A study in deductions: How the taxman spots anomalies

A guide to how the tax system’s algorithms are flagging mismatches in Form 16, AIS and ITRs

- Shipra Singh

In December 2025, many salaried taxpayers were caught off guard when emails and SMS alerts from the income tax department landed in their inboxes, flagging discrepancies in deductions and exemptions claimed in their income tax returns (ITR).

For several filers, the notices came as a surprise—especially those who believed their claims were routine and legitimate.

The alerts pointed out that certain deductions did not match employer-reported salary data or other records available with the tax system, and required taxpayers to revisit and revise their returns.

Most of the flagged cases involved situations where exemptions or deductions were claimed directly in the ITR but did not appear in Form 16, said Nemin Shah, director at EQX Business Consultancy. This mismatch, he explained, has become a key trigger for system-generated alerts.

If an employer deducted tax assuming fewer deductions, but the employee later claimed a larger set of exemptions in the return, it typically resulted in a refund of excess TDS. “Seeking a big refund increases the likelihood of the system taking notice and flagging the return,” Shah said.

This is where the annual investment declaration and proof-submission window with employers becomes especially critical, often determining how smoothly a tax return is processed later.

Take declarations seriously

Every year, typically in January or February, employers ask employees to submit proof of investments and expenses declared at the start of the financial year as part of their payroll compliance process. Often treated as a routine HR exercise, this step plays a crucial role in how smoothly a tax return is processed later, especially in an environment of increased system-based scrutiny.