ITR 2026: Common income tax return filing mistakes that cost employees lakhs

For salaried employees, income tax return (ITR) filing is generally seen as a straightforward process, primarily because most salary details and tax deductions are captured in Form 16 issued by the employer. However, with the increasing digitisation of tax reporting through Form 26AS, AIS (annual information statement), and TIS (taxpayer information summary), the income tax department now has access to a much wider set of financial information, including interest income, dividends, capital gains, high-value transactions, foreign remittances, and other reported data. As a result, even a small mismatch or omission in the return can lead to tax notices, additional tax liability, interest, and penalty exposure.

Further, employees who have changed jobs, opted for the wrong tax regime, claimed deductions without adequate proof, failed to report capital gains, or overlooked foreign assets may end up facing substantial tax demands. Therefore, ITR filing is no longer a mere compliance formality based only on Form 16, but requires a careful reconciliation of all income, deductions, tax credits and disclosures to ensure that the return is accurate and complete.

In this article, we provide a brief overview of the common mistakes employees make when filing income tax returns, which may result in a significant financial impact for taxpayers.

Key ITR filing mistakes:

ITR filing requires more than just Form 16 details

Many salaried employees rely entirely on Form 16 while filing their ITR. While Form 16 is an important document, it generally captures only salary income and TDS (tax deducted at source) details reported by the employer. It may not fully reflect income from other sources, such as savings bank interest, fixed deposit (FD) interest, dividend income, capital gains, rental income, or income from freelance/consulting assignments.

Employees should, therefore, reconcile Form 16 with Form 26AS, AIS, TIS, bank statements, capital gains statements and investment records before filing the return. Failure to report income appearing in AIS or Form 26AS may result in mismatch notices and additional tax liability.

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Wrong selection of tax regime

A significant filing error may arise where taxpayers select the tax regime without carrying out a comparative computation under the old regime and the new/concessional regime. While the new tax regime provides for concessional slab rates, it restricts the availability of several exemptions and deductions that are otherwise available under the old regime, such as HRA exemption, LTA exemption, deduction for interest on self-occupied house property, and deductions under Chapter VI-A, including Sections 80C, 80D, 80CCD(1B), etc., except for specifically permitted deductions.

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Employees should, therefore, evaluate the net tax liability under both regimes after considering salary structure, eligible exemptions, deductions, the employer's contribution to NPS (National Pension System), standard deduction, home loan interest, investment-linked deductions, and other eligible claims.

Further, employees should ensure that the regime opted in the ITR is consistent with the applicable rules for exercising such an option, particularly where business income is involved, as the flexibility to switch regimes may be restricted in such cases, i.e., a taxpayer having income from a business or profession who has exercised the above option of shifting out of the new tax regime shall be able to exercise the option of opting back to the new tax regime only once. However, other taxpayers shall be able to exercise this option every year.

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Overclaiming deductions without valid proofs

Deductions under Sections such as 80C, 80D, 80CCD, 80G and other eligible provisions should be claimed only where the taxpayer has made valid payments or investments within the prescribed timeline. Employees sometimes claim deductions based on proposed investments declared to the employer but fail to actually make the investment before the end of the financial year.

This may result in excess deduction being claimed in the return and can lead to tax demand at a later stage. Therefore, employees should verify actual payment receipts, insurance premium certificates, ELSS statements, provident fund contributions, home loan repayment certificates and donation receipts before claiming deductions.

Capital gains reporting errors

Employees investing in shares, mutual funds (MFs), employee stock option plans (ESOPs), property, or other capital assets should pay special attention to capital gains reporting. Capital gains must be computed separately based on the nature of the asset, holding period, cost of acquisition, sale consideration, expenses and available exemptions.

The taxpayer is required to compute and report the correct capital gains in the return. Errors in reporting short-term or long-term capital gains, grandfathering benefits, indexation, cost of acquisition, or exemption claims can result in significant tax demands.

Incorrect tax treatment of bonus, arrears and severance pay

Employees receiving bonus, arrears, advance salary, joining bonus, retention bonus, severance pay, VRS compensation, or retirement benefits should evaluate the correct tax treatment of such receipts. Depending on the nature of the payment, it may be fully taxable, partly exempt, eligible for relief under Section 89, or taxable under a different head of income.

Incorrectly treating such receipts as exempt or failing to claim eligible relief may have substantial financial implications. Employees should review Form 16, salary slips, employer communication, and relevant provisions before reporting such income.

Non-disclosure of foreign assets and ESOPs

Resident and ordinarily resident employees are required to disclose foreign assets and foreign income in their ITRs. This may include foreign bank accounts, overseas shares, foreign ESOPs, retirement accounts, financial interests in foreign entities, or signing authority in overseas accounts.

Employees working with multinational companies, start-ups, or overseas group entities should be particularly careful in case of foreign ESOPs or RSUs. Even where the income is not taxable in India in a particular year, disclosure requirements may still apply.

Failure to disclose foreign assets and income can attract stringent penalties and prosecutions under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. Section 43 of the Black Money Act imposes a penalty of Rs 10 lakh for failure to furnish in the ITR any information or for furnishing inaccurate particulars relating to an asset (including financial interest in any entity) located outside India, held by him as a beneficial owner or otherwise, or in respect of which he was a beneficiary.

It is pertinent to note that a penalty under this section shall not apply in respect of an asset/s (other than immovable property), having an aggregate balance that does not exceed a value equivalent to Rs 20,00,000 at any time during the relevant year.

Bank account and refund-related mistakes

Incorrect bank account details, non-prevalidation of a bank account, or a mismatch in PAN-bank linkage can delay refunds. Employees should ensure that the bank account selected for the refund is active, pre-validated and linked with PAN. They should also verify IFSC, account number, and account type before filing the income tax return (ITR).

In case of refund failure, the taxpayer may need to raise a refund reissue request, which can delay receipt of funds. Simple verification at the filing stage can help avoid unnecessary follow-ups and delays.

Failure to verify ITR on time

Filing the return is not the final step. The return must also be verified within the prescribed timeline through Aadhaar OTP, net banking, a demat account, or a bank account validation or by sending a signed ITR-V, as applicable. If the return is not verified on time, it may be treated as invalid.

This can result in the loss of refund and the non-processing of return and may also attract consequences for non-filing. Employees should ensure that the return is e-verified immediately after filing and retain the acknowledgement for their records.

Key takeaways

Income tax return filing for employees is no longer a simple exercise of copying figures from Form 16. With the tax department having access to extensive financial data through AIS, TIS, and Form 26AS, accuracy and reconciliation have become critical and indulging in the above mistakes can result in tax demands running into lakhs.

Thus, a careful, timely, and well-documented filing approach can help employees avoid notices, interest, penalties, and refund delays, while ensuring that all eligible deductions and benefits are correctly claimed.