Gyaan Ganga 40 – What the Government Already Knows About Your Income

This Gyaan Ganga explains what all information the IT department has about the assessee and the sources. It also discusses on ways by which you can identify your incomes in their records.

The tax department doesn’t just wait for you to file your return. It is already watching.

Every year, millions of taxpayers believe they can quietly omit rental income, underreport interest or forget mutual fund gains. What they don’t realise is that the Income Tax Department has built has built a strong system to collect financial information from various sources. This guide covers exactly what tax authorities already know about you before you file your ITR.

The Annual Information Statement (AIS) & Form 26AS

Introduced in November 2021, the AIS goes far beyond the older Form 26AS (Section 285BB of Income Tax Act 1961 / Section 263 of Income Tax Act 2025). It consolidates data from dozens of reporting entities and presents the department with a comprehensive financial picture:

Income / Transaction Type	Source of Reporting
Salary income	TDS returns filed by Employer
Interest from savings / FDs / RDs	Banks
Dividend income	Companies / Mutual Funds
Securities & mutual fund transactions	Depositories, stock exchanges, AMCs
Immovable property (sale/purchase)	Sub-registrar via SFT
Foreign remittances	Authorised dealers
GST turnover	GSTN (cross-referenced with ITR)
Rent received	Tenant TDS under Section 194-I, HRA Claim

When you file your ITR, the system automatically flags mismatches with AIS data, triggering the e-Verification scheme and potentially a scrutiny notice.

Tax Deducted at Source (TDS) — A Real-Time Income Tracker

Every payer making certain payments must deduct tax at source and report it to the department before you even file your return. Every deductor files quarterly TDS Returns (Form 24Q / 26Q / 27Q), which feed directly into your Form 26AS and AIS. Department expects inclusion of such transactions, on which TDS is deducted, to form part of your total income while filing returns.

Statement of Financial Transactions (SFT) — High-Value Reporting

Under Section 285BA of 1961 Act / Section 262 of 2025 Act, specified entities must report high-value transactions. This is perhaps one of the most significant information-gathering mechanisms available to the Income-tax Department.

Reporting Entity	Threshold / Transaction
Banks (savings accounts)	Cash deposits ≥ ₹10 lakh in a financial year
Banks (current accounts)	Cash deposits ≥ ₹50 lakh
Banks (credit cards)	Cash payments ≥ ₹1 lakh; any mode ≥ ₹10 lakh
Sub-registrar	Purchase/sale of property ≥ ₹30 lakh
Mutual Funds	Purchase of units ≥ ₹10 lakh
Companies / institutions	Bonds, debentures or share acquisition ≥ ₹10 lakh
Foreign exchange dealers	Foreign currency sale/purchase ≥ ₹10 lakh
Crypto platforms	Specified digital asset transactions

All these transactions are linked to your PAN. The system checks whether these transactions match the income you have reported.

PAN-Aadhaar Linkage — Closing the Identity Gap

Mandatory under section 139AA of 1961 Act / Section 515 of 2025 Act, PAN-Aadhaar linkage has closed long-exploited loopholes. Your PAN is now your complete financial identity, seeded across:

Financial Account / Asset	Consequence of Missing / Invalid PAN
All bank accounts	Higher TDS under— up to 20%
Demat & brokerage accounts	Transaction trail created automatically
Mutual fund folios	SFT reporting triggered
Property registration documents	Sub-registrar reports transaction
EPF, NPS, insurance (>₹50k premium)	Aadhaar-seeding mandatory

Capital Gains — The SEBI–IT Department Pipeline

If you trade in shares or mutual funds, every transaction is already known. Depositories (NSDL/CDSL) and exchanges (NSE/BSE) report all transactions via SFT under Section 285BA. Entities also deduct TDS on mutual fund unit dividend distribution under Section 194K (Section 403, 2025 Act). The department pre-populates approximate STCG and LTCG figures in your AIS; any ITR mismatch is flagged automatically. Switching between schemes within the same fund house, or redemptions across multiple AMCs, are captured in a single unified view by agencies such as CAMS.

Foreign Income & Assets — FEMA and FATCA

Residents must disclose foreign assets and income under Schedule FA of the ITR. Non-disclosure may attract consequences under the Black Money (Undisclosed Foreign Income and Assets) Act, wherever applicable.

India participates in two key international frameworks:

Framework	How it works	Coverage
FATCA	US-India IGA: foreign institutions report Indian residents’ accounts to IRS, which shares with CBDT	US-held accounts of Indian residents
CRS (OECD)	100+ countries auto-exchange financial account data annually	Singapore, UAE (from 2023), UK, most of Europe

The Risk Management System — The Algorithm That Selects You

The CBDT’s centralised Risk Management System (RMS) and CASS (Computer Aided Scrutiny Selection) identify returns for scrutiny. The system looks for warning signs such as:

Risk Signal	What It Indicates
AIS vs ITR mismatch	Undisclosed / under-reported income
Unusual deductions vs income level	Inflated or bogus claims
High cash transactions, low declared income	Cash-based income suppression
Year-on-year income drop + high spending	Income diversion or concealment
SFT transactions but no ITR filed	Non-filer with financial activity

Beyond Algorithms — Specialised Surveillance Units

The Income Tax Department does not rely on automated systems alone. Dedicated cells actively monitor lifestyle and spending patterns that may be inconsistent with declared income:

Surveillance Area	What the Department Does With It
Credit Card Spending & Foreign Travel	Banks report credit card payments above ₹10 lakhs. Airlines and travel data also tracked. Compared with the income reported in your tax return. Large differences may lead to further enquiries.
Luxury Goods Purchase (jewellery, luxury watches, high-end vehicles etc.)	Large purchases that do not match your reported income may lead to enquiries about the source of money used.
Agricultural Income Verification	Assessing officers verify (using Satellite imagery, Google Maps and state-level agricultural income filings) whether claimed land is cultivable and productive.
Inoperative PAN & Dormant Accounts	Such transactions remain on record and may be examined when the PAN becomes operative again or during future assessments.

Inter-Department Data Sharing – One Transaction, Multiple Sources of Information

Today, different government departments and regulatory authorities routinely share information with each other. This allows the Department to compare data reported across various systems and identify significant differences that may require an explanation.

For example:

• Turnover reported in GST returns may be compared with the income and receipts disclosed in the ITR.
• Import and export transactions recorded through ICEGATE (Indian Customs EDI Gateway) may be matched with GST records and business income reported in the ITR.
• Information filed with the Ministry of Corporate Affairs (MCA), such as directors’ details, shareholding patterns, financial statements and related party transactions, may also be compared with income-tax disclosures.

Early Warning System

Before issuing notices in many cases, the Department may give taxpayers an opportunity to explain certain transactions through the Compliance Portal or by providing feedback on entries appearing in the Annual Information Statement (AIS).

Conclusion: Compliance Is No Longer Optional

The Indian tax administration has undergone a quiet revolution. Today’s assessments are increasingly data-driven rather than document-driven. The best approach is to report your income correctly, check your records carefully and make complete disclosures.

As a CA, our advice is clear: do not file a return in defiance of what your AIS shows. Reconcile every figure. Disclose fully. If there are genuine differences — errors in TDS reporting or transactions that don’t belong to you, use the formal AIS portal feedback mechanism to submit corrections.

— TEAM CVOCA

This publication is for awareness and education only. Please consult your chartered accountant, or legal advisor for decisions specific to your situation.