switch or transfer of units is a redemption in the eyes of the Income Tax Department and generates capital gains or losses.

Short-Term vs Long-Term Capital Gains: Holding Period Rules

The boundary between short-term capital gains (STCG) and long-term capital gains (LTCG) depends on the type of mutual fund.

Note: Post Finance Act 2023: For debt mutual funds and overseas funds purchased on or after 1 April 2023, there is no distinction between STCG and LTCG all gains are taxed at income tax slab rates regardless of holding period.

Capital Gain Tax Rates on Mutual Funds for AY 2026-27

The Finance Act 2024 revised the capital gains tax rates applicable from 23 July 2024 onwards. These revised rates apply fully to FY 2025-26 returns filed as AY 2026-27.

Equity Mutual Funds (Equity Exposure ≥ 65%)

Budget 2024 Change: STCG rate on equity was raised from 15% to 20%. LTCG rate was raised from 10% to 12.5%. The exemption limit was raised from Rs. 1 lakh to Rs. 1.25 lakh. These changes apply to transactions on or after 23 July 2024.

Debt Mutual Funds (Post 1 April 2023 Purchases)

Note: The Finance Act 2023 removed the LTCG benefit and indexation for debt mutual funds purchased on or after 1 April 2023. This fundamentally changed debt fund tax efficiency versus fixed deposits.

Hybrid & Other Fund Categories

What Is Indexation Benefit and Who Can Still Claim It?

Indexation allows you to inflate your purchase cost using the Cost Inflation Index (CII) notified by the Income Tax Department each year. This reduces your effective capital gain and therefore your tax liability.

Post the Finance Act 2024 amendments, indexation for most asset classes has been modified. For mutual funds specifically:

• Equity mutual funds: Never had indexation benefit tax at flat rates
• Debt mutual funds purchased before 1 April 2023 and held for more than 36 months: LTCG with indexation at 20% still applies grandfathered treatment
• Debt mutual funds purchased on or after 1 April 2023: No indexation, taxed at slab rates regardless of holding
• Gold funds and FoFs: Post Finance Act 2024, the 20% with indexation benefit for long-term gains has been replaced with 12.5% without indexation

Exemptions Available on Mutual Fund Capital Gains

Rs. 1.25 Lakh LTCG Exemption on Equity Funds

Under Section 112A of the Income Tax Act, 1961, long-term capital gains from equity-oriented mutual funds are exempt up to Rs. 1.25 lakh per financial year (aggregate across all equity assets including equity MFs, equity shares, equity ETFs, and units of business trusts).

Only gains exceeding Rs. 1.25 lakh are taxed at 12.5% (without indexation).

Example: If your total LTCG from equity mutual funds and direct equity shares combined is Rs. 2 lakh in FY 2025-26, your taxable LTCG is Rs. 75,000 (Rs. 2L minus Rs. 1.25L), taxed at 12.5% = Rs. 9,375.

Section 54F: Capital Gain Exemption on Reinvestment in Residential Property

If you redeem any long-term capital asset (including mutual fund units classified as long-term, other than a residential house) and reinvest the net consideration in purchasing or constructing a residential house property, you may claim exemption under Section 54F.

This is particularly useful for investors planning to deploy mutual fund redemption proceeds into real estate.

Section 54EE and 54EC: Bonds

Long-term capital gains from mutual funds may also qualify for exemption under Section 54EC by reinvesting up to Rs. 50 lakh in specified NHAI or REC bonds within 6 months of the sale.

Tax Loss Harvesting: A Practical Strategy for Mutual Fund Investors

Tax loss harvesting is a strategy where investors intentionally redeem loss-making mutual fund units before the financial year end (March 31) to book losses, which can then be set off against existing capital gains to reduce tax liability.

How Set-Off Rules Work Under the Income Tax Act

Key Insight: You can set off your short-term capital losses from poorly performing debt funds against long-term capital gains from equity funds. This cross-asset, cross-category set-off is allowed under the Income Tax Act and is a powerful planning tool.

Tax Harvesting in Practice: Example

Situation: Aditya has LTCG of Rs. 3 lakh from equity mutual funds in FY 2025-26. He also has STCL of Rs. 1.5 lakh from an international fund that has underperformed.

• Taxable LTCG before set-off = Rs. 3 lakh
• Less: LTCG exemption = Rs. 1.25 lakh
• Taxable LTCG after exemption = Rs. 1.75 lakh
• Less: STCL set-off = Rs. 1.5 lakh
• Net taxable LTCG = Rs. 25,000
• Tax at 12.5% = Rs. 3,125 (versus Rs. 21,875 without harvesting)

AIS, Form 26AS and Mutual Fund Capital Gains: Reporting Obligations

The Annual Information Statement (AIS) on the Income Tax portal now captures all mutual fund transactions reported by RTAs (Registrar and Transfer Agents) such as CAMS and KFintech. This includes purchases, redemptions, switches, SIP and SWP transactions, and dividend payouts.

Why AIS Mismatches in Mutual Funds Are a Common Notice Trigger

If your ITR does not reflect the capital gains shown in your AIS, the Income Tax Department’s automated system flags this discrepancy. This is one of the most common reasons salaried individuals who also have mutual fund investments receive notices under Section 143(1)(a) or Section 142(1).

Common causes of AIS mismatch for mutual fund investors:

• Not reporting gains from old folio numbers or dormant accounts
• Switching between direct and regular plans without reporting the resulting gain
• Not accounting for reinvested dividends (growth option vs IDCW option confusion)
• Not including gains from ELSS fund redemptions after 3-year lock-in
• Joint holding gains reported under the first holder’s PAN in AIS

How to Download Your Capital Gain Statement

1. Log in to CAMS (camsonline.com) or KFintech (kfintech.com) with your PAN and email
2. Navigate to ‘Capital Gain Statement’ under the Reports section
3. Select the financial year FY 2025-26 (1 April 2025 to 31 March 2026)
4. Download the statement and verify it matches your AIS on incometax.gov.in
5. For SIPs, each SIP instalment has a different purchase date and cost ensure all are captured

Which ITR Form to Use for Mutual Fund Capital Gains in AY 2026-27?

How to Report Mutual Fund Capital Gains in ITR-2

• Go to Schedule CG (Capital Gains) in ITR-2
• Equity MF LTCG report under ‘Section 112A’ in Schedule 112A (scrip-wise details required)
• Equity MF STCG report under ‘Section 111A’
• Debt MF / other MF gains report under ‘Short-Term Capital Gains taxable at applicable rate’ or LTCG under Section 112
• Set-off and carry forward report in Schedule CYLA, BFLA, and CFL
• Use the pre-filled data but always verify against your capital gain statement

TDS on Mutual Fund Redemptions and Dividends

TDS on Mutual Fund Dividends (IDCW)

Under Section 194K of the Income Tax Act, mutual fund houses deduct TDS at 10% on dividend (IDCW) income paid to resident individuals if the aggregate dividend in a financial year exceeds Rs. 5,000. This TDS is reflected in Form 26AS and AIS.

TDS on Redemptions by NRIs

For NRI investors, mutual fund redemptions attract TDS as follows:

The Grandfathering Rule: Equity Mutual Funds Held Before 31 January 2018

When the government reintroduced LTCG tax on equity mutual funds through the Finance Act 2018, it provided a grandfathering benefit. Gains accrued in equity mutual funds up to 31 January 2018 were protected from taxation.

If you are still holding equity mutual fund units purchased before 31 January 2018, your cost of acquisition for tax purposes is the higher of:

• Your actual purchase price
• The NAV (Net Asset Value) of the fund on 31 January 2018

This effectively means that all gains up to 31 January 2018 are tax-free under LTCG. Only gains post that date are taxable at 12.5%.

If you have very old mutual fund folios with units purchased before 2018, your capital gain statement will reflect this grandfathering cost automatically. Ensure your ITR filing uses the correct grandfathered cost basis.

ELSS Mutual Funds: Tax Deduction + Capital Gains Taxation

Equity Linked Savings Schemes (ELSS) offer a dual tax benefit deduction under Section 80C (up to Rs. 1.5 lakh) on investment, and long-term capital gains treatment on redemption after the mandatory 3 year lock in.

Common Mistakes Mutual Fund Investors Make in ITR Filing

• Filing ITR-1 or ITR-4 despite having capital gains from mutual funds leads to defective return notice
• Not reporting ELSS redemptions treated as income not disclosed, can trigger scrutiny
• Not matching AIS with capital gain statement before filing AIS mismatches trigger Section 143(1)(a) notices
• Missing gains from SWP (Systematic Withdrawal Plans) each SWP withdrawal is a partial redemption taxable as capital gain
• Ignoring dividend (IDCW) income taxable at slab rate, must be reported under ‘Income from Other Sources’
• Not reporting losses losses eligible for carry forward are forfeited if not claimed in ITR
• Treating all mutual fund gains as LTCG STCG from equity funds held under 12 months is taxed at 20%, not 12.5%
• Not accounting for SIP-wise holding period each SIP instalment has its own purchase date; gains from instalments held <12 months are STCG

Also Read : ITR 1 vs ITR 2 vs ITR 3 vs ITR 4: The Definitive Guide to Picking the Right Income Tax Return Form for AY 2026-27

Practical Examples: Calculating Mutual Fund Capital Gains Tax for AY 2026-27

Example 1 : Salaried Investor with Equity MF Redemption

Ramesh is a salaried individual earning Rs. 10 lakh per year. In FY 2025-26, he redeemed equity mutual fund units with total LTCG of Rs. 2 lakh and STCG of Rs. 30,000.

Example 2 : Debt Fund Investor (Post April 2023 Purchase)

Sunaina purchased debt mutual fund units in June 2023 for Rs. 5 lakh. She redeemed them in December 2025 for Rs. 5.8 lakh (gain of Rs. 80,000). She falls in the 30% tax bracket.

• No LTCG benefit purchased after 1 April 2023
• No indexation benefit
• Rs. 80,000 added to total income and taxed at 30% slab = Rs. 24,000
• Had she purchased this before 1 April 2023 and held for >36 months LTCG with indexation at 20% could have been applicable

Example 3 : SIP with Mixed LTCG and STCG

Priya runs a monthly SIP of Rs. 10,000 in an aggressive hybrid fund (equity ≥65%) since April 2023. She redeemed all units in May 2025.

• SIP instalments from April 2023 to April 2024 (13 months or more by May 2025): LTCG at 12.5%
• SIP instalments from May 2024 to April 2025 (held <12 months by May 2025): STCG at 20%
• Her capital gain statement from CAMS will split this automatically she should not manually aggregate

Key Takeaways

• Equity mutual funds: LTCG at 12.5% above Rs. 1.25 lakh (>12 months); STCG at 20% (≤12 months) Finance Act 2024 rates
• Debt mutual funds purchased after 1 April 2023: taxed at slab rates no LTCG, no indexation benefit
• Debt funds purchased before 1 April 2023: LTCG with indexation at 20% still applicable if held >36 months
• Switch, SWP, and plan change transactions are taxable redemption events often missed by investors
• Tax loss harvesting before 31 March can significantly reduce net capital gains tax liability
• Short-term losses from any capital asset can be set off against both STCG and LTCG
• AIS on the Income Tax Portal captures all MF transactions mismatches trigger notices
• File ITR-2 or ITR-3 for capital gains not ITR-1 or ITR-4
• NRIs face TDS at source on MF redemptions and must file ITR to claim excess TDS refunds
• For SIP investments, each instalment has its own holding period and cost use the capital gain statement from CAMS/KFintech

Frequently Asked Questions (FAQs)

Conclusion:

Mutual fund capital gains taxation in India has gone through some of its most significant changes in recent memory the Finance Act 2023 and Finance Act 2024 together rewrote the rules for both equity and debt funds. For AY 2026-27, investors need to be particularly careful about the revised LTCG and STCG rates for equity funds, the slab-rate treatment of new debt fund investments, and the correct ITR form to use.

The good news is that with proper planning tax loss harvesting, use of the Rs. 1.25 lakh LTCG exemption, set-off of losses, and timely filing the overall tax outgo from mutual fund investments can be optimised legally.

The starting point is always the capital gain statement from your RTA (CAMS or KFintech), reconciled carefully against your AIS. Do this before your ITR filing, not after a notice arrives.

File on time, report accurately, and claim every benefit you are entitled to. If your portfolio has multiple fund types, SIPs, and switches, professional guidance ensures you don’t leave money on the table — or face unnecessary scrutiny.

Disclaimer

ITRAdvisor.in is an educational and informational platform focused on tax awareness and compliance updates. Nothing contained herein should be construed as solicitation or advertisement of professional services. Professional services, where applicable, are rendered in accordance with ICAI guidelines. This article is published on ITRAdvisor.in, a tax and compliance knowledge platform. The content has been reviewed for technical accuracy by professionals associated with Adwani & Co LLP.

bout the Author
Dr. Haresh Adwani
Ph.D. in Commerce | Law Graduate | Managing Partner, Adwani & Co LLP Dr. Haresh Adwani holds a Ph.D. in Commerce and is a qualified Law graduate with over two decades of hands-on experience in GST advisory, direct taxation, and statutory compliance for businesses across Pune and Maharashtra.

Every year, lakhs of Indian taxpayers scramble to file their Income Tax Returns just before the deadline. Some miss it. And that’s when things get complicated.

Missing the ITR filing deadline for AY 2026-27 isn’t just an administrative lapse it has real financial consequences. From a late filing fee under Section 234F to interest under Section 234A, the cost of delay adds up quickly. There’s also the risk of income tax notices, loss of refunds, and the permanent loss of certain tax benefits.

Whether you’re a salaried employee, freelancer, business owner, or NRI, this guide covers everything you need to know about the late filing penalty for AY 2026-27.

What Is the ITR Filing Due Date for AY 2026-27?

The Assessment Year (AY) 2026-27 corresponds to income earned during the Financial Year (FY) 2025-26 from 1 April 2025 to 31 March 2026.

For most individual taxpayers including salaried employees, freelancers, and small businesses not subject to tax audit the standard due date for filing an ITR is 31 July of the assessment year.

So for AY 2026-27, the general due date is 31 July 2026.

Important: Due dates are subject to CBDT notifications and extensions. Always verify the latest notification on the Income Tax India portal or ITRAdvisor.in before filing.

What Is Section 234F? Late Filing Fee Explained

Section 234F was inserted into the Income Tax Act, 1961, with effect from AY 2018-19. It introduced a mandatory late filing fee for taxpayers who miss the due date but still want to file a belated return.

Before Section 234F, there was no direct fee for late filing only interest. The section was introduced to encourage timely compliance.

Section 234F Late Filing Fee Structure for AY 2026-27

Key Point: Even if your tax liability is zero or you are eligible for a full refund, the late filing fee under Section 234F still applies unless your total income is below the basic exemption limit (i.e., below Rs. 3 lakh under the new regime for FY 2025-26).

Who Is Exempt from Section 234F Late Filing Fee?

• Individuals whose total income is below the basic exemption limit
• Individuals not required to file ITR under the law (though voluntary filing is advisable)
• Returns filed within the prescribed due date

Section 234A : Interest on Late Filing When Tax Is Due

Section 234F is a fee. But if you also have unpaid tax liability at the time of filing, you will additionally be charged interest under Section 234A of the Income Tax Act.

How Is Section 234A Interest Calculated?

• Rate: 1% simple interest per month or part of a month
• Calculated on the outstanding tax payable (i.e., tax due minus TDS, advance tax, and self-assessment tax paid)
• Period: From the day after the due date till the date of actual filing or payment

Example: If you file your ITR on 30 September 2026 (due date 31 July 2026) with Rs. 50,000 outstanding tax, you will pay 2 months of 234A interest = Rs. 1,000. Plus Rs. 5,000 under Section 234F. Total additional outgo: Rs. 6,000.

Section 234B and 234C: Additional Interest Traps

If you are required to pay advance tax but haven’t paid it correctly, you may also face:

• Section 234B –:Interest for default in payment of advance tax (if advance tax paid is less than 90% of the total tax liability)
• Section 234C Interest for deferment of advance tax instalments

Beyond Penalty: Other Consequences of Late ITR Filing

1. Loss of Carry Forward of Losses

2. Delay in Income Tax Refund

3. Inability to Revise the Return

4. Difficulty in Loan Approvals and Visa Applications

5. Income Tax Notices for Non-Filing

What Is a Belated Return? Can You Still File After the Deadline?

Yes. If you miss the 31 July 2026 due date, you can still file a belated return under Section 139(4) of the Income Tax Act, 1961 up to 31 December 2026.

A belated return carries the Section 234F fee and applicable interest. However, it is far better to file a belated return than not to file at all.

What You Can and Cannot Do in a Belated Return

Practical Examples: How the Penalty Adds Up

Example 1 : Salaried Employee, No Outstanding Tax

Rajan is a salaried employee with total income of Rs. 8 lakh. His full tax has been deducted at source by his employer. He forgets to file his ITR and files it on 15 September 2026.

• Section 234F fee: Rs. 5,000 (income above Rs. 5 lakh, filed after 31 July 2026)
• Section 234A interest: Nil (no outstanding tax payable)
• Total additional payment: Rs. 5,000

Example 2 : Freelancer with Outstanding Tax

Priya is a freelancer with total income of Rs. 12 lakh and advance tax of Rs. 40,000 paid. Total tax liability is Rs. 1,20,000. She files her return on 1 October 2026.

• Outstanding tax = Rs. 80,000
• Section 234F fee = Rs. 5,000
• Section 234A interest = 2 months x 1% x Rs. 80,000 = Rs. 1,600
• Total additional payment = Rs. 6,600
• Plus: she cannot carry forward any capital losses (if applicable)

Example 3 – Low Income Taxpayer

Sunita is a retired individual with pension income of Rs. 4.5 lakh. She files her return on 20 August 2026.

• Section 234F fee: Rs. 1,000 (income below Rs. 5 lakh)
• Section 234A interest: Nil (no outstanding tax after standard deduction)
• Total additional payment: Rs. 1,000

Common Mistakes That Lead to Late Filing

• Waiting for Form 16 to arrive before starting the process
• Assuming no tax liability means no need to file
• Not reconciling AIS and Form 26AS before filing, causing last-minute corrections
• Forgetting to include income from fixed deposits, rental income, or freelance work
• NRIs not tracking their Indian income sources properly
• Not updating bank account details, causing failure to receive refunds even after filing
• Misunderstanding the ITR form applicable to their income type (ITR1 vs ITR2 vs ITR4)
• Also Read : ITR 1 vs ITR 2 vs ITR 3 vs ITR 4: The Definitive Guide to Picking the Right Income Tax Return Form for AY 2026-27

How to Avoid Late Filing Penalties: A Practical Checklist

1. Collect all income documents : Form 16, Form 16A, rental agreements, freelance invoices
2. Download and reconcile your AIS (Annual Information Statement) from the Income Tax Portal
3. Verify TDS credit in Form 26AS matches your actual tax deductions
4. Calculate advance tax liability if you have income beyond salary (freelance, rent, capital gains)
5. Identify the correct ITR form for your income type
6. File on or before 31 July 2026 to avoid Section 234F fee
7. If you discover any errors post-filing, file a revised return by 31 December 2026
8. If you have capital losses or business losses, timely filing is non-negotiable

NRI Taxpayers: Special Note on Late Filing

Non-Resident Indians (NRIs) with income arising in India rent, capital gains from sale of property or securities, interest from NRO accounts are also required to file ITR if their Indian income exceeds the basic exemption limit.

For NRIs, the same Section 234F fee applies if the return is filed late. Additionally, NRIs dealing with property transactions often receive TDS at higher rates (such as 20%+ on LTCG). If they fail to file returns, excess TDS deducted cannot be claimed as refund.

If you are an NRI who sold property in India in FY 2025-26, filing your ITR on time is critical to reclaiming excess TDS. A late return not only delays the refund but also attracts Section 234F fee.

NRIs should also be aware of the 120day rule those who visit India for 120 days or more and whose Indian income exceeds Rs. 15 lakh may be classified as Resident but Not Ordinarily Resident (RNOR), which has separate filing obligations.

Read our Guide on The 120-Day Rule That Is Silently Taxing Thousands of NRIs in India :Are You at Risk?https://itradvisor.in/blog/the-120-day-rule-silently-taxing-nris

Key Takeaways

• File your ITR for AY 2026-27 by 31 July 2026 to avoid late filing fee under Section 234F
• Late filing fee is Rs. 5,000 for income above Rs. 5 lakh and Rs. 1,000 for income up to Rs. 5 lakh
• Section 234A interest applies at 1% per month on unpaid taxes from the due date to the filing date
• Capital losses and business losses cannot be carried forward if the return is filed late
• Belated returns (up to 31 December 2026) are better than no return at all
• NRIs must also file returns on time to avoid penalties and claim excess TDS refunds
• Even nil-tax returns should be filed on time for compliance, refund claims, and loan documentation

Frequently Asked Questions (FAQs)

Conclusion: File On Time — There Is No Good Reason to Delay

The late filing penalty for AY 2026-27 is not just about the Rs. 5,000 fee. It’s about losing carry-forward benefits that could save you thousands of rupees in future taxes. It’s about delayed refunds that you are rightfully entitled to. It’s about the risk of notices that create unnecessary stress and professional fees.

The income tax system in India is increasingly data-driven. With AIS capturing your bank transactions, mutual fund purchases, property deals, and more — there is very little that the Income Tax Department does not know. Filing your return accurately and on time is no longer just an option. It’s the only sensible financial decision.

If you are unsure about which ITR form to use, how to reconcile your AIS, or whether you have any outstanding tax liability — seek professional guidance well before 31 July 2026. The cost of advice is always less than the cost of a penalty.

Timely ITR filing = Avoided penalties + Protected benefits + Peace of mind.

Conclusion: File On Time

The late filing penalty for AY 2026-27 is not just about the Rs. 5,000 fee. It’s about losing carry-forward benefits that could save you thousands of rupees in future taxes. It’s about delayed refunds that you are rightfully entitled to. It’s about the risk of notices that create unnecessary stress and professional fees.

The income tax system in India is increasingly data driven. With AIS capturing your bank transactions, mutual fund purchases, property deals, and more there is very little that the Income Tax Department does not know. Filing your return accurately and on time is no longer just an option. It’s the only sensible financial decision.

ITR filing = Avoided penalties + Protected benefits + Peace of mind.

About the Author
Dr. Haresh Adwani
Ph.D. in Commerce | Law Graduate | Managing Partner, Adwani & Co LLP Dr. Haresh Adwani holds a Ph.D. in Commerce and is a qualified Law graduate with over two decades of hands-on experience in GST advisory, direct taxation, and statutory compliance for businesses across

Disclaimer

ITRAdvisor.in is an educational and informational platform focused on tax awareness and compliance updates. Nothing contained herein should be construed as solicitation or advertisement of professional services. Professional services, where applicable, are rendered in accordance with ICAI guidelines. This article is published on ITRAdvisor.in, a tax and compliance knowledge platform. The content has been reviewed for technical accuracy by professionals associated with Adwani & Co LLP.

Dr. Haresh Adwani May 2026 14 min read

Imagine filing your income tax return confidently only to receive a notice three months later saying your reported income does not match what the Income Tax Department already knows. This is exactly what happens when taxpayers skip reviewing their Annual Information Statement (AIS) before filing ITR.

The AIS is not just another document on the Income Tax e-filing portal. It is the government’s comprehensive financial dossier on you capturing every significant transaction linked to your PAN,

In this complete guide, the tax professionals at Adwani and Company led by Dr. Haresh Adwani, PhD in Commerce and a qualified law graduate walk you through exactly how to download AIS from the Income Tax portal, how to open the password protected AIS PDF, how to interpret it, and why reconciling AIS before filing your ITR for AY 2026-27 could save you from costly income tax notices.

What Is the Annual Information Statement (AIS) and Why Does It Matter for ITR Filing?

The Annual Information Statement, commonly referred to as AIS, was introduced by the Income Tax Department of India to give taxpayers a consolidated, transparent view of all financial information that the department has collected about them from various reporting entities banks, brokers, mutual fund houses, registrars, employers, GST authorities, and more.

Before the introduction of AIS, taxpayers relied primarily on Form 26AS for TDS-related data. AIS goes several steps further it is a far more expansive document that captures the full spectrum of your financial activity throughout the financial year.

What Information Does AIS Contain?

AIS captures the following key categories of information:

• Salary income as reported by your employer
• Interest income from savings accounts, fixed deposits, recurring deposits, and bonds
• Dividend income from shares and mutual funds
• Capital gains from sale of equity shares, mutual fund units, debt instruments, and real estate
• Purchase and sale transactions of immovable property
• Mutual fund purchase and redemption details
• Foreign remittances sent or received under LRS (Liberalised Remittance Scheme)
• GST turnover figures for registered businesses
• High-value cash deposits or withdrawals
• TDS and TCS data (which also appears in Form 26AS)
• Rent paid or received above prescribed thresholds
• Cryptocurrency and virtual digital asset (VDA) transactions

Expert Insight: “The AIS has transformed how the Income Tax Department tracks compliance. Every mismatch between your filed return and your AIS is a potential trigger for a Section 143(1)(a) intimation or a full scrutiny notice. Reviewing AIS before filing ITR is no longer optional — it is essential,” says Dr. Haresh Adwani, Founder of Adwani and Company.

AIS vs Form 26AS vs TIS Key Differences Every Taxpayer Must Know Before Downloading

Many taxpayers confuse AIS with Form 26AS or are unsure about the Tax Information Summary (TIS). Here is a clear breakdown:

In short: for AY 2026-27, always start with AIS, cross-check it against Form 26AS, review the TIS for any feedback you may have submitted, and only then proceed to file your income tax return.

Read our detailed guide on AIS Reconciliation and Income Tax Notice Management for a complete walkthrough.

How to Download AIS from the Income Tax Portal – Complete Step-by-Step Process

Downloading your Annual Information Statement from the Income Tax e-filing portal takes under five minutes if you know the right steps. Follow this exact process:

How to Download TIS (Tax Information Summary) from the AIS Portal

1. On the AIS portal, go to the ‘TIS’ tab (next to ‘AIS’).
2. Select the Financial Year.
3. Click Download → select PDF or JSON.
4. The TIS PDF uses the same password format as AIS: PAN (lowercase) + DOB (DDMMYYYY).

The TIS is particularly useful when the department processes your ITR and computes pre-filled data it uses TIS figures as the reference point for any automated intimations.

Why Reviewing AIS Is Critical Before Filing Your ITR for AY 2026-27

1. Catch Income the Department Already Knows About

Every bank, mutual fund house, stock broker, property registrar, and company that deducts TDS from your payments is required to report this information to the Income Tax Department. If they have reported income linked to your PAN and you do not include it in your ITR the department’s automated system will flag the mismatch immediately.

2. Identify Errors in Reported Data

AIS data is not always correct. Banks sometimes report interest income for the wrong PAN. Brokers may report capital gains figures that differ from your actual gains due to corporate actions. If you find incorrect entries in your AIS, you can submit feedback directly on the AIS portal, marking the entry as ‘Incorrect’ or ‘Not relating to me’. This feedback is reflected in your TIS.

3. Avoid Defective Return Notices and Scrutiny

The Income Tax Department’s automated processing system compares your filed ITR with your AIS/TIS data. Any significant discrepancy whether it is unreported mutual fund redemptions, omitted interest income, or missing property sale consideration — may result in an intimation under Section 143(1)(a) or even a scrutiny notice under Section 143(2), explains Dr. Haresh Adwani of Adwani and Company.

4. Claim Accurate TDS Credit

AIS also reflects TDS entries from multiple sources — salary TDS (Form 16), bank TDS on FD interest, TDS on professional fees, rent TDS, and more. Cross-checking AIS with your Form 26AS ensures you claim all available TDS credit and do not leave money on the table.

Learn more about our Income Tax Filing and TDS Compliance Services for salaried professionals and business owners.

Real-Life Example: How an AIS Mismatch Triggered an Income Tax Notice

Most Common AIS Mismatches That Trigger Income Tax Notices in AY 2026-27

• Mutual fund redemptions reported in AIS but not declared in ITR especially SIP redemptions or systematic withdrawal plans
• FD and savings account interest income under-reported or omitted entirely
• Dividend income from shares or mutual funds not included (dividends are now taxable in the hands of the investor)
• Property sale consideration shown in AIS at the registered value, while taxpayer reports lower consideration in ITR
• Cryptocurrency or VDA transactions reported by exchanges but omitted from ITR
• GST turnover in AIS not matching income declared in ITR (common for freelancers and small business owners)
• Foreign remittances or LRS transactions in AIS not reflected in ITR
• Employer reporting perquisites or ESOPs in AIS that the taxpayer was unaware of

Learn more about our AIS Reconciliation and Pre-ITR Compliance Review Services at Adwani and Company.

Who Must Absolutely Review AIS Before Filing ITR for AY 2026-27?

While every taxpayer benefits from an AIS review, certain profiles face the highest risk from AIS mismatches:

• Salaried professionals who invest in mutual funds, stocks, or have fixed deposits
• Freelancers and consultants who receive professional fees and may have GST registration
• Business owners whose GST turnover is captured in AIS and must match income tax declarations
• Doctors, architects, lawyers, and other self-employed professionals with TDS on professional fees
• NRIs with Indian income sources rental income, interest, dividends, or capital gains
• Stock market investors and traders particularly those with F&O trading activity
• Real estate investors who sold property during FY 2025-26
• Crypto investors whose exchange transactions are now reported to the Income Tax Department

Critical ITR Filing Deadlines and AIS Review Timeline for AY 2026-27

Managing your AIS review within the right timeline is essential for penalty-free ITR filing:

Frequently Asked Questions

Conclusion:

The Annual Information Statement is the Income Tax Department’s most powerful transparency tool and it should be your most important pre-filing checklist. Before you file a single digit in your ITR for AY 2026-27, download your AIS, open it with the correct password, reconcile every entry against your own records, and submit feedback for any incorrect data.

As Dr. Haresh Adwani of Adwani and Company emphasises: “Taxpayers who review their AIS carefully before filing rarely face income tax notices. Those who skip it often spend weeks dealing with the consequences. The ten minutes spent on AIS review today saves ten hours of notice management tomorrow.”

About the Author
Dr. Haresh Adwani
Ph.D. in Commerce | Law Graduate | Managing Partner, Adwani & Co LLP Dr. Haresh Adwani holds a Ph.D. in Commerce and is a qualified Law graduate with over two decades of hands-on experience in GST advisory, direct taxation, and statutory compliance for businesses across Pune and Maharashtra. He has guided hundreds of SMEs, startups, and corporates through India’s evolving tax landscape. He is a recognised advisor on GST compliance, company formation, and Virtual CFO services, and regularly contributes to professional seminars and industry forums in Pune.

20 May 2026• Dr. Haresh Adwani 10 min Read

The Simple ITR Form That Is Not So Simple for Millions of Taxpayers

Every year, millions of Indians instinctively reach for ITR 1 also known as the Sahaj form because it feels familiar, it looks simple, and it has always been “the salaried person’s form.” And for a large segment of taxpayers, it absolutely is the right choice.

But here is the problem: a significant and growing number of salaried employees, professionals, and investors are filing ITR 1 when they are not eligible to do so. The result is a defective return notice under Section 139(9), a delayed refund, and in some cases, a demand for revised filing with penalties.

The Income Tax Department has made ITR form selection a critical compliance checkpoint. With the introduction of the Annual Information Statement (AIS) and real-time data reporting from banks, brokers, mutual funds, and registrars, the department’s processing systems automatically flag returns where the wrong form has been used. The verification is instant, the notice is automated, and the consequences are real.

At ITR Advisor, we help taxpayers across India understand which ITR form is correct for their specific income profile and we file their returns with the precision and expertise that modern tax compliance demands. This guide answers, once and for all, the question that thousands of taxpayers search for every season: who cannot file ITR-1 for AY 2026-27?

What Is ITR 1 (Sahaj) and Who Is It Actually Designed For?

ITR-1, officially called the Sahaj form, was designed for the simplest income profiles a single employer, straightforward salary, basic deductions, one house property, and limited financial activity. As per the guidelines published on the official Income Tax e-Filing Portal, ITR 1 is applicable only for resident individuals whose income profile satisfies all of the following conditions simultaneously:

• Total income does not exceed ₹50 lakh during the financial year
• Income comes only from salary or pension
• Income from one house property (where there is no brought-forward loss)
• Income from other sources such as savings interest and FD interest (excluding lottery, horse racing, or speculative income)
• Agricultural income up to ₹5,000

If your income profile matches all five conditions cleanly ITR1 is your form. If even one condition is not met, you must move to a different form, most commonly ITR 2 or ITR 3.

The challenge is that most taxpayers do not realise how many common financial activities knock them out of ITR 1 eligibility. Let us go through each restriction in detail.

Complete List: Who Cannot File ITR-1 for AY 2026-27

1. Taxpayers Whose Total Income Exceeds ₹50 Lakh

This is the most straightforward restriction. If your gross total income from salary, interest, rental, capital gains, or any other source exceeds ₹50 lakh in FY 2025-26, you cannot use ITR 1.

Taxpayers crossing this threshold must use ITR 2 (if no business income) or ITR 3 (if business or professional income is also present).

It is important to note that “total income” for this purpose includes all income before deductions under Chapter VI A. So even if your net taxable income after 80C and 80D deductions is below ₹50 lakh, if your gross income exceeds the limit, ITR 1 is not applicable.

2. Taxpayers with Capital Gains from Any Source

This is the single most common reason salaried employees are disqualified from ITR 1 and the one they are least aware of.

If you have earned capital gains during the year from any of the following sources, you cannot file ITR 1:

• Sale of equity shares (listed or unlisted)
• Redemption or switching of mutual fund units (including SIPs)
• Sale of ELSS fund units after the lock-in period
• Sale of debt mutual funds
• Encashment of bonds or debentures
• Sale of residential property or commercial property
• Sale of gold, gold ETFs, or sovereign gold bonds
• Sale of any other capital asset

Important: Even if your LTCG from equity falls below the ₹1.25 lakh exemption threshold and no tax is payable, the transaction still disqualifies you from ITR 1. The exemption applies to tax liability not to the disclosure requirement or form eligibility.

The correct form for salaried employees with capital gains is ITR 2, which includes a dedicated Schedule CG for accurate reporting.

Real Example: Meera is a schoolteacher in Nagpur earning ₹9.8 lakh annually. In March 2026, she redeemed her ELSS mutual fund after the three year lock in period and received ₹1.1 lakh in LTCG entirely within the ₹1.25 lakh exemption. She assumed that since no tax was owed, she could still file ITR-1. Her return was marked defective. She had to refile using ITR 2, which delayed her ₹32,000 refund by nearly two months.

Learn more about our Capital Gains Calculation and ITR-2 Filing Services.

3. Individuals with Business Income, Freelance Income, or Professional Receipts

If you earn any income that qualifies as business or professional income under the Income Tax Act, ITR 1 is not applicable. This includes:

• Freelance writing, design, photography, or consulting fees
• Income from tuition or coaching classes
• Commission income (insurance agents, real estate brokers)
• Income from practice (doctors, lawyers, architects, CAs with private clients)
• Income from any trade, commerce, or manufacturing activity
• Income from gig economy platforms (Uber, Swiggy delivery, Upwork, Fiverr)

If you are salaried but also earn even a modest amount from freelance or consulting work say ₹30,000 from a project you cross into ITR-3 territory (or ITR-4 if you opt for presumptive taxation under Section 44ADA).

4. Individuals Holding Foreign Assets or Having Foreign Income

If you hold or have held at any point during FY 2025-26:

• A foreign bank account (including NRE, NRO, or FCNR accounts held abroad)
• Foreign equity shares or stocks (including RSUs from a foreign employer that have vested)
• A foreign property or immovable asset
• Beneficial ownership in a foreign trust or entity
• Any other foreign asset required to be disclosed under the Black Money Act

…then you cannot file ITR 1. You must use ITR 2, which includes Schedule FA (Foreign Assets) for mandatory disclosure.

Similarly, if you received any income from foreign sources RSU income, overseas salary credits, foreign dividend, or international freelance payments ITR 2 is required.

The Income Tax Department has significantly stepped up enforcement of foreign asset disclosures in recent years. Non-disclosure of foreign assets can attract penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 making accurate form selection critically important for anyone with overseas financial exposure.

5. Company Directors and Unlisted Equity Shareholders

If you serve as a director in any company private, public, or otherwise during the financial year, you are not eligible to use ITR-1, regardless of your salary level or other income.

Similarly, if you hold equity shares in an unlisted company at any point during the year, ITR-2 is mandatory. This is a particularly important restriction for employees of startups who receive ESOPs in unlisted companies, or for professionals who hold a nominal stake in a family-owned private limited company.

6. Taxpayers with More Than One House Property

ITR-1 allows income from only one house property. If you own more than one property whether both are self-occupied, one is let out, or one is deemed let-out you must file ITR-2.

This restriction catches many taxpayers by surprise. Common scenarios where this applies:

• Inherited property alongside your own purchased flat
• Joint ownership in parents’ house along with your own home
• Two self-occupied properties (only one can be treated as self-occupied for tax purposes under current rules; the other is treated as deemed let-out)

7. Individuals with Crypto or Virtual Digital Asset (VDA) Income

Virtual Digital Assets, including cryptocurrency, NFTs, and other digital tokens, are taxable at a flat 30% under Section 115BBH. Since crypto income falls outside the “income from other sources” category permitted in ITR-1, taxpayers with any crypto transactions whether profit or loss must use ITR-2 or ITR-3.

The Income Tax Department receives transaction data from crypto exchanges registered in India. If your AIS shows crypto activity but your ITR 1 does not reflect it, an AIS mismatch notice is virtually certain.

8. NRIs and Non-Resident Taxpayers

ITR-1 is available only for resident individuals as defined under the Income Tax Act. If your residential status for FY 2025-26 is:

• Non-Resident (NRI)
• Resident but Not Ordinarily Resident (RNOR)

…you cannot use ITR-1. NRIs and RNORs must file using ITR-2, which provides for the correct residential status declaration and applicable income schedules.

If you returned to India during the year and are unsure of your residential status, a day-count calculation based on physical presence in India is required. This is an area where professional guidance from a tax expert is strongly recommended.

Learn more about our NRI Residential Status Determination and ITR Filing Services.

9. Taxpayers with Agricultural Income Exceeding ₹5,000

While agricultural income itself is exempt from tax, if your agricultural income exceeds ₹5,000 during the year, ITR 1 is not eligible. You must use ITR 2, which allows for the proper partial integration calculation applicable when agricultural income exceeds this threshold.

10. Individuals with Brought-Forward Losses from Previous Years

If you have carried forward capital losses from prior assessment years that you wish to set off against current year gains, ITR 1 cannot accommodate this. The Schedule CG in ITR 2 handles brought-forward loss set off and carry forward calculations.

Similarly, if you have house property losses from previous years (exceeding the ₹2 lakh cap) still being carried forward, ITR 2 is required.

Why Filing the Wrong ITR Form Is a Bigger Problem Than Most Taxpayers Realise

Filing ITR 1 when you are actually eligible for ITR 2 or ITR 3 triggers a Section 139(9) defective return notice from the Income Tax Department. This notice:

• Declares your return invalid
• Gives you a 15-day window (extendable) to file a corrected return in the right form
• Holds your tax refund pending correction
• In some cases, results in interest implications if the correction is delayed

Beyond the notice itself, an incorrect ITR can result in under-reporting of income (by omitting schedules the correct form would have captured), which carries penalty risk under Section 270A.

The good news is that this is entirely preventable with proper form selection before filing begins.

How to Correctly Identify Your ITR Form for AY 2026-27

Before selecting your form, ask yourself these five questions:

1. Is my gross total income below ₹50 lakh?

2. Have I sold any shares, mutual funds, property, or any capital asset this year?

3. Do I have any freelance, consulting, business, or professional income?

4. Do I hold foreign assets or have I received foreign income?

5. Am I a director in any company or do I hold unlisted shares?

If the answer to question 1 is YES and all others are NO ITR 1 is likely your correct form (subject to verifying the other conditions above).

If the answer to any of questions 2 through 5 is YES you need ITR-2 at minimum, possibly ITR-3.

When in doubt, reviewing your AIS on the Income Tax portal before making the decision is the most reliable approach. Your AIS will show every transaction reported against your PAN making it clear whether any of the disqualifying activities occurred during the year.

At ITR Advisor, Dr. Haresh Adwani a PhD holder in Commerce and a law graduate with deep expertise in income tax law leads a team of professionals who review each client’s complete income profile before selecting the appropriate ITR form. This expert first approach prevents defective return notices and ensures your filing is accurate from the start.

Learn more about our Expert ITR Form Selection and Filing Services.

Frequently Asked Questions

Conclusion:

ITR form selection is not a formality it is the foundation of a correct and compliant income tax return. Filing ITR 1 when you are not eligible is one of the most common and most avoidable reasons salaried taxpayers receive defective return notices, face refund delays, and invite unnecessary scrutiny.

The restrictions around who cannot file ITR-1 for AY 2026-27 are clear and well-defined: income above ₹50 lakh, capital gains of any kind, business or freelance income, foreign assets, directorship, unlisted shares, more than one property, crypto transactions, NRI status, and carried-forward losses any one of these requires a different form.

The smart approach is to check your AIS, review your full income profile, and confirm your form eligibility before filing. When the decision involves complexity multiple income sources, foreign exposure, capital gains, or ESOPs professional guidance is not just helpful, it is essential.

By Dr. Haresh Adwani, PhD (Commerce), Law Graduate, Adwani and Company

One Missed GST Deadline Could Freeze Your Business : Here Is What You Must Do Right Now

Picture this: Your best supplier calls to say your payment is on hold because your e-way bill generation has been blocked by the GST portal. Your accountant is scrambling. Three months of Input Tax Credit worth ₹1.8 lakh is about to lapse permanently. And all of it traces back to a single unfiled GSTR3B return from four months ago.

This scenario plays out in thousands of small and medium businesses across India every financial year. Not because business owners are careless but because GST compliance for small businesses in FY 2026-27 is genuinely complex, deadline-heavy, and far less forgiving than most people realize.

The GST portal, managed by GSTN under the oversight of the Central Board of Indirect Taxes and Customs (CBIC) at gst.gov.in, has undergone significant enforcement upgrades from January 2026 onward. Returns older than three years are now permanently blocked. ITC mismatches are flagged within days. Bank account validation failures can suspend your GST registration entirely halting your ability to issue invoices, collect GST, or move goods.

Whether you run a manufacturing unit, a professional services firm, a retail outlet, or an e-commerce business, this GST compliance checklist for FY 2026-27 will walk you through every obligation you need to meet monthly, quarterly, and annually with practical timelines, real penalty figures, and expert insights from Dr. Haresh Adwani and the team at Adwani and Company.

Learn more about our GST Registration and Compliance Services

Who Must Register Under GST in FY 2026 -27?

Before diving into the compliance calendar, it is essential to confirm whether your business is legally required to register under GST. According to the CBIC guidelines published on gst.gov.in, the mandatory GST registration thresholds in FY 2026-27 are:

GST registration is done online at the GST portal at zero cost. However, from 2026, the portal mandates bank account verification during the registration process. Ensure your active business bank account is pre-linked before initiating the registration application — incomplete bank details are now one of the leading causes of registration delays and subsequent suspension notices.

Once registered, your GST compliance obligations begin immediately from the effective date of registration — not from the date you first make a taxable supply.

The Master GST Filing Calendar for FY 2026-27: Every Deadline That Matters

The foundation of solid GST compliance for small businesses is a non-negotiable commitment to filing deadlines. Miss one, and the consequences cascade: late fees accumulate daily, ITC gets blocked, e-way bill generation halts, and the risk of a GST show-cause notice rises sharply.

Here is your complete, authoritative GST compliance deadline calendar for FY 2026-27:

The foundation of solid GST compliance for small businesses is a non-negotiable commitment to filing deadlines. Miss one, and the consequences cascade: late fees accumulate daily, ITC gets blocked, e-way bill generation halts, and the risk of a GST show-cause notice rises sharply.

Here is your complete, authoritative GST compliance deadline calendar for FY 2026-27:

QRMP Scheme Alert: The Quarterly Return Monthly Payment (QRMP) scheme is available to businesses with Aggregate Annual Turnover (AATO) below ₹5 crore. It permits quarterly GSTR-1 and GSTR-3B filings but requires monthly tax deposits via PMT-06. While the scheme reduces paperwork, many small business owners misunderstand that monthly tax payment is still mandatory even under QRMP missing PMT-06 payments attracts the same interest charges as regular non-payment.

Your Monthly GST Compliance Checklist: What to Do and When

By the 11th : Upload Sales Invoices (GSTR-1)

Every month, your first GST compliance task is uploading all outward supply invoices through GSTR-1. This step is critical not just for your own compliance but for your customers’ ability to claim Input Tax Credit on their purchases from you. Failure to file GSTR-1 on time directly blocks your buyers’ ITC damaging your business relationships and your reputation.

Key actions for accurate GSTR1 filing:

• Verify all B2B invoices include the correct GSTIN of the recipient
• Ensure HSN/SAC codes are accurate and updated at the start of the financial year
• Report debit notes, credit notes, and amendments from previous months correctly
• For e-invoicing-registered businesses (AATO above ₹10 crore): confirm all IRN numbers are generated from the Invoice Registration Portal (IRP) within 30 days of the invoice date — IRN generation is permanently blocked beyond 30 days from 2026

By the 14th : Download GSTR-2B and Reconcile ITC

GSTR-2B is your system-generated Input Tax Credit statement, auto-populated from your suppliers’ GSTR-1 filings. Download it by the 14th and reconcile it line-by-line against your purchase register.

Why this step is non-negotiable: Under Section 16(2)(aa) of the CGST Act, you can only claim ITC on invoices that appear in your GSTR-2B. If a supplier has not filed their GSTR-1, those invoices will not appear in your GSTR-2B — and you legally cannot claim ITC on them, regardless of whether you have physically received the goods or paid the invoice.

Action items during ITC reconciliation:

• Identify invoices present in your purchase register but missing from GSTR-2B
• Follow up immediately with non-compliant suppliers to file their pending returns
• Check the Invoice Management System (IMS) portal to accept valid invoices and reject invalid ones
• Do not claim ITC on blocked categories: motor vehicles (except for specified businesses), food and beverages, personal use expenses, and club memberships

By the 20th : File GSTR3B and Pay Tax

GSTR-3B is your monthly summary return and payment statement. It must be filed and the tax liability must be paid in full before 8:00 PM on the 20th to avoid late fees and interest.

Critical actions for GSTR3B compliance:

• Report total outward supplies (from GSTR-1)
• Claim only ITC amounts verified in GSTR-2B overclaiming ITC is a primary trigger for GST scrutiny notices and departmental audits
• Pay any applicable Reverse Charge Mechanism (RCM) tax: legal services, Goods Transport Agency (GTA) services, director remuneration, and security services all attract RCM
• Pay interest at 18% per annum on any tax paid after the due date this is calculated from the due date, not the date of filing

Read our detailed guide on How to Respond to a GST Show Cause Notice

Annual GST Compliance Obligations Every Business Must Complete

GSTR-9 Annual Return : Due 31 December 2026

GSTR-9 is the comprehensive annual return summarising all monthly or quarterly filings for FY 2025-26. It reconciles outward supplies, inward supplies, ITC claimed, tax paid, and demands or refunds across the entire financial year.

Who must file: All regular GST-registered businesses. Composition scheme dealers file GSTR9A instead.

Businesses with turnover exceeding ₹5 crore must additionally file GSTR-9C, a reconciliation statement audited and certified by a Chartered Accountant. This statement compares the figures in your annual return against your audited financial statements making it a serious compliance exercise that requires proper documentation and professional expertise.

The ITC Deadline You Cannot Afford to Miss : September 2026

This is one of the most financially damaging deadlines that small business owners routinely miss. Any ITC pertaining to FY 2025-26 purchases that is not claimed by the due date of the September 2026 GSTR-3B return is permanently lost with no mechanism for recovery.

This means if you discover in October 2026 that you missed claiming ₹80,000 of ITC on purchases made in February 2026, that ₹80,000 is gone. You cannot revise earlier returns to recover it. The tax paid by your suppliers is not returned. It simply becomes dead money.

Monthly ITC reconciliation not annual is the only reliable protection against this loss.

Invoice Number Reset : Mandatory from 1 April 2026

Every GST registered business must begin a fresh invoice number series at the start of each financial year. Invoice numbers must be unique within each GSTIN for each financial year. Continuing the previous year’s series creates reconciliation complications during audits and can lead to duplicate IRN generation errors for e-invoice businesses.

Composition Scheme vs Regular GST: Which Is Right for Your Business?

If your annual turnover is below ₹1.5 crore (₹75 lakh for service providers), the GST Composition Scheme may significantly reduce your compliance burden. Here is how the two options compare:

The Composition Scheme is best suited for small retailers, traders, restaurants, and manufacturers with high turnover to cost ratios but low ITC claims. It is NOT suitable for businesses that make inter-state supplies, supply to other registered businesses who need ITC, or have significant input costs where ITC recovery is valuable.

As Dr. Haresh Adwani of Adwani and Company consistently advises business clients: “The Composition Scheme is not automatically the simpler option — it depends entirely on your supply chain structure and ITC profile. A business that gives up ₹3 lakh in annual ITC to save ₹50,000 in compliance costs has made the wrong choice. Always calculate before you commit.”

Real Example: How GST Non-Compliance Cost One Business ₹2.3 Lakh

Consider the case of a furniture manufacturer in Pimpri-Chinchwad with a monthly turnover of around ₹18 lakh. The proprietor had a practice of filing GSTR-3B on the 25th or 26th of every month typically 5 to 6 days after the due date believing the late fee of “just ₹300 per return” was negligible.

Here is what that pattern actually cost over 12 months:

The proprietor had categorized GST compliance as a “₹300 per month problem.” The actual annual cost was ₹2.3 lakh. Dr. Haresh Adwani and the team at Adwani and Company now handle this business’s complete monthly GST compliance and the proprietor has not received a single GST notice since. This is the real financial arithmetic of GST non-compliance for small businesses

7 Critical GST Mistakes Small Businesses Make in FY 2026-27

Based on extensive client work across industries, the compliance team at Adwani and Company has identified the seven most damaging and most common GST errors made by small businesses:

1. Not Filing Nil Returns: Even in months with zero transactions, GSTR1 and GSTR3B must be filed as nil returns. Skipping nil returns accumulates ₹20 per day in late fees and can eventually trigger GST registration suspension.

2. Claiming ITC Without GSTR2B Verification: Claiming ITC based on invoices in hand without verifying they appear in GSTR-2B is legally invalid and a primary audit trigger. Always reconcile before claiming.

3. Using Incorrect HSN/SAC Codes: Incorrect product or service classification leads to wrong tax rate application, creating discrepancies that attract scrutiny notices. Review and update your HSN/SAC master list at the beginning of every financial year.

4. Ignoring Reverse Charge Mechanism Obligations: Services from unregistered legal professionals, transport via GTA, director remuneration, and security personnel are among several categories where RCM applies. Many small businesses are entirely unaware of their RCM liability and the notices arrive years later with compounded interest.

5. Missing the 3-Year Return Filing Bar: From January 2026, the GST portal permanently blocks filing of returns older than 3 years. If your business has pending returns from 2022-23 or earlier, file them immediately. After the bar is crossed, ITC is permanently lost and penalties are unavoidable.

6. Not Updating Bank Details After Registration: Unverified or outdated bank account details on the GST portal can trigger automatic registration suspension under enhanced 2026 validation rules. Log in to gst.gov.in and verify your bank account is active and linked.

7. Delaying ITC Reconciliation to Year-End: Performing ITC reconciliation once a year instead of monthly means you discover supplier non-compliance too late to recover ITC that is now permanently lapsed. Monthly reconciliation is the only effective safeguard.

Learn more about our Monthly GST Filing and ITC Reconciliation Service

How Adwani and Company Delivers End to End GST Compliance for Small Businesses

Adwani and Company, led by Dr. Haresh Adwani PhD (Commerce) and qualified Law Graduate with over two decades of GST and direct tax advisory experience provides comprehensive GST compliance services designed specifically for small and medium businesses.

The firm, established in 1977 by Advocate N.T. Adwani, brings a rare combination of legal expertise, tax technical depth, and technology-enabled compliance management to every client engagement.

Services provided include:

• Monthly GSTR-1 and GSTR-3B filing with pre-submission review
• Monthly GSTR-2B ITC reconciliation with supplier follow-up management
• Annual GSTR-9 and GSTR-9C preparation and filing
• GST registration, composition scheme advisory, and QRMP scheme evaluation
• RCM liability identification and payment management
• E-invoicing integration and IRN compliance for eligible businesses
• GST audit support and representation before GST authorities
• Proactive GST show-cause notice response and demand management

“GST compliance is not just about filing returns on time it is about protecting your ITC, maintaining your vendor relationships, and ensuring your business never faces the operational disruption that a blocked registration causes,” says Dr. Haresh Adwani. “Small businesses deserve the same quality of compliance management that large corporates receive. That is what we deliver.”

Frequently Asked Questions:

Conclusion:

The GST landscape for small businesses in India in FY 2026-27 has never been more demanding or more consequential. Tighter portal validations, the permanent 3year filing bar, monthly ITC reconciliation deadlines, and the risk of registration suspension have collectively raised the stakes for every registered business.

The good news: none of these obligations are beyond reach with the right systems, the right calendar discipline, and the right professional guidance. A business that files on time, reconciles ITC monthly, understands its RCM obligations, and keeps its portal details updated will never receive a GST notice.

The GST compliance checklist for FY 2026-27 outlined in this guide from GSTR1 on the 11th through GSTR9 by December 31st is your roadmap to clean, penalty free, uninterrupted business operations. Follow it without exception.

“GST compliance is not a burden your business carries it is the proof that your business is built to last. Compliant businesses attract better suppliers, better customers, and better credit. Non-compliant businesses pay for it twice once in penalties, and once in lost opportunities.” Dr. Haresh Adwani, Adwani and Company

If you want expert, end-to-end GST compliance support for your business in FY 2026-27, connect with Adwani and Company today. Our team handles everything monthly filings, ITC reconciliation, annual returns, and notice management so you can focus entirely on growing your business.

About the Author
Dr. Haresh Adwani
Ph.D. in Commerce | Law Graduate | Managing Partner, Adwani & Co LLP Dr. Haresh Adwani holds a Ph.D. in Commerce and is a qualified Law graduate with over two decades of hands-on experience in GST advisory, direct taxation, and statutory compliance for businesses across Pune and Maharashtra.

Dr. Haresh Adwani April 2026 14 min read

Imagine spending decades building your career abroad, sending money home faithfully, and then one day discovering that a brief holiday visit to India has quietly triggered a massive tax liability on your global income. This is not a hypothetical scenario

It is the harsh reality being faced by thousands of Non Resident Indians (NRIs) who are completely unaware of the 120 day NRI tax rule in India. One seemingly harmless overstay, and you could find yourself reclassified as a tax resident, with your foreign salary, overseas investments, and global savings suddenly falling within the reach of the Indian Income Tax Department.

According to Dr. Haresh Adwani, of Adwani and Company a leading Chartered Accountancy firm trusted by NRIs across the globe this rule has become one of the most misunderstood and dangerous provisions in Indian tax law today. “We see clients every year who did not even know the 120-day threshold existed,” he says. “By the time they find out, the damage is already done.” This comprehensive guide breaks down the 120-day NRI residency rule in India, explains how NRI taxation works, and shows you exactly what steps to take to stay protected. You can check on Income Tax India

What Exactly Is the 120-Day NRI Tax Rule in India?

Before the Finance Act of 2020, the residency threshold for NRIs was straightforward: if you stayed in India for fewer than 182 days in a financial year (April 1 to March 31), you were classified as a Non-Resident Indian for tax purposes. Under this classification, only your income earned or received in India was taxable. Your overseas salary, foreign bank interest, and global investments were beyond the reach of Indian tax authorities.

However, the Finance Act 2020 introduced a critical amendment that changed the game entirely for high-income NRIs. Under the revised rules, if your total taxable income from Indian sources exceeds ₹15 lakhs in a financial year, the residency threshold drops significantly from 182 days to just 120 days. In other words, if you earn more than ₹15 lakh from Indian sources (such as rent from Indian property, fixed deposit interest, capital gains on Indian investments, or salary for services rendered in India) and you stay in India for 120 days or more in that financial year, the Income Tax Department can classify you as a Resident but Not Ordinarily Resident (RNOR) and eventually even as a full Resident.

As the Income Tax Department of India notes under Section 6 of the Income Tax Act, 1961, an individual’s residential status is determined each financial year based on physical presence in India and other prescribed criteria. The 2020 amendment brought this provision into sharper focus for NRIs with substantial Indian income.

The Three Residential Status Categories Every NRI Must Know

Understanding the 120-day rule requires understanding how the Indian Income Tax Act classifies individuals into three distinct residential categories:

1. Non-Resident Indian (NRI)

An NRI is someone who does not qualify as a resident under the Income Tax Act. As an NRI, you pay taxes only on income that arises, accrues, or is received in India. Your foreign earnings are entirely outside Indian tax jurisdiction. This is the most tax-efficient status for Indians living abroad.

2. Resident but Not Ordinarily Resident (RNOR)

This is the middle ground and often where the 120-day NRI tax rule pushes unsuspecting NRIs. An RNOR is treated somewhat like a resident but still enjoys limited tax protection: foreign income is generally not taxable unless it is derived from a business controlled from India or a profession set up in India. You qualify as RNOR if you have been a non-resident for nine out of the ten preceding financial years, or if you have stayed in India for 729 days or fewer during the last seven financial years.

3. Resident and Ordinarily Resident (ROR)

This is the most tax heavy classification. As a full resident, your worldwide income salary earned in the UK, interest from US bank accounts, dividends from Canadian stocks all become taxable in India. This is why the 120-day rule can be so financially devastating for NRIs who unknowingly cross this threshold.

How the 120-Day NRI Residency Rule Works:

A Practical Example

Let us take the example of Mr. Rajesh Mehta, a software engineer based in Dubai for the past twelve years. He owns a flat in Mumbai that generates rental income of ₹18 lakhs per year, and he has a fixed deposit in an Indian bank earning additional interest of ₹2 lakhs annually. His total Indian taxable income is ₹20 lakhs well above the ₹15 lakh threshold.

In Financial Year 2023-24, Rajesh decided to extend his India visit due to a family function and medical check ups. Without realising it, his total stay reached 128 days. He also checks whether he spent 365 days or more in India during the preceding four financial years (FY 2019-20 to FY 2022-23). If he did say, due to COVID-related lockdowns he gets classified as RNOR for FY 2023-24.

As an RNOR, Rajesh still escapes full global income taxation for now. But if he continues to stay beyond the 182-day mark in subsequent years or fails to meet the RNOR conditions, he could quickly become a full resident and his Dubai salary, overseas savings, and international investments would all become taxable in India. A scenario Dr. Haresh Adwani describes as “a ticking tax time bomb that most NRIs do not even know is ticking.”

The Deemed Residency Trap: Even Zero Days in India Is Not Safe

Here is something that shocks most NRIs: you can be classified as a tax resident of India even if you did not step foot in the country during that financial year. This is what is known as the “deemed residency” provision under the Finance Act 2020.

If you are an Indian citizen whose total taxable Indian income exceeds ₹15 lakhs, and you are not liable to pay income tax in any other country (for example, if you reside in a tax-free jurisdiction like the UAE, Bahrain, or Qatar), then you will be automatically classified as a Resident but Not Ordinarily Resident in India even with zero days of physical presence.

This provision was specifically designed to close a longstanding loophole where high-earning Indians would move to tax-free countries, maintain their NRI status, and avoid paying taxes both in India and abroad. While the objective is logical, it has caught many well-intentioned NRIs completely off guard.

Adwani and Company has encountered several such cases where clients living in Dubai or Abu Dhabi with significant Indian rental or investment income were deemed Indian tax residents without ever realising it. According to Dr. Haresh Adwani, “The deemed residency rule is the hidden clause of the 120-day rule. Most NRIs in the Gulf region have never heard of it yet they may already be non-compliant.”

Also Read: Income Tax Notice India 2026: Every Section Explained What It Means and How to Respond

What Income Is Taxable for NRIs in India?

As long as you maintain your NRI status, the following types of income earned or received in India are taxable under the Indian Income Tax Act:

• Salary received in India or for services rendered in India
• Rental income from properties located in India
• Capital gains from the sale of Indian assets (property, shares, mutual funds)
• Interest earned on NRO (Non-Resident Ordinary) accounts NRE and FCNR account interest remains tax-free
• Dividends from Indian companies (now taxable in the hands of shareholders)
• Income from business or profession set up in India
• Any income received or deemed to be received in India

Importantly, interest earned on NRE accounts and FCNR deposits continues to be exempt from Indian taxation, even for returning NRIs, until they acquire the status of Resident and Ordinarily Resident. This makes strategic account management a key tool for NRI tax planning something the experts at Adwani and Company can help you navigate effectively.

Learn more about our NRI Taxation & Compliance Services https://www.adwaniandco.com/services/global-delivery-model

How to Calculate Your Days in India : And Why Precision Matters

Day counting sounds simple, but it is far more nuanced than most NRIs assume. The Income Tax Act requires that you count both the day of arrival and the day of departure as days spent in India. This means a visit from July 1 to December 31 which feels like six months is actually 184 days, not 183. A single day’s miscalculation near the 120-day boundary could be the difference between being an NRI and being reclassified.

Additionally, you need to look back at the four preceding financial years to determine whether your cumulative stay in India has crossed 365 days. Even if you stayed well under 120 days in the current year, a longer stay in earlier years could trigger residency classification when combined with your current year’s visit. This multi-year calculation is something that requires expert guidance, not guesswork.

Dr. Haresh Adwani recommends that every NRI maintain a detailed travel log flight tickets, boarding passes, hotel receipts, and entry/exit stamps to create a paper trail that can be presented to tax authorities if your residential status is ever questioned.

Smart Strategies to Stay Safe from the 120-Day NRI Tax Trap

If your Indian income is approaching or exceeds the ₹15 lakh mark, here are the key strategies that Dr. Haresh Adwani and the team at Adwani and Company recommend:

1. Monitor Your Days in India in Real Time

Do not wait until the end of the financial year to count your days. Use a travel tracker and set alerts when you approach the 100-day mark. This gives you a 20-day buffer to plan your departure before crossing the 120 day threshold.

2. Manage Your Indian Taxable Income Below ₹15 Lakhs

If your Indian income is close to ₹15 lakhs, consider restructuring it. For instance, investing in NRE fixed deposits rather than NRO deposits, or shifting rental income through tax-efficient vehicles, could help keep your taxable Indian income below the threshold that activates the 120 day rule.

3. Leverage the Double Tax Avoidance Agreement (DTAA)

India has signed Double Tax Avoidance Agreements (DTAAs) with over 90 countries. If you are residing in one of these treaty nations, you can submit a Tax Residency Certificate (TRC) from your country of residence to claim DTAA benefits and avoid double taxation. This is especially critical for NRIs who get reclassified as RNOR under the 120-day rule.

4. Time Your Return to India Strategically

If you are planning to return to India permanently, consider returning after October 2 of the financial year. This limits your days in India to under 182 during that transition year, potentially allowing you to retain NRI or RNOR status for one more year giving you time to restructure your overseas finances without global tax exposure.

Read our detailed guide on NRI Return to India Tax Planning https://www.adwaniandco.com/blog/nri-tax-rules-10-critical-questions-before-returning-to-india

What Changed with the Income Tax Bill 2025 : And How It Affects NRIs from April 2026

In February 2025, the Central Government introduced the Income Tax Bill 2025, a sweeping overhaul of India’s tax system. While the Bill retains the core NRI residency rules including the 120-day rule it brings significant structural simplifications. The bill consolidates the existing framework from 819 sections into 536 clauses, making compliance somewhat cleaner, but the substantive rules remain unchanged.

Key takeaways for NRIs under the new bill (effective April 1, 2026): The 120-day rule continues to apply for high-income NRIs with Indian income exceeding ₹15 lakhs. The deemed residency provision remains intact for Indian citizens in tax-free jurisdictions. RNOR status is preserved, ensuring foreign income remains untaxed at that intermediate stage. Enhanced tax recovery provisions mean authorities now have greater powers to recover dues from Indian assets of NRIs who fail to comply.

Given these strengthened enforcement mechanisms, proactive tax planning for NRIs is not optional it is essential. The professionals at Adwani and Company stay updated with every policy change from the Ministry of Finance, the Income Tax Department, and relevant government portals to ensure their NRI clients remain fully compliant.https://www.adwaniandco.com/

Conclusion

The 120day NRI tax rule in India is not just a technicality buried in the fine print of the Income Tax Act it is a real and growing tax risk for millions of NRIs worldwide. Whether you are a professional in the Gulf, a businessperson in the UK, or an IT consultant in the United States, if you earn significant income from India and visit home regularly, this rule directly affects your financial future.

The good news is that with the right planning precise day counting, income structuring, DTAA utilisation, and timely return filing you can legally and effectively protect your wealth from unintended Indian tax exposure. The critical first step is awareness, and the second is action.

Frequently Asked Questions

Author

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Dr. Haresh Adwani

PhD (Commerce) · Adwani & Company, Pune

Dr. Haresh Adwani is a PhD holder in Commerce with over 20 years of experience in NRI taxation, FEMA compliance, international financial advisory, and tax notice resolution. He is one of Pune’s most trusted NRI tax advisors, specialising in residential status assessment, DTAA planning, and cross-border compliance for professionals returning from the US, UK, UAE, Canada, and Australia.

Dr. Haresh Adwani, April 2026, 9 min read

Reply to a GST Notice

You open your email one morning to find a notice from the GST department. Your pulse quickens. Your mind races. What does this mean? Will you face massive penalties? Is your business at risk?

Take a deep breath you are not alone, and this situation is far more manageable than it seems.

Every year, thousands of Indian businesses receive a GST notice under Section 73 of the Central Goods and Services Tax (CGST) Act, 2017. Most of these notices arise from routine discrepancies in return filings not from any deliberate wrongdoing. The good news? When handled correctly and promptly, a Section 73 notice can be resolved without paying a single rupee in penalty.

This comprehensive 2026 guide crafted by the advisory team at ITR Advisor in consultation with Dr. Haresh Adwani of Adwani and Company walks you through every step of the process. From understanding what the notice actually says, to drafting a powerful reply, to attending hearings and filing appeals, we cover it all.

What is a GST Notice Under Section 73? Understanding the Legal Framework

Section 73 of the CGST Act, 2017 empowers a Proper Officer of the GST department to issue a Show Cause Notice (SCN) to a registered taxpayer when any of the following situations arise:

• Tax has not been paid or has been short-paid
• An erroneous refund has been claimed and granted
• Input Tax Credit (ITC) has been wrongly availed or utilised

The defining feature of a Section 73 notice and what separates it from the far more serious Section 74 is that it applies only to cases where there is NO allegation of fraud, wilful misstatement, or suppression of facts. In other words, the tax authority is saying: ‘We believe there is a gap in your tax payments, but we are not accusing you of intentional wrongdoing.’

According to the GST Portal (gst.gov.in), Section 73 proceedings are one of the most common types of demand proceedings initiated against registered taxpayers, particularly in the context of ITC mismatches and return filing inconsistencies.

Learn more about our GST Compliance and Advisory Services to ensure your filings are always accurate and audit-ready.

When is a GST Notice Under Section 73 Issued? Common Triggers You Must Know

Understanding why you received this notice is the first critical step toward resolving it. The GST department relies heavily on data analytics and cross-matching of return data to identify discrepancies. Here are the most common triggers:

As Dr. Haresh Adwani frequently advises his clients: ‘A Section 73 notice is not the end of the road it is an invitation by the department to explain your position. Your response determines the outcome, not the notice itself.’

Critical Time Limits Under Section 73 : Deadlines That Can Make or Break Your Case

One of the most important and most overlooked aspects of handling a GST notice under Section 73 is understanding the time limits. Missing a deadline can transform a simple notice into a confirmed demand with penalties and interest.

Important 2026 Update: Following amendments introduced through the Finance Act 2024, the deadline for issuing orders under Section 73 for financial years 2018-19 through 2021-22 was extended. If you receive a notice covering these years in 2025 or 2026, it may still be legally valid. Always verify the notice date against the applicable deadline and consult a qualified tax advisor immediately.

Read our detailed guide on GST Return Filing Deadlines and Compliance Calendar to stay ahead of important dates.

https://itradvisor.in/blog/how-to-reply-to-a-gst-notice-under-section73

Step by Step: How to Reply to a GST Notice Under Section 73 (7 Step Action Plan)

Now let’s get to the heart of the matter — the actual process of replying to your GST Section 73 notice. Follow these seven steps methodically for the best possible outcome.

Step 1 : Read the Notice Carefully (DRC-01 or DRC-01A)

Before doing anything else, sit down and read the notice thoroughly. Identify the following key elements:

• Financial year and tax period in question
• Amount demanded broken down by CGST, SGST, IGST, and Cess
• Specific reason or allegation stated in the notice
• Whether this is a pre SCN intimation (DRC 01A) or a formal Show Cause Notice (DRC 01)
• The exact deadline for your response

DRC-01A is an intimation before the formal notice responding at this stage gives you the maximum benefit of zero penalty.

Step 2 : Gather and Analyse Your Records

Download all relevant data from the GST portal for the disputed period: your GSTR 1, GSTR 3B, GSTR 2A, and GSTR 2B. Compare the department’s claim against your own books. In most cases, discrepancies arise from timing differences, supplier non-filing, or genuine data entry errors all of which can be explained with proper documentation.

Step 3 : Decide Your Response Strategy

Based on your analysis, you have three broad options:

• Option A : Accept and Pay: If the demand is correct, paying within 30 days of the SCN eliminates any penalty. You pay only tax + 18% interest.
• Option B : Partial Agreement: Accept the valid portion of the demand, pay it, and formally contest the remaining amount with evidence.
• Option C : Full Contest: If you believe the entire demand is incorrect or unsupported, file a detailed point-by-point rebuttal with documentary proof.

Dr. Haresh Adwani recommends: ‘Always aim for Option A or B where the facts support it. Paying what is legitimately due and contesting only what is genuinely disputable gives you the strongest position with the adjudicating officer.’

Step 4 : Draft Your Reply (GST Notice Reply Format for Section 73)

Your written reply must address each allegation in the SCN paragraph by paragraph. The reply should include:

• A brief background of your business and the relevant period
• A point-by-point rebuttal of each discrepancy raised
• A reconciliation statement showing your computation vs. the department’s
• References to relevant GST circulars, notifications, or judicial rulings (if applicable)
• A list of attached supporting documents

File your reply using Form GST DRC-06 on the GST portal. You can upload your detailed written representation as a PDF attachment within the form.

Step 5 : File the Reply on the GST Portal

Log in to the GST Portal at gst.gov.in. Navigate to: Services → User Services → View Notices and Orders. Locate the relevant notice and click on it to open the reply interface. Select DRC-06, fill in the required details, upload your reply document and supporting attachments (PDF, maximum 5 MB each), and submit. Save the ARN (Acknowledgement Reference Number) as proof of submission.

Step 6 : Attend the Personal Hearing

After reviewing your reply, the adjudicating officer may call you for a personal hearing. This is your opportunity to present your case verbally and clarify any points of confusion. Attend in person or send an authorised representative (a CA or tax consultant). Carry original documents, a concise argument sheet, and be prepared to answer questions. If you need more time, request a written adjournment through the portal.

Step 7 : Review the Order and Plan Next Steps

Following the hearing, the officer will issue a demand order via Form DRC-07. If the order is in your favour, no further action is needed. If you disagree with the outcome, file an appeal before the First Appellate Authority using Form GST APL-01 within three months of the order date. Pre-deposit 10% of the disputed amount when filing the appeal.

Documents Required to Effectively Reply to a Section 73 GST Notice

A strong reply is only as powerful as the evidence behind it. Gather the following documents before filing your response:

• GSTR 1 for all months in the disputed period
• GSTR 3B for all months in the disputed period
• GSTR 2A and GSTR 2B reconciliation statement
• GSTR-9 (Annual Return) and GSTR-9C (if applicable)
• Purchase invoices supporting every ITC claim in question
• Sales invoices for the disputed tax period
• Bank account statements confirming payment of tax
• Supplier correspondence or confirmation letters (for disputed ITC)
• E-way bills (where goods movement is in question)
• Books of accounts and tax ledgers
• CA certified reconciliation statement this carries significant weight

Pro Tip from the ITR Advisor team: Even if the officer did not specifically ask for a reconciliation statement, always include one. It demonstrates transparency and good faith two qualities that adjudicating officers value when exercising their discretion.

Real World Example: How Proper Handling of a Section 73 Notice Saved ₹16+ Lakhs

To understand the real-world impact of responding correctly, consider this illustrative case:

A mid-sized textile wholesaler in Pune received a Section 73 SCN alleging that ITC of ₹18.4 lakhs had been claimed on invoices not reflecting in GSTR-2B for FY 2021-22. The business owner, unfamiliar with the process, missed the initial response deadline, and an ex-parte order was passed confirming the entire demand.

When the case was brought to Adwani and Company, Dr. Haresh Adwani’s team conducted a detailed reconciliation exercise. They discovered that:

• 87% of the disputed ITC (₹16.01 lakhs) was valid and supported by purchase invoices and payment proof. The mismatch had occurred because several suppliers had filed GSTR-1 after the GSTR-2B cut-off date.
• The remaining ₹2.39 lakhs represented ITC that had genuinely been claimed in error.

The team filed a rectification application with the complete reconciliation and supporting evidence. The result: the confirmed demand was reduced from ₹18.4 lakhs to just ₹2.1 lakhs — a reduction of over 88%. The penalty on the rectified amount was also fully waived given the circumstances.

The lesson? Even after an ex-parte order, a well-constructed response backed by solid documentation can dramatically change the outcome. Acting early is always better, but acting correctly is what truly matters.

What Happens If You Ignore a GST Section 73 Notice? The Consequences Are Severe

The single most important thing to remember: if you pay the full tax demand within 30 days of receiving the SCN, you pay ZERO penalty. This window is your most valuable legal protection do not let it pass unused.

Conclusion: A Section 73 GST Notice Is a Problem You Can Solve With the Right Guidance

Receiving a GST notice under Section 73 is understandably stressful. But with the right knowledge and timely action, it is a problem that can be resolved often without paying any penalty at all.

The key steps are simple in principle: read the notice carefully, understand the allegation, gather your documentation, and respond within the stipulated time. Whether you choose to pay, partially accept, or fully contest the demand, what matters most is that you respond and respond well.

The Indian GST framework, as administered through the GST Portal (gst.gov.in) and guided by the Ministry of Finance, provides multiple safeguards for honest taxpayers. The law rewards proactive compliance and penalises inaction. Every window the law provides the 30-day penalty-free payment window, the right to a personal hearing, the right to appeal exists to protect you. Use these windows wisely.

As Dr. Haresh Adwani of Adwani and Company puts it: ‘The worst response to a GST notice is no response. The best response is a prompt, well-documented, professionally crafted reply that demonstrates your commitment to compliance and places the burden of proof squarely on the department’s claims.’

At ITR Advisor, we are committed to making complex tax matters understandable and manageable for every Indian business from startups to established enterprises. Our goal is to give you the clarity and confidence to handle any tax situation with authority.

Take Action Today Expert GST Notice Assistance Is Just a Call Away

Facing a GST notice under Section 73 and unsure how to respond? Do not wait every day counts when tax deadlines are involved.

Connect with Adwani and Company a trusted CA firm with decades of experience in GST advisory, tax notice handling, and business compliance. Led by Dr. Haresh Adwani (PhD in Commerce, Law Graduate, Managing Partner), the firm has successfully resolved hundreds of GST disputes for SMEs, startups, and corporates across Pune and Maharashtra.

• 90%+ success rate in demand reduction
• Expert reply drafting and hearing representation
• 24-hour turnaround for urgent notice reviews
• Transparent, fixed-fee advisory

ContactAdwani and Company today for a confidential consultation and take the first step toward resolving your GST notice with confidence, clarity, and expert support.

Visit: www.adwaniandco.com | Call: +91 7620 127 137 | Email: enquiries@adwaniandco.com

Dr. Haresh Adwani April 2026 11 min read

Introduction: Why Income Tax Notices Are Increasing in 2026

The Income Tax Department’s Annual Information Statement (AIS) now aggregates data from over 30 reporting entities banks, mutual funds, stock exchanges, property registrars, foreign remittance handlers, insurance companies, and employers against every PAN in India. In AY 2026-27, mismatches between ITR disclosures and AIS data are the primary automated notice trigger.

The result: the volume of income tax notices issued has risen significantly, and the majority of them are not accusations of wrongdoing they are requests for information, automated processing results, or procedural communications. The problem is never the notice itself; it is an uninformed, delayed, or incomplete response.

All Income Tax Notices: Quick Reference Table 2026

Every Income Tax Notice Explained in Detail

Section 139(9): Defective Return Notice

Issued when your filed ITR is considered defective incorrect form selection, incomplete mandatory fields, or data mismatches between the ITR and Form 26AS or AIS. You must rectify and refile within 15 days. Failure results in the return being treated as never filed, attracting late filing penalties and permanent loss of loss carry-forward benefits.

Section 142(1): Inquiry Notice Before Assessment

One of the most frequently received notices. Issued to request production of specific documents, clarification on income items, or to ask you to file a return if you have not. Respond within the timeframe specified typically 15 to 30 days. This is usually manageable if your books are accurate and your ITR is correctly filed. Non-compliance attracts penalties under Section 271(1)(b) and, in wilful cases, criminal prosecution under Section 276D.

Section 143(1): Automated Intimation from CPC

This is an automated, system-generated intimation not a traditional assessment notice. It communicates the result of the CPC’s processing of your ITR: a demand, a refund, or no change. You need to respond only if you believe the department’s calculation is incorrect. In that case, file a rectification request under Section 154 on the e-filing portal. Most 143(1) demands arise from TDS credit mismatches or arithmetic differences.

Section 143(2): Scrutiny Notice High Priority

This is a high-priority notice. It signals that the Assessing Officer (AO) intends to examine your ITR in full detail requiring production of books of accounts, vouchers, contracts, and financial statements. The AO must issue this notice within 3 months from the end of the financial year in which the return was filed. Engage a qualified CA immediately. Do not attempt to respond to a Section 143(2) notice without professional representation.

Section 148: Reassessment Notice

Issued when the AO has “reason to believe” that income chargeable to tax has escaped assessment in a past year. The Finance Act 2021 fundamentally overhauled the reassessment framework a mandatory pre-notice procedure under Section 148A must now be followed before any Section 148 notice can be validly issued. A significant proportion of Section 148 notices are legally challengeable. The limitation period is 3 years from the end of the relevant assessment year for escaped income below Rs. 50 lakh; up to 10 years for escaped income of Rs. 50 lakh or more with specific documentary evidence.

Section 156: Notice of Demand

Issued after assessment is completed, confirming that tax, interest, or penalty is payable. You must pay within 30 days. If you disagree for example, because the demand does not account for TDS credits or because an appeal has been filed respond immediately with a rectification under Section 154 or an appeal under Section 246A. Failure to pay or contest results in recovery proceedings.

Section 245: Refund Adjusted Against Arrear Demand

Penalty Reference Table: Non-Compliance with Income Tax Notices

The AIS Cross-Matching Effect: Why More Notices Are Being Issued in 2026

The Annual Information Statement (AIS) captures data from banks (savings account credits, fixed deposits), mutual fund transactions, stock market trades (including F&O and ESOP vesting), property purchases and sales, foreign remittances, insurance policy payouts, and employer salary data. Every significant financial transaction is reported against your PAN.

Before filing your ITR for AY 2026-27, always download and review your AIS on www.incometax.gov.in. Unexplained entries in AIS should be addressed in the ITR itself not left to explain in a notice response. Discrepancies between AIS and ITR figures trigger automated notices within weeks of filing.

Also Read ;

https://itradvisor.in/blog/gst-show-cause-notice-2026

How to Respond to an Income Tax Notice: Step-by-Step

Step 1: Verify the Notice Is Genuine

Log into www.incometax.gov.in, go to the “e-Proceedings” tab, and verify the notice against your PAN. Every valid notice carries a Document Identification Number (DIN) use “Verify Service Request” to validate it. A notice without a DIN, or one not appearing in e-Proceedings, is legally invalid and need not be acted upon. Verify first, then respond.

Step 2: Identify the Section and Urgency Level

The notice specifies the section under which it is issued. This tells you the nature of proceedings and urgency. Section 143(2) and Section 148 require immediate professional engagement. Section 143(1) intimations are typically straightforward to resolve online using the rectification mechanism.

Step 3: Note Your Exact Response Deadline

Every notice carries a specific response deadline. Missing it risks: an ex-parte assessment done entirely on the AO’s judgment, adverse income additions, and Section 271(1)(b) penalties for each default. Your response deadline is your most critical resource time lost cannot be recovered.

Step 4: Engage a Chartered Accountant

Section 143(1) intimations can often be addressed directly via the e-filing portal. All other notices particularly 143(2), 148, and 156 require professional analysis, documentation assembly, and representation.