The alerts said certain claims did not match employer-reported salary data or other system records and needed revision.

Most of the flagged cases involved returns where exemptions or deductions were claimed in the ITR but did not reflect in Form 16, said Nemin Shah, director at EQX Business Consultancy.

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

This is where the annual investment declaration and proof-submission window with employers becomes critical.

Take investment declaration seriously

Every year, in January or February, employers ask employees to submit proof of investments and expenses declared at the start of the financial year. Often treated as a routine HR exercise, this step plays a crucial role in how smoothly a tax return is processed later.

“It is advisable to disclose all the exemptions and deductions to the employer so that everything is included in Form 16," Shah said. Once this is done, there is less chance of claims being flagged, and TDS gets adjusted accordingly, leaving little or no refund to be claimed.

When proofs are submitted and verified, the employer factors eligible deductions and exemptions into payroll calculations and reflects them in Form 16. Tax deducted at source (TDS) is adjusted accordingly. The final Form 16 then mirrors what you are likely to claim in your return.

Proofs employees should prioritise

According to Himank Singla, partner at S B H S & Associates, chartered accountants, the tax department is largely focusing on high-value refunds and claims showing data mismatches.

“These included HRA claims, especially with high rent and non-metro city thresholds, deductions under sections 80C, 80D, 80E, 80G, interest on housing loan, LTA claims and exemptions like leave encashment.”

Most employers are strict about certain claims, especially house rent allowance (HRA). They insist on rent receipts, landlord PAN (mandatory if annual rent exceeds ₹1 lakh), and sometimes even a copy of the rent agreement. This documentation burden often leads employees to skip declaring HRA to the employer and claim it directly in the return later.

However, this approach is now leading to a mismatch. This is because the process of verifying claims is largely automated.

“There is no officer manually scanning each return. The scrutiny is algorithm-driven, not discretionary,” Singla said. The system cross-checks information from multiple sources, like Form 16 issued by employers, Form 26AS, AIS and TIS statements, employer payroll filings, third-party data from banks and insurers.

For HRA, employees should ideally maintain rent receipts, rent agreement, landlord PAN and proof of rent payment through bank statements, Singla said. “Cash rent receipts attract greater scrutiny.”

Similarly, for housing loan interest, an interest certificate from the lender and possession details are critical. The same applies to education loan interest deduction as well. For deductions under Section 80C, policy documents, public provident fund or PPF statements and equity linked savings scheme (ELSS) proofs should be retained. Health insurance deductions under Section 80D require policy copies.

Donations under Section 80G or political contributions under Section 80GGB are often not allowed by employers while computing TDS. “This is because CBDT (Central Board of Direct Taxes) circulars on salaries do not specifically mandate their consideration. In such cases, employees have no option but to claim them directly in the return,” said Shah.

However, if your employer accepts deductions on donations to calculate TDS liability, you must submit receipts of donations with trust registration details and mode of payment.

Singla pointed out that irrespective of whether an employer insists on proof or not, employees should always maintain documentary evidence for all claims. “Absence of employer verification does not dilute the assessee’s burden of proof under the Income-tax Act. These records are crucial if the IT department scrutinises your return.”

This has become more relevant as ITR forms now seek granular disclosures—insurance policy numbers, lender details, donation identifiers and landlord information.

“Any mismatch between the disclosed particulars and supporting documents can now be easily identified through system-based verification and may lead to unnecessary queries, adjustments or penalties,” Singla said, adding accuracy in disclosure has become as important as the eligibility of the claim itself

Not a tax evasion

The alerts sent by the tax department were not scrutiny notices and shouldn’t be mistaken for an investigation into tax evasion. Claiming deductions or exemptions directly in the tax return — even if not declared to the employer — is legally permitted, provided they are accurate and fully disclosed.

“The Income Tax Act does not mandate that deductions or exemptions must be claimed only through the employer. The employer’s role is limited to TDS estimation, not final tax determination,” said Singla.

However, not routing deductions through the employer can mean additional follow-up later. The department is flagging claims missing from Form 16, requiring the taxpayer to reconcile the mismatch and file a revised tax return. This could delay ITR processing and refunds, if any.

For FY 2025-26, timely and accurate use of the investment declaration and proof-submission window can help taxpayers avoid alerts like those seen in December for FY2024-25. Aligning employer records with eventual ITR claims remains the simplest way to stay off the system’s radar.