Introduction
Many salaried taxpayers choose the old tax regime because it allows deductions and exemptions such as HRA, home loan interest, Section 80C, Section 80D, education loan interest, donations and other tax-saving claims. These benefits are genuine and useful when supported by actual documents.
However, some taxpayers misuse the old tax regime by entering fake deductions or inflated exemptions only to claim a higher refund. This usually happens when an agent or return filer promises that “full TDS refund” can be claimed by adding deductions manually.
This is a serious mistake. The Income Tax Department has become more data-driven in recent years. Returns are now checked through AIS, TIS, Form 26AS, Form 16, employer data, TDS data and risk analytics. If a taxpayer claims fake deductions or exemptions, the return may be selected for verification, scrutiny or notice.
For clean and compliant filing, taxpayers can use TaxClear’s income tax return filing services.
Old Tax Regime Allows Deductions, But Only Genuine Ones
The old tax regime provides several deductions and exemptions. These include Section 80C for eligible investments, Section 80D for medical insurance, HRA exemption, home loan interest, education loan interest, NPS deduction, donations and other eligible claims.
But the important point is that every claim must be real. A taxpayer cannot claim LIC premium without paying it, HRA without actual rent payment, medical insurance without a valid policy, or home loan interest without an actual loan.
| Claim | Documents taxpayers should keep |
|---|---|
| LIC premium | Policy number, premium receipt and payment proof |
| Health insurance | Policy receipt and bank payment proof |
| Children’s tuition fee | Fee receipt from school |
| ELSS investment | Folio statement and investment proof |
| PPF | Account number and deposit proof |
| Home loan interest | Loan account number and interest certificate |
| Education loan | Bank certificate and loan account details |
| HRA | Rent agreement, rent receipts and landlord PAN where applicable |
The department may not ask for these documents at the time of filing, but it can ask later through a notice.
Why Fake Deductions Are Risky
A fake deduction may give quick refund today, but it can create a larger tax problem later. If a salaried person has TDS deducted on salary and then claims unusually high deductions not reflected in Form 16, the department may question the refund.
Examples of risky claims include:
fake HRA rent receipts,
false rent agreement,
fake LIC or 80C entries,
wrong medical insurance deduction,
false home loan interest,
wrong education loan interest,
fake donation deduction,
inflated LTA or travel claim, and
deductions claimed without payment proof.
Many taxpayers believe that because no document is uploaded while filing the ITR, the claim cannot be checked. This is incorrect. The return may be processed initially, but processing does not mean final acceptance.
Department Action on Bogus Refund Claims
The Income Tax Department has already issued public warnings about bogus deduction and exemption claims. In a PIB release, the department stated that it monitors the correctness of returns, including eligibility of deductions and exemptions claimed.
The department has also identified misuse of deductions and exemptions such as HRA, 80GGC, 80E, 80D, 80EE, 80EEB, 80G, 80GGA and 80DDB in fraudulent return filing cases.
This means the department is not only relying on manual checking. It is using financial data, risk analytics, third-party information and return patterns to identify suspicious refund claims.
Scrutiny Notices and Document Verification
If the return is selected for scrutiny under Section 143(2) and assessment proceedings continue under Section 143(3), the taxpayer may have to provide documentary evidence for deductions and exemptions.
This may include proof of investment, insurance policy, rent receipts, landlord details, loan certificates, tuition fee receipts, donation receipts or bank statements.
If the taxpayer cannot prove the claim, the deduction may be disallowed. The department may then raise tax demand, interest and penalty.
For taxpayers who have received a notice, TaxClear’s income tax notice support can help in preparing a proper response with supporting documents.
Penalty for Wrong Deduction Claims
Wrong deduction claims can be treated as under-reporting or misreporting of income. The penalty can be severe where the department considers the claim to be false or fabricated.
The official penalty framework provides that under-reporting may attract penalty, and misreporting may attract
Have a tax question? Get expert help.