An employee claims the full ₹1.5 lakh under section 80C, health insurance under 80D, a donation receipt handed over by a colleague and house rent allowance for a flat owned by his parent. His employer's Form 16 shows a fraction of these. The return is filed, a refund is expected, and a few months later the department asks him to justify each claim. Some were genuine but undocumented, some were ineligible, and one was simply wrong. This article explains how deduction claims are checked today, where they typically go wrong, what it can cost, and how to correct a claim before it becomes a dispute.
Deduction claims in an income tax return are cross-checked against Form 16, AIS, donee and insurer data, and the PANs of recipients. Claims that are unsupported, ineligible or inconsistent can be adjusted during processing, examined in scrutiny, and attract penalty for under-reporting or misreporting. Claim a deduction only when you are eligible and hold the proof, and revise or update the return promptly if a claim was wrong.
How are deduction claims verified now?
Deductions used to be checked mainly in scrutiny. Today much of the checking happens automatically, because the department holds data from several sources against which a claim can be tested.
In December 2025 the CBDT announced a NUDGE campaign: using risk analytics, it identified returns for assessment year 2025-26 with possibly ineligible deductions or exemptions, including donations to registered unrecognised political parties and claims with invalid donee PANs, and asked taxpayers by SMS and email to review and revise them.
Common deduction errors that trigger notices
| Claim (1961 Act reference) | Typical error | What proves the claim |
|---|---|---|
| Section 80C investments and payments | Claiming the full ₹1.5 lakh without actual investment; counting payments made after year-end | Premium receipts, PPF/ELSS statements, tuition fee receipts, loan principal certificate |
| Section 80D health insurance | Claiming parents' premium paid by someone else; cash payment of premium | Premium receipt in the claimant's name, paid otherwise than in cash |
| Section 80G donations | Donation to an unregistered entity; receipt without donee's statement; cash donations above the permitted limit | Certificate from the donee matching its filed statement, with valid PAN and registration |
| Section 80GGC political donations | Receipts from entities that are not genuine parties or that return the money | Bank trail and receipt from a genuine registered party |
| HRA exemption (section 10(13A)) | Rent to a non-existent landlord; rent paid to a spouse; inconsistent rent receipts | Rent agreement, bank-paid rent, landlord's PAN where required |
| Section 80E education loan interest | Claiming principal; loans from relatives or non-approved lenders | Lender certificate showing interest paid in the year |
For the 2026-27 tax year onwards, these deductions are governed by the corresponding provisions of the Income-tax Act, 2025. The concepts are largely unchanged, but check current section references and limits in the return form before claiming.
Under the default new tax regime, most of these deductions are not available at all. Claiming them in a new-regime return is an error, not a planning choice.
The regime question: are you even entitled to the deduction?
Eligibility starts with the tax regime. The new regime is the default for individuals and HUFs. It offers lower slab rates and a standard deduction for salaried taxpayers, but excludes most deductions such as section 80C, 80D, 80G and HRA. A few items, such as the employer's contribution to NPS within the prescribed limit, remain available.
Taxpayers with salary income can choose the regime each year when filing the return. Taxpayers with business or professional income must opt out of the new regime through the prescribed form within the due date, and their ability to switch back and forth is restricted. A return that claims old-regime deductions without a valid option, or after a late return, will not be accepted on that basis.
The practical point is that the regime decision should be made with numbers, before investments and claims are planned, not at the time of filing.
What a wrong deduction can cost
A wrong claim does not stay a simple arithmetic error once it is detected. Depending on the facts it can lead to:
- Adjustment during processing, where the claim is inconsistent with data or the return itself, after a communication giving you a chance to respond.
- Scrutiny or reassessment, especially where a pattern of claims or an intermediary is involved.
- Interest on the tax that became payable and recovery of any refund already issued.
- Penalty under section 270A of the 1961 Act (and the corresponding provision of the 2025 Act): 50% of the tax on under-reported income, rising to 200% where the under-reporting is a result of misreporting, which includes claims of expenditure not substantiated by evidence and false entries.
A taxpayer in the 30% slab under the old regime claims ₹1.5 lakh under section 80C but invested only ₹90,000, and claims a ₹50,000 political donation that turns out to be bogus. The excess claim is ₹1,10,000. Tax at 30% plus 4% cess is ₹34,320, plus interest. If the donation claim is treated as misreporting, penalty at 200% of the related tax of ₹15,600 is ₹31,200, and the under-reported ₹60,000 of 80C at 50% of ₹18,720 adds ₹9,360. A refund of a few thousand rupees becomes a liability of about ₹74,880 before interest.
Claimed a deduction you should not have? How to fix it
- Check each claim against proof. List every deduction and exemption in the return and match it to a document. Separate genuine but undocumented claims from ineligible ones.
- Revise the return if the window is open. A revised return withdraws the wrong claim and pays the correct tax with interest, without additional tax. Under the Income-tax Act, 2025 the revised return window is linked to the end of the tax year; check the current limit.
- Use an updated return if revision is time-barred. An updated return can withdraw a claim and offer the resulting income, with additional tax that rises with delay, provided proceedings have not already begun for that year.
- Respond to any communication on time. If you have already received a query, reply with evidence for genuine claims and accept adjustments for wrong ones.
- Keep the file. Retain the reconciliation, revised computation and documents for the full period during which the year can be reopened.
Voluntary correction before the department acts is almost always cheaper and simpler than defending a claim that cannot be proved. Our article on reassessment time limits under section 148 explains how long a year can remain open.
Deductions for businesses: timing and conditions
Business taxpayers face an additional layer. Profit-linked deductions under Part C of Chapter VI-A of the 1961 Act can be claimed only if the return is filed within the due date, and many deductions require an audit report or certificate in the prescribed form before the return. The Income-tax Act, 2025 carries similar conditions.
Business expenses are also tested for conditions such as TDS compliance and payment timelines. A claim that ignores these conditions is not a valid deduction, however genuine the expense. Our article on TDS disallowance under section 40(a)(ia) illustrates the point.
Before filing, prepare a one-page schedule of every deduction claimed, the section, the amount, the condition that makes it eligible and the document that proves it. If any column is blank, the claim is not ready.
Frequently asked questions
Can I claim deductions in my ITR that I did not declare to my employer?
Yes, eligible deductions can be claimed in the return even if not declared to the employer. Expect the difference from Form 16 to be checked, so keep proof of each additional claim ready.
What happens if I claimed a bogus donation deduction?
The claim can be disallowed, tax and interest recovered, and penalty for misreporting levied, which can be 200% of the tax on the under-reported income. If you have claimed such a deduction, correct the return through a revised or updated return as early as possible.
Are section 80C and 80D deductions available under the new tax regime?
No. Under the default new regime most deductions, including section 80C, 80D, 80G and the HRA exemption, are not available. Only a few items such as the employer's NPS contribution within limits remain.
Can I withdraw a wrong deduction after the revised return deadline?
Yes, through an updated return, which allows you to offer additional income on payment of tax, interest and additional tax. It cannot be filed once certain proceedings have started for that year, so act before a notice arrives.
What documents should I keep for deduction claims?
Keep receipts, certificates and statements showing payment in the relevant year, the payee's details and, where required, the payee's PAN and registration. Keep them for as long as the year can be reopened.
What is the CBDT NUDGE campaign on deductions?
It is an initiative in which the CBDT uses data analytics to identify returns with possibly ineligible deductions or exemptions and asks taxpayers by SMS and email to review and correct their claims voluntarily.
Conclusion
A deduction is a legal entitlement, not an estimate. It depends on the right regime, the right conditions and the right evidence, and each of those can now be tested against data the department already holds. Claims that rest on belief rather than proof tend to surface, and when they do, the cost is far more than the tax saved.
If you are unsure whether a past claim will hold, review it now. A timely revision or updated return, or a well-documented response to a query, keeps a small error from becoming a penalty case.
Received a tax notice or planning a transaction?
H K Davra & Co. advises on income tax assessments, notices, appeals and documentation.
Talk to usThis article is for general information only and does not constitute professional advice or solicitation. Examples are illustrative and use simplified computations. Section references are to the Income-tax Act, 1961 unless stated; for the 2026-27 tax year onwards, the corresponding provisions of the Income-tax Act, 2025 apply. Provisions are summarised as of October 2026. Please refer to the relevant provisions and seek advice on your specific facts.