16 transactions which tax dept gets to know via SFT returns; Report them now to avoid possible jail term for misreporting income

All banks and specified financial institutions have to file a return to the income tax department known as the ‘Specified Financial Statement (SFT). The SFT return includes the details of all the financial transactions undertaken by a taxpayer . The information is PAN based which allows the tax department to monitor your financial activities for signs of possible tax evasion.

For example, if someone reported an income of Rs 2 lakh per year on their ITR, but the tax department's records shows that this person purchased gold worth Rs 14 lakh, it raises concerns . While there is no legal issue with the purchases, it can trigger scrutiny and the individual may be asked to explain the source of their funds.

Ramakrishnan Srinivasan, former chief commissioner of Income Tax Department told ET Wealth Online:

• “I recollect two instances. A friend who was in a multinational bank filed an ITR omitting to disclose his savings bank interest which was about Rs 25,000. The case was picked up for scrutiny and when his bank account was extracted the assessing officer found out and added to taxable income and initiated penalty proceedings.”
• “In another case of a businessman, the SFT information revealed he had disposed of a piece of land and had not offered capital gains on the said transaction. The officer reopened the assessment and brought capital gains to tax and levied penalty and initiated prosecution proceedings.”

How is SFT used for tracking transactions?

The information reported in the SFT by the reporting entity i.e., by banks, mutual funds, registrars, etc., is automatically populated in the Annual Information Statement (AIS) of the respective taxpayer.

Ritika Nayyar, Partner, Singhania & Co, says all information from SFT returns against a taxpayer’s PAN is auto-populated in the taxpayer’s annual information statement (AIS).

Nayyar explains: “Whatever financial information is provided by financial institutions in this SFT form gives an overview of all the financial transactions undertaken by the taxpayer during the year. This in turn helps the taxpayer in verifying the data to be put in his ITR. One should ensure that they check the data in the AIS while preparing and filing the return, it will help in ensuring the ITR is accurately filed and eventually faster processing of ITRs.”

Also read: Four critical changes in Income Tax Act: Standard deduction, UPS, income tax search, and other changes to be applicable in FY 2025-26

What transactions are reported via SFT?

The following table shows transactions reported via SFT returns, which in turn is auto-populated in your AIS.
Source: Singhania & Co

Sanjoli Maheshwari, Executive Director, Nangia & Co LLP says: “These thresholds are applicable on an annual basis. The SFT must be furnished by the reporting entities on or before 31st May following the end of the financial year.”

Also read: How stock market traders can reduce their capital gains tax even under new tax regime at the time of ITR filing

What can happen if you don’t report the incomes shown in the SFT and AIS?

Maheshwari from Nangia & Co LLP, says: “If a Taxpayer fails to report the transactions in its Income Tax Return (ITR) or there is mismatch in the transactions reported through SFT and reflecting in AIS, it may result in various consequences which includes:

• Tax notices: The Income Tax Department may issue a notice seeking clarification on high-value financial transactions reflected in the taxpayer’s AIS. Such notices are typically issued to verify whether the reported transactions have been appropriately disclosed in the Taxpayer’s ITR and insisting to file revised or ITR-U in case of non/ partial disclosure in the return filed.
• Selection under scrutiny: In case the information reported in SFT does not align with the income disclosed in the ITR, or if the taxpayer has failed to file the ITR despite required, or where response to a notice issued is not furnished or found unsatisfactory and requires detailed scrutiny, the Tax Authorities may issue notice to verify the overall correctness and completeness of the income reported.
• Penalty for under reporting or misreporting of income: Following these scrutiny proceedings, if the Tax Authorities issue an order that assesses income by making addition and determining the extra tax liability along with any applicable interest, then, a penalty may also be imposed for under-reporting or misreporting of income. This penalty, if levied, may range from 50% to 200 % of the tax payable (in cases of under-reporting and misreporting of income).

Maheshwari says that taxpayers can be subject to prosecution and imprisonment in cases of willful or deliberate tax evasion:
Source: Nangia & Co LLP

Maheshwari says: “However, it may be pertinent to note that there are provisions wherein said proceedings would not be instituted and would be eligible for compounding subject to prescribed guidelines and prior approval of relevant Tax Authority.”