Refund Claim on Hold – New Risk Management Alert from Income Tax Department (AY 2025-26)

The Income-tax Department has recently started issuing system-generated messages / emails to taxpayers informing them that the processing of their Income-tax Return (ITR) has been put on hold under the Risk Management Framework (RMF) due to discrepancies noticed in the refund claimed.

This communication is being seen for Assessment Year (AY) 2025-26 and is a new compliance-driven approach adopted by the Department.

A typical message received by taxpayers reads as under:

 “It was noticed that a claim of refund has been made in the Income-Tax Return for PAN: XXXXXXXXXX, for AY 2025-26 filed by you.

 Processing of the said return was held as it was identified under risk management process on account of certain discrepancies in the claim of refund. An email with details has also been sent to your registered email address.

  As the time-limit for filing of revised return of income for A.Y. 2025-26 will expire on 31/12/2025, you are requested to avail the opportunity to file revised return within the due date. An updated return may be alternatively filed from 01.01.2026, however with additional tax liabilities.

 In case a revised return has already been filed on the referred issue, kindly ignore this message.”

 In addition to the SMS, the email communication has also been sent by the Income-tax Department, the specific reason for keeping the refund on hold has been mentioned. The Department has also included an express clarification stating that this is not a notice but just a reminder.

 “Kindly Note:

1. This communication is intended to alert you on any possible incorrect claims / omissions in the above- mentioned return of income.

 2. This email has been sent to you as part of Income Tax Department communication. It is not a Notice.”

 Accordingly, while the Department has flagged a specific discrepancy and temporarily kept the refund on hold, it has consciously clarified that the communication is only an alert or advisory in nature and not a statutory notice issued under any provision of the Income-tax Act, 1961.

This article explains the background, legality of this SMS / Email, implications, reasons for such alerts, and the correct course of action for taxpayers and professionals.

A. What is the Risk Management Framework (RMF)?

The Risk Management Framework is an internal mechanism of the Income-tax Department used to flag high-risk or inconsistent claims at the processing stage itself, even before issuing an intimation under section 143(1).

Under RMF, returns may be flagged on account of:

• Unusual or high refund claims
• Mismatch between deductions/exemptions claimed and third-party data
• Inconsistency with past filing patterns
• Sector-specific or deduction-specific risk parameters

Once flagged, refund processing is temporarily kept on hold until the taxpayer corrects the discrepancies.

B. Legal Validity of the SMS / Email Communication

This appears to be the first instance where the Income-tax Department has placed the processing of refunds on hold without issuing a formal intimation proposing adjustments. Earlier, any discrepancy noticed during processing was communicated to the taxpayer through an intimation proposing adjustment under section 143(1)(a) of the Income Tax Act, 1961. Such intimations were limited strictly to the adjustments expressly permitted under clauses (a) to (f) of section 143(1).

Under section 143(1)(a), while processing a return, the total income or loss can be computed only after making the following adjustments:

• any arithmetical error in the return;
• an incorrect claim, if such incorrect claim is apparent from any information in the return;
• any prescribed inconsistency with information furnished in the return of any preceding previous year;
• disallowance of loss claimed, where the return of the year in which the loss was incurred was furnished beyond the due date under section 139(1);
• disallowance of expenditure or increase in income indicated in the audit report but not considered in computing total income;
• disallowance of deduction claimed under section 10AA or Chapter VI-A, where the return is filed beyond the due date under section 139(1);
• addition of income appearing in Form 26AS, Form 16 or Form 16A but not included in the return.

Further, the provisos to section 143(1) clearly mandate that no adjustment can be made unless prior intimation is given to the assessee, and the assessee must be provided an opportunity to respond before such adjustment is carried out.

In contrast, this new mechanism of placing refund processing on hold under an undefined “Risk Management Framework”, without issuing a formal intimation under section 143(1)(a), does not cite any specific statutory provision under which such action is being taken.

There is also no corresponding press release, CBDT circular, or notification explaining the legal basis or procedural safeguards governing this mechanism. It is pertinent to note that administrative instructions, internal risk parameters, or system-based flags cannot override or expand the scope of powers expressly conferred by the Income-tax Act. The Act, as it currently stands, permits adjustments during processing only within the limited framework of section 143(1)(a), and that too after due intimation to the assessee.

Therefore, the validity and legality of keeping return processing and refund issuance in abeyance—without invoking any statutory provision or issuing a notice under section 143(1)(a)—requires serious examination. Unless such action is traceable to a specific enabling provision under the Act, it raises concerns regarding procedural fairness, natural justice, and jurisdictional overreach.

 C. Common Reasons for Refund Being Put on Hold

Based on recent cases and departmental trends, refund claims are being flagged mainly due to:

a. Mismatch with AIS / TIS / Form 26AS

• • Excess TDS claimed vis-à-vis income offered
  • Income appearing in AIS but not offered to tax
  • Incorrect head of income mapping

b. Deductions / Exemptions Claimed Without Adequate Backing

• • Chapter VI-A deductions (e.g., sections 80C, 80D, 80G, 80GGC, etc.) not aligning with Form 16 or other risk parameters
  • Claims inconsistent with income level or employment details

c. Exempt Income or Relief Claims

• • Exemption under section 10 incorrectly claimed
  • Relief under section 89 / section 90 claimed without corresponding salary arrears data

d. Bank Account or Refund Validation Issues

• • Non-validated bank account
  • Mismatch in PAN–bank linkage

D. Why is the Department Asking to File a Revised Return?

The communication specifically highlights that:

• Revised Return can be filed up to 31.12.2025 (as per section 139(5))
• Updated Return under section 139(8A) can be filed from 01.01.2026, but with additional tax (25%), interest, and penalty implications

This indicates that the Department is giving taxpayers a pre-emptive opportunity to voluntarily correct errors, instead of straightaway moving towards scrutiny, adjustment, or recovery proceedings.

E. Revised Return vs Updated Return – Key Differences 

Hence, filing a Revised Return before the due date is strongly advisable.

F. What Should Taxpayers Do Upon Receiving Such Message?

 Step 1: Do Not Ignore the Message

This is not a routine SMS. It indicates a system-level risk flag.

 Step 2: Review the Return Thoroughly

• Reconcile income with AIS, TIS, and Form 26AS
• Verify all deductions and exemptions claimed
• Cross-check bank interest, capital gains, salary details

 Step 3: Identify and Correct Errors

If any incorrect claim or mismatch is found, file a Revised Return immediately.

 Step 4: Maintain Supporting Documentation

Keep documentary evidence ready in case the return is selected for further verification or scrutiny.

G. What If the Claim Is Correct?

If the refund claim and deductions are:

• Factually correct
• Properly supported by documents
• Correctly reported in the return

then no immediate action may be required. However, there is no clarity on the timeline within which the return will be processed and the refund released, as the current system does not provide any online mechanism to respond to the SMS or email or to affirm that the claims made in the return are correct. Consequently, taxpayers are effectively left with no option but to wait for the return to be processed, despite the refund having been placed on hold.

H. Key Takeaway for Taxpayers and Professionals

•  This is a new-age compliance alert, not a scrutiny notice
• Refunds can remain blocked indefinitely if discrepancies are not addressed
• Revised Return is a golden opportunity to correct mistakes without penalty
• Waiting for an Updated Return will result in additional tax costs

I. Conclusion

In the previous assessment year, the Income-tax Department had adopted a markedly proactive approach by prioritising the processing and release of high-value refunds, resulting in swift processing and timely receipt of refunds by taxpayers, often without any significant issues. However, the approach in the current year appears to be exactly the opposite.

For AY 2025-26, high-value refund cases are seemingly being processed at a much later stage, only after extensive re-validation of all information available with the Department under its risk management and data analytics framework. While such verification may be administratively justified, it is evidently a time-consuming exercise, with no defined timelines communicated to taxpayers or professionals.

As a result, it has become increasingly difficult for tax professionals to provide any reasonable assurance to clients regarding when their returns will be processed or refunds will be issued, especially when compared to the immediate processing experienced in the previous year. This shift in approach has created uncertainty, cash-flow concerns for taxpayers, and challenges in client communication, underscoring the need for greater transparency and clarity from the Department on expected processing timelines.

The Income-tax Department is increasingly leveraging data analytics and risk frameworks to curb incorrect refund claims at an early stage. Taxpayers receiving such messages for AY 2025-26 should act promptly, carefully, and professionally.

A timely review and, where required, filing of a Revised Return before 31 December 2025 can save taxpayers from future litigation, penalties, and cash flow issues arising from blocked refunds.

Disclaimer: This article is for informational purposes only and should not be construed as professional advice. Taxpayers are advised to consult their tax advisor before taking any action. 

In case you have any questions / query, you can email me at sharshil323@gmail.com.