UPI, NEFT, RTGS or IMPS: When can your digital payments come under the Income Tax Department’s scanner?

Making payments through UPI, NEFT, RTGS or IMPS does not automatically trigger an income tax notice. However, digital transactions can come under the tax department’s scrutiny when the value or frequency of transactions does not appear consistent with the income disclosed in the taxpayer’s Income Tax Return (ITR).

Tax experts say the Income Tax Department is increasingly using data from multiple sources to identify discrepancies between a taxpayer’s reported income and financial activity. The focus, therefore, is not necessarily on the payment method but on whether the transaction can be explained and reconciled with the taxpayer’s declared financial position.

When can digital transactions attract scrutiny?

A common trigger is when substantial amounts are credited to a bank account but are not reflected as business receipts, professional income, investment proceeds or other legitimate sources in the ITR.

For example, frequent or sizeable digital credits may appear inconsistent with the turnover or income reported by a business or professional. Similarly, a high-value property purchase funded through NEFT or RTGS could invite questions if the taxpayer cannot establish the source of funds.

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Tax experts also point to transactions where TDS has been deducted and reported in Form 26AS or the Annual Information Statement (AIS), but the corresponding income has not been disclosed appropriately in the tax return.

The same issue can arise with capital gains. Information relating to transactions in shares, mutual funds and other investments can be reported by brokers, depositories, registrars and financial institutions. If these transactions do not match the capital gains declared in the ITR, taxpayers may be asked to explain the discrepancy.

How does the Income Tax Department track transactions?

The tax department receives information under the Statement of Financial Transactions (SFT) framework from banks, financial institutions, mutual funds, property-related authorities and other specified reporting entities.

This information is matched electronically against the taxpayer’s PAN and other identifiers. The department can then compare information appearing in AIS and Form 26AS with the income disclosed in the ITR.

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According to tax experts, scrutiny can also involve comparing property purchases with declared income and sources of investment, while business receipts can be checked against GST information, TDS returns and banking transactions.

How can taxpayers avoid unnecessary notices?

Taxpayers should regularly check their AIS and Form 26AS before filing their ITR. If information appearing in AIS is incorrect, the taxpayer can use the available feedback mechanism where applicable.

Maintaining a clear source-of-funds trail is equally important, particularly for large investments and payments. Bank statements, investment records and supporting documents can help establish the origin of funds if questions arise.

Experts also recommend keeping personal and business transactions separate wherever possible. Businesses and professionals should maintain dedicated accounts to make reconciliation easier.

Finally, taxpayers should ensure that income, TDS, capital gains, investments and other reportable transactions are accurately reflected in their ITR.

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