Top 5 Mistakes People Make While Filing ITR and How to Avoid Them

Introduction : Why Accurate ITR Filing is More Important Than Ever

Filing your Income Tax Return (ITR) is not just an annual obligation—it’s a crucial part of your financial hygiene. With the Income Tax Department getting increasingly tech-savvy and leveraging AI-driven scrutiny tools, even a minor error in your ITR can lead to major consequences. Whether you are a salaried individual, a freelancer, or a business owner, the importance of accurate ITR filing cannot be overstated.

Each year, thousands of taxpayers either receive notices from the Income Tax Department or miss out on refunds simply because of avoidable ITR filing mistakes. From mismatching Form 16 with Form 26AS to claiming ineligible deductions, the errors vary—but the impact is consistent: penalties, prolonged refund delays, and unwanted scrutiny.

What Happens If You Make a Mistake in Your ITR?

Incorrect ITR filing can lead to a cascade of problems. Here’s what’s at stake:

Notices Under Section 139(9) or 143(1): These are issued when discrepancies are found in your filed return. Responding to them takes time and requires accuracy.
Rejection of Refunds: A mismatch in tax credits or incorrect bank details can lead to refund rejection or delays.
Penalties Under Sections 234F, 270A: Filing late or furnishing incorrect information may attract penalties ranging from ₹5,000 to ₹10,000—or even more in some cases.
Increased Scrutiny in Future Filings: Repeated mistakes can put you on the radar of tax authorities, increasing the chances of audits.

Who Is Most at Risk?

While anyone can make a mistake, the most common victims are:

First-time filers unfamiliar with ITR forms.
Freelancers and gig workers with irregular incomes.
Salaried individuals who rely solely on Form 16 and ignore other income sources.
Business owners who fail to reconcile GST and ITR data.

If any of this sounds familiar, don’t worry—you’re not alone. But being informed is the first step toward error-free ITR filing.

Why This Blog is a Must-Read

This comprehensive blog will walk you through the top 5 mistakes people make while filing ITR—and more importantly, how to avoid them. Whether you’re filing it yourself or through a tax consultant, understanding these pitfalls can help you:

Avoid unnecessary notices and penalties.
Get your refunds faster.
Stay compliant with current tax laws.
Maintain a clean financial record.

We’ll also share pro tips from experts at S SHEKHAR & Co., who’ve helped thousands of individuals and businesses file accurate and timely ITRs.

So, before you hit that “Submit” button on the Income Tax portal, read on to ensure your ITR is error-free, fully compliant, and eligible for every benefit you deserve.

Mistake #1: Choosing the Wrong ITR Form

Overview of Different ITR Forms (ITR-1 to ITR-7)

One of the most common and impactful mistakes while filing your Income Tax Return (ITR) is choosing the wrong ITR form. The Income Tax Department has designed a set of ITR forms to cater to different categories of taxpayers and their income sources. These forms range from ITR-1 to ITR-7, and it’s crucial to pick the right one to avoid penalties, delays in processing, and even rejections of your return.

Let’s break down the most commonly used ITR forms:

ITR-1 (Sahaj): This form is designed for resident individuals with income from salaries, pensions, and other sources such as interest or rental income. It’s simple and widely used by individuals who don’t have income from complex sources like capital gains or business activities.
ITR-2: If you have income from capital gains, foreign assets, or if you are a director of a company, you cannot use ITR-1. Instead, ITR-2 is the correct form. It’s typically used by individuals and Hindu Undivided Families (HUFs) who don’t have income from business or profession but have other complicated sources of income.
ITR-3: This form is used by individuals and HUFs who have income from a business or profession. It includes those with income from a partnership firm, sole proprietorship, or freelancing, among others.
ITR-4 (Sugam): This form is for small business owners and professionals who are eligible for the Presumptive Taxation Scheme under Section 44ADA and Section 44AE. If you are a freelancer, a small business owner, or a contractor, ITR-4 can help simplify your filing process.
ITR-5: This form is for firms, LLPs, associations of persons (AOPs), bodies of individuals (BOIs), and other similar entities. If you’re filing for a business or organization, this is the form you need.
ITR-6: Used by companies other than those claiming exemption under Section 11 (which is for charitable organizations), this form is relevant for business owners in corporate structures.
ITR-7: This form is for trusts, political parties, and charitable institutions that need to file returns under Section 139(4). If your income is exempt under sections 11 to 13A of the Income Tax Act, you’ll likely need to use ITR-7.

Common Confusion Between ITR-1 and ITR-2

A key area where taxpayers frequently make errors is the confusion between ITR-1 (Sahaj) and ITR-2. This mistake is common, especially among salaried individuals with additional sources of income like interest or rental income.

ITR-1 (Sahaj) is specifically for resident individuals who earn income from salaries/pensions, interest, and other income from a single house property. If you have only income from these sources, ITR-1 is sufficient. However, ITR-1 cannot be used if:
- You have income from capital gains (from selling stocks, property, etc.).
- You own more than one house property.
- You have foreign income or assets.
- You are a director in a company or have business/profession income.

On the other hand, ITR-2 is applicable for taxpayers who have a wider variety of income, such as capital gains, foreign income, or multiple sources of income. For example:

You need to file ITR-2 if you have sold property or stocks, or if you earn income from capital gains.
It’s also applicable if you are an individual with business or profession income that doesn’t qualify for ITR-3 (i.e., non-presumptive income).
If you have foreign assets or have made foreign investments, this form is required.

Confusing ITR-1 and ITR-2 can result in incorrect filing, and the Income Tax Department may reject your return, forcing you to file again with the correct form. Always check the eligibility criteria carefully and don’t hesitate to consult a tax expert or use a GST calculator to ensure you're choosing the right form for your needs.

How to Select the Right ITR Form Based on Income Source

Selecting the right ITR form depends on your sources of income. Here’s a simple guide to help you pick the correct one based on the type of income you receive:

Salaried Individuals (with income from salary and other sources):
- If your income is only from salary, pension, or interest and you don’t have any complex income sources like capital gains, use ITR-1.
- If you have capital gains, foreign income, or are a director in a company, use ITR-2.
Business Owners, Freelancers, and Professionals:
- If you’re a freelancer, a sole proprietor, or have income from a business or profession, use ITR-3.
- If your business is eligible for the Presumptive Taxation Scheme under Section 44ADA or 44AE, then ITR-4 will be the right form for you.
Property Owners with Rental Income:
- If you own property and earn rental income, and if your total income is only from rental income, salary, or interest, you can file ITR-1 (if you have only one property).
- If you have multiple properties or other complex income sources like capital gains, choose ITR-2.
Companies:
- For companies, use ITR-6 for regular returns. Companies claiming exemption under Section 11 (charitable institutions) will use ITR-7.
HUF (Hindu Undivided Family):
- If you are filing for an HUF, your income from salary, interest, or property will dictate whether you use ITR-1 or ITR-2.

Avoiding Common Mistakes in Form Selection

To avoid making this common ITR mistake, always:

Check your income sources before selecting the form.
Understand the eligibility criteria for each form (you can easily do this with the help of an online tax tool or by consulting with a tax professional).
Be aware that using the wrong form can lead to delays in processing your return, rejections, or penalties under Section 234F for late filing.

By being vigilant and careful, you can easily avoid this mistake and ensure that your ITR is filed correctly. If in doubt, it’s always a good idea to use expert tools like the S SHEKHAR & Co. ITR filing calculator to ensure that your form selection aligns with your financial situation.

Mistake #2: Not Reporting All Income Sources

Interest from Savings, FD, PPF, Capital Gains, etc.

One of the most common yet dangerous mistakes that taxpayers make during Income Tax Return (ITR) filing is the non-disclosure of all income sources. Income tax law mandates that you report all income received by you, irrespective of the type of income. Even income earned from sources such as interest on savings accounts, fixed deposits (FDs), public provident fund (PPF), or capital gains must be disclosed to avoid discrepancies and potential legal consequences.

Many taxpayers often overlook income earned from interest or capital gains on their savings and investments. While these may seem like small amounts to the individual, non-disclosure can result in significant issues during tax audits or scrutiny.

Interest from Savings Accounts, FDs, and PPF

Interest earned from savings accounts is fully taxable, even if the amount is small. If you earn more than ₹10,000 in interest annually from any savings account, it’s subject to tax, and you must report it under “Income from Other Sources” in your ITR.

Similarly, interest earned from fixed deposits (FDs) and public provident funds (PPFs) is also taxable in most cases. For example, if you invest in a fixed deposit or term deposit, the interest earned is taxable based on your income tax slab, which means you must report it when filing your returns. Failing to report this income can result in the Income Tax Department flagging your return, leading to penalties and legal complications.

In cases where your FDs are jointly held, all individuals contributing to the FD should disclose their respective share of interest income. It is important to disclose this income, even if TDS (Tax Deducted at Source) has been deducted, as not doing so may attract scrutiny notices from the Income Tax Department.

Capital Gains

Capital gains are another common source of income that individuals often fail to report. Whether you’ve earned income by selling stocks, mutual funds, property, or other assets, these earnings are classified as capital gains and must be disclosed in your ITR.

Short-Term Capital Gains (STCG): When you sell assets like stocks or mutual funds within a short period (typically less than 36 months for property and less than 12 months for equity shares), any profit made is subject to Short-Term Capital Gains Tax (STCG).
Long-Term Capital Gains (LTCG): When assets are held for a period longer than the prescribed holding period, the profit is classified as Long-Term Capital Gains (LTCG), which has its own tax rates and exemptions.

Failing to report capital gains can lead to penalties under Section 271(1)(c) of the Income Tax Act. It is critical to calculate these gains correctly, apply exemptions if applicable, and disclose the amount properly in your return.

Freelance Income, Rental Income, Dividend Income

Income from freelancing, rental income, and dividends is also taxable, and not reporting them is one of the most frequent mistakes taxpayers make. It is essential to disclose these earnings to avoid issues like tax evasion accusations or scrutiny.

Freelance Income

Freelancers often receive income from multiple clients, and many mistakenly believe that they are not required to report their freelance earnings if no formal salary is paid. However, income received from freelancing or any professional services is taxable and must be reported.

Whether you work as a freelancer in graphic design, content writing, consultancy, software development, or any other service, the income should be reported under the head “Income from Business and Profession” in your ITR. Furthermore, if you earn substantial freelance income, you might be subject to advance tax payments and may need to file ITR-3 or ITR-4.

Not reporting freelance income can result in severe penalties. Moreover, since freelancers are often paid through bank transfers or online platforms, failing to report can easily be detected during scrutiny or audits, making it vital to report all freelance income in your return.

Rental Income

Rental income is another commonly overlooked source of income. If you own property and receive rental income, this income must be declared under the head “Income from House Property.” If you have rented out a residential or commercial property, report the annual rental income, minus allowable deductions like municipal taxes and 30% standard deduction for repairs and maintenance.

You must disclose all rental income, whether the rent is paid in cash or via bank transfer. Failing to disclose rental income can attract penalties, and in severe cases, the tax authorities may initiate legal action.

Dividend Income

In recent years, with the rise in investments in mutual funds, stocks, and bonds, dividend income has become another common source of taxable income. While dividend income up to ₹10 lakhs is exempt from tax under Section 10(34), it must still be reported under the head “Income from Other Sources.” If the total dividend income exceeds ₹10 lakh, tax is applicable, and it must be reported accordingly.

Many taxpayers overlook small dividend incomes, assuming that they are exempt, but the cumulative total can exceed the exemption threshold. Additionally, even if TDS (Tax Deducted at Source) is deducted on dividends, you must still report it in your return to avoid discrepancies and penalties.

How Non-Disclosure Can Lead to Scrutiny

When you fail to report income from various sources, such as interest, capital gains, freelance work, rental income, or dividends, the Income Tax Department can easily flag your ITR. Discrepancies in the reported income can lead to:

Tax Scrutiny or Audit: If there is a mismatch or missing income, the tax authorities may initiate a scrutiny process to investigate your returns further. This could lead to additional paperwork, questions, and penalties.
Penalty under Section 270A: Non-disclosure or under-reporting of income can lead to penalties under Section 270A of the Income Tax Act. These penalties can be substantial and can increase depending on the severity of the mistake.
Legal Action: In the worst-case scenario, repeated non-disclosure or concealment of income can lead to legal action, including prosecution under tax laws.

Therefore, it is essential to ensure full disclosure of all your income sources. Whether it’s interest from savings, freelance income, capital gains, or dividends, every penny counts when filing your ITR.

Conclusion

Failing to report all income sources is a mistake that can lead to unnecessary scrutiny and penalties. It’s crucial to maintain accurate records of all your income, including interest, capital gains, freelance earnings, rental income, and dividends, and ensure that they are properly reported while filing your ITR.

If you're unsure about how to report your various income sources or need expert assistance, consider consulting with a tax professional or using reliable tax filing tools. Taking a proactive approach can help avoid costly mistakes and ensure your tax filing is both accurate and compliant.

Mistake #3: Incorrect Claim of Deductions and Exemptions

Filing an Income Tax Return (ITR) requires careful attention to the deductions and exemptions that reduce your taxable income. However, many taxpayers make the mistake of incorrectly claiming deductions or exemptions, which can lead to penalties, tax liabilities, or even legal issues. Common mistakes are found in sections like 80C, 80D, and 80TTB, as well as when reporting exempt income such as Provident Fund (PF) withdrawals or agricultural income. Let’s take a closer look at these mistakes and how to avoid them.

Common Mistakes in Section 80C, 80D, 80TTB

Section 80C allows taxpayers to claim deductions for investments made in specified instruments, such as Life Insurance Premiums, PPF contributions, National Savings Certificates (NSC), and ELSS (Equity Linked Savings Schemes). The maximum deduction under this section is ₹1.5 lakh. However, people often make mistakes by incorrectly calculating the total amount invested or by including ineligible investments like Tax Saving Fixed Deposits or reinvested interest earnings. Another mistake is not ensuring that the investment has been made in the financial year for which the return is being filed.

Section 80D offers deductions for premiums paid for health insurance. Many taxpayers claim premiums for policies that do not qualify, such as policies paid for friends or extended family, or fail to include details of the premiums paid for the medical insurance of their parents. Another frequent mistake is not claiming deductions for preventive health check-ups under the same section.

Section 80TTB allows senior citizens to claim a deduction of up to ₹50,000 on interest income from savings accounts, fixed deposits, or recurring deposits. A common error is failing to claim this deduction or mistakenly claiming it for non-eligible interest, such as interest earned from corporate bonds or non-savings accounts.

Reporting Exempt Income Like PF Withdrawals, Agricultural Income

Provident Fund (PF) withdrawals can sometimes be considered exempt income if the contribution has been made for the specified period. However, taxpayers often fail to report PF withdrawals when they are considered taxable, leading to discrepancies in income reporting.

Similarly, agricultural income is exempt from tax under certain conditions. Many taxpayers mistakenly fail to differentiate between taxable and exempt agricultural income, leading to improper claims. For instance, agricultural income must be earned from agricultural land and reported correctly, ensuring that no part of it is erroneously claimed as tax-exempt.

How to Validate Your Claims with Supporting Documents

The key to accurately claiming deductions and exemptions is to have the proper documentation. For Section 80C, retain investment receipts or proof of deposits, such as receipts from PPF accounts, LIC policies, NSC, and ELSS investments. Similarly, for Section 80D, keep premium payment receipts for your health insurance policies. If you are claiming a Section 80TTB deduction, keep the bank statements or interest certificates that show interest income from fixed deposits or savings accounts.

Make sure to cross-check all your deductions and exemptions before filing your ITR and maintain proper records to back up your claims. If your claims are ever challenged, you will have the necessary documents to support your filing.

Mistake #4: Mismatch in Form 26AS or AIS

One of the most crucial aspects of ITR filing is the reconciliation of income with Form 26AS and AIS (Annual Information Statement). Failing to reconcile these forms correctly is a major mistake that can trigger tax notices or even delay your refund.

Importance of Reconciling Income with Form 26AS & AIS

Form 26AS is a consolidated tax statement that displays details of tax payments made on your behalf, such as TDS (Tax Deducted at Source), TCS (Tax Collected at Source), and advance tax payments. AIS gives a detailed record of all the financial transactions that the Income Tax Department has gathered about you.

It’s important to ensure that the income reported in Form 26AS matches the income you report in your ITR. If there’s a mismatch, the tax authorities will likely initiate a scrutiny of your return. Similarly, AIS includes all financial transactions, such as interest income, mutual fund dividends, or property transactions, and needs to be cross-checked to ensure that you haven’t missed anything.

TDS Mismatch and How It Affects Refund or Triggers Notices

A common mistake is not reconciling the TDS mentioned in Form 26AS with the tax payable as per the ITR. A TDS mismatch can lead to several issues:

Delayed Refund: If the tax deducted at source is not correctly accounted for in your ITR, your refund may be delayed.
Tax Notices: Mismatched TDS can also trigger notices from the Income Tax Department, which could lead to further complications, such as penalties or interest.

Ensure that all the TDS deductions mentioned on your Form 26AS match the income reported in your ITR, and make any necessary corrections.

Mistake #5: Late Filing or Filing Without Verification

Filing your ITR on time and ensuring verification is crucial for smooth processing. However, many taxpayers either miss the filing deadline or fail to complete the e-verification process, which can lead to penalties and complications.

Penalties under Section 234F for Late Filing

Under Section 234F of the Income Tax Act, taxpayers who miss the ITR filing deadline are liable to pay a penalty. The penalty depends on how late the filing is:

Up to ₹5,000 for returns filed after the due date but before December 31 of the assessment year.
Up to ₹10,000 if filed after December 31.

If you owe taxes, the penalty amount could increase. It’s crucial to file your return on time to avoid these penalties. Timely filing also helps avoid issues with carry-forward losses and interest charges.

E-Verification Process and Why It’s Critical for Return Processing

The e-verification of your ITR is the final step in the filing process. If you fail to complete this step, your return will be treated as invalid, and it won’t be processed. You can verify your return through:

Aadhaar OTP: Quick and simple for individuals linked to Aadhaar.
Net Banking: If you have access to net banking, it’s another secure method of verification.
EVC (Electronic Verification Code): For other verification methods, an EVC is available for use.

Make sure you complete the e-verification within 120 days of filing your return to ensure that it’s processed without any issues.

Tips to Avoid These Mistakes

Here are some tips to avoid the common ITR mistakes discussed above:

Use an ITR Filing Checklist: A checklist will ensure that you don’t miss any important steps or documents.
Keep Form 16, AIS, and Other Documents Ready: Having your documents organized will simplify the filing process.
Seek Expert Help for Complex Returns: If your return involves multiple income sources or deductions, it’s better to consult a tax professional.

How S SHEKHAR & Co. Can Help You File ITR Error-Free

At S SHEKHAR & Co., we offer personalized tax consultation to help you file your ITR without mistakes. Our experts can guide you through the complex process, ensuring accurate filing every time. We provide end-to-end filing and compliance services, making sure that your return is filed on time and in compliance with all relevant laws.

We also offer a free ITR health check for first-time filers to make sure your returns are free of errors.

Conclusion + Call to Action

Avoiding these common ITR mistakes is essential to filing a correct and timely return. Don’t risk penalties or notices — let the experts at S SHEKHAR & Co. handle your ITR filing. Book your free ITR filing consultation today and ensure that your taxes are filed the right way.

FAQs

What happens if I file the wrong ITR form?
Filing the wrong form may result in your return being rejected or delayed, leading to penalties or notices.

Can I revise my ITR after submission?
Yes, you can file a revised return within the assessment year if you realize a mistake.

How do I verify if my income is correctly reported in Form 26AS?
Log in to the Income Tax portal and check Form 26AS under the Tax Credit Statement to match the income.