Income Tax Alert: Why Your Refund is on Hold and How to Respond to “Nudge” Campaign
The Context of the New Initiative:
The Income Tax Department, under its risk management framework, has identified specific income tax returns (ITRs) for Assessment Year 2025-26 where refund claims appear potentially ineligible. This initiative, known as the “Nudge” campaign, leverages advanced data analytics to identify discrepancies before the returns are fully processed. The goal is a “trust-first” approach, giving taxpayers an opportunity to voluntarily correct errors rather than facing immediate legal action or detailed investigations.
Why You Received the Communication:
The department is specifically looking for instances where deductions or exemptions have been claimed to reduce taxable income, but these claims do not match the data available in the department’s system.
Common reasons for these alerts include:
Ineligible Deductions: Claiming deductions for donations made to Registered Unrecognised Political Parties (RUPPs) that may be bogus.
Documentation Errors: Quoting incorrect or invalid PANs for donees or entities where deductions are claimed.
Disproportionate Claims: Cases where a significant proportion of the Tax Deducted at Source (TDS) on Gross Total Income is being claimed back as a refund, which triggers a risk flag in the system.
Detailed Scenarios and Action Plan
Scenario 1: The Claims are Genuine and Supported
If you have received this message but are confident that every deduction (such as 80G for donations, HRA, or 80D for insurance) is genuine and you possess valid receipts and proof of payment:
What to do: You are not required to take any further action at this stage.
Risk: However, be aware that because your return is flagged under the risk framework, it may still be selected for a detailed investigation later. Ensure all supporting documents are digitally archived and ready for submission if a formal notice follows.
Scenario 2: Identifying an Error or Ineligible Claim
If upon review you realize that certain deductions were claimed without proper documentation, or if an aggressive tax position was taken that cannot be defended:
What to do: Use this window to file a Revised Return. This allows you to correct the claim, pay any additional tax due, and move the ITR out of the high-risk category.
Timeline: The deadline for filing a Revised Return for AY 2025-26 is December 31, 2025.
Scenario 3: Missing the December 31 Deadline
If the discrepancy is not corrected by the end of the calendar year:
What to do: You can still file an Updated Return starting from January 1, 2026.
Consequence: Unlike a Revised Return, an Updated Return comes with an additional tax liability as permitted under the law.
The Cost of Inaction
Ignoring these communications may be construed by the department as a “deliberate choice” to misrepresent income. As noted in the official press release, failing to act on these alerts may lead to the case being selected for a detailed investigation or scrutiny. Over 21 lakh taxpayers have already updated their returns for previous years, and over 15 lakh have already revised their returns for the current AY 2025-26 to stay compliant.
Conclusion for Assessees
Review your communication immediately. If you have received an SMS or email, log in to the e-filing portal, verify your deductions against your records, and if any mismatch is found, prioritize filing a Revised Return before the December 31 deadline to avoid penalties and additional interest.
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