Why income tax refunds are stuck for so many, and why taxpayers are worried about new December 31 deadline

Usually, by the Income Tax Department’s own admission on their portal, it takes 4-5 weeks for the refund to be credited to the account of the taxpayer. Going by this timeline, most income tax refunds should have been released by October-end, given that the filing deadline for individuals and non-audit cases was September 16. Individuals account for nearly 95 per cent of the total number of returns filed.

An income tax refund is issued if the taxes paid exceed the actual amount due through TDS or TCS or advance tax or self-assessment tax after taking all deductions and exemptions into consideration.

So, why the delayed income tax refunds this year?

As per the Income Tax Department, certain taxpayers have been identified through the “risk management framework” for claiming “ineligible refunds” through deductions or exemptions to which they are not entitled. This, the Department said, has resulted in “understatement of income”.

The I-T Department has flagged some key mismatches: (1) “bogus” donations to registered unrecognised political parties (RUPPs), with incorrect PANs of donees in some cases; (2) mismatch between tax deducted at source (TDS) and Annual Information Statement (AIS) reflecting higher income; (3) large deductions or ineligible claims; (4) non-disclosure of foreign assets or income.

Earlier, in a release dated December 13, the Central Board of Direct Taxes (CBDT), the overarching body for the I-T Department, had noted that it acted upon many intermediaries involved in filing income tax returns with bogus claims of deductions and exemptions.

“The exercise revealed that some intermediaries have established a network of their agents all over India for filing returns with incorrect claims on commission basis,” it said. Sources said data analytics flagged over 2 lakh taxpayers who claimed suspicious deductions worth nearly Rs 5,500 crore under Section 80GGC, routed through suspicious or non-existent (RUPPs) and charitable organisations.

Similarly, several taxpayers had also received e-mails from the Department asking them to file their foreign income and asset details correctly and revise their returns by December 31. “…Data has been shared by the USA authorities showing that you held or earned foreign assets or income (e.g., bank accounts, interest, dividends, investments) during calendar year 2024. However, Schedule Foreign Assets was not included in your ITR for Assessment Year 2025-26,” one such e-mail stated.

Non-disclosure of foreign income can attract penalty under The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax, 2015.

Unusual cases, high-value refunds scrutiny

There have been some unusual cases too. Some taxpayers have flagged that they received the messages despite not having claimed any deductions or exemptions, while some said they had not received any SMS/e-mail but their refunds have been held back. Several taxpayers received the SMS despite having opted for the new tax regime, which doesn’t have any deductions or exemptions, except standard deduction.

Sources close to the tax Dept said SMS or e-mails have been sent for some cases as there were other discrepancies despite no deduction or exemption. For instance, a taxpayer employed by a contractor had his TDS deducted under the category of professional services, but the return filed was ITR-1 for a salaried income and not business income. Thus, the taxpayer was sent an e-mail urging him to revise his return.

High-value refunds, especially those above the threshold of Rs 50,000, have been under scrutiny and taxpayers have been complaining about the stuck refunds since the September 16 deadline. Many of them have also pointed out financial liquidity issues to meet their household expenses in absence of refunds.

But it is the series of messages and e-mails sent by the Department, especially over the last two weeks, that has resulted in panic among taxpayers. The concern is that the discrepancies have been flagged with just 10 days remaining for the revised return filing deadline of December 31.

On Monday night, many taxpayers with stuck refunds said they received SMS from the I-T Department, without any accompanying e-mail, as was seen for earlier cases. The SMS stated: “…processing of the said return was held as it was identified under risk management process on account of certain discrepancies in the claim of refund. An email with details has also been sent to your registered email address…”

Most taxpayers were clueless about responding to such communication without being made aware of the specific discrepancy in their tax return as they had not received any e-mail. This made many of them to approach the Department through their helpline numbers to register their grievances about their returns not getting processed, with several claiming that the helplines are not accessible now.

Old tax regime under scanner, filing revised returns

At the core of this issue is the high level of deductions being claimed, which are allowed primarily in the old tax regime. The emerging view among tax authorities is whether there should be an end-date to the old tax regime to disallow such large deductions, which turn out to be bogus in certain cases.

Taxpayers, on the other hand, took to social media to say that salaried individuals have less scope to evade taxes and that measures should be taken to widen the taxpayer base instead.

The I-T Department said the NUDGE campaign used advanced data analytics. Terming it as an initiative with a “trust-first approach”, it said the taxpayers are being given an opportunity to review their ITRs and “voluntarily correct” any ineligible claims, wherever required. Taxpayers whose deduction or exemption claims are genuine and correctly made in accordance with law are not required to take any further action, it said.

While high-value refunds are under the tax authorities’ scanner, sources said that they have started issuing refunds, which are likely to reflect over the next 10 days.

Taxpayers who don’t meet the December 31 deadline may still file an updated return from 1 January 2026, the Department said, subject to payment of additional tax liability.

So far, over 15 lakh income tax returns have already been revised for AY 2025-26, the Department said. To put it in context, 25.8 lakh revised ITRs were filed for AY 2024-25. Separately, over 21 lakh taxpayers have updated their ITRs for assessment years 2021-22 to 2024-25 and paid over Rs 2,500 crore in taxes during the ongoing financial year, it added.

Taxpayers are now demanding an extension of the December 31 filing deadline for revised returns. Many tax experts have also advised their clients to not panic if they have only received the SMS and not the e-mail for discrepancies from the I-T Department. Filing of revised returns is required if there has been an incorrect disclosure of income or wrongful deductions have been claimed, they said.

A revised return can be filed three months before the end of the assessment year, that is, December 31. An updated return (ITR-U) can be filed by a taxpayer within 48 months from the end of the assessment year (increased from 24 months in the Finance Act, 2025). An updated return can be filed even if the return was not previously filed. If the updated return is filed during 24-36 months from the end of the relevant AY, then additional tax payable is 60 per cent of the total tax and interest on additional income. For ITR-U filed 36-48 months after the AY, 70 per cent additional tax is payable of the aggregate tax and interest.