Income tax dept identifies up to 20,000 cases of individuals who used the ‘swapped provisions’ trick to reduce net tax liability;
Know what to do now to fix this

Jun 24, 2026

Synopsis
The Income Tax Department has flagged 15,000-20,000 cases of individuals using a 'swapped provisions' trick to unfairly reduce their tax liability. This involves manipulating claims like House Rent Allowance (HRA) for undue benefits. Taxpayers who engaged in this practice are advised to voluntarily pay the correct tax and interest, or seek condonation from the department to avoid penalties and potential legal action.

The Income Tax Department using data analytics and other tools and sources at its disposal have identified about 15,000 to 20,000 likely cases where individuals have used 'swapped provisions' trick to reduce their taxable income and thus pay a lower income tax.

As reported by TOI, this initiative is part of the tax department's mandate to crack down on bogus claims. In line with this, the department has reached out to employers, urging them to examine discrepancies in Form 24Q concerning the TDS they deducted from their employees' salaries.

The tax department is planning to take action against multiple cases of 'swapping' where concessions were swapped between the original ITR and the revised or updated ITR.

Citing one example, the TOI report said that the Income Tax officials said that they have observed instances where taxpayers have 'swapped provisions' to claim benefits like house rent allowance (HRA). For example, some employees who initially claimed a high HRA in their original ITR, later retracted that claim and opted for benefits under Section 10(14) of the Income Tax Act, which covers allowances for things like conveyance, education or for working in hilly areas.

Similarly, in some cases, taxpayers switched their political party donations to research institute donations in updated ITR.

The report said that the internal threshold for reaching out to taxpayers with such suspected claims is Rs 50,000 to Rs 1 lakh and the department has identified 15,000 to 20,000 cases. 

According to the TOI report, tax department officials said they can take up these cases for scrutiny to ensure offenders face consequences. But before any adverse action is taken, the tax department will run its Nudge campaign under which a chance will be given to come clean and in extreme cases, legal action will be taken.

What are swapping provisions and why taxpayers should not do this?

Chartered Accountant Suresh Surana said to ET Wealth Online that 'swapping' generally refers to a situation where a taxpayer withdraws or reduces one claim which may not be supportable, and substitutes it with another exemption or deduction merely to avail a tax benefit or refund position.

According to Surana, this approach is not appropriate because exemptions and deductions under the Income-tax Act, 1961 are not interchangeable. Each provision has its own statutory purpose, eligibility conditions, prescribed limits and documentation requirements. 

For example, HRA exemption under Section 10(13A) is linked to actual rent payment, receipt of HRA as part of salary and satisfaction of the prescribed computation mechanism. 

On the other hand, Section 10(14) applies only to specified allowances granted by the employer to meet particular expenses or circumstances, and the exemption is available only subject to the nature of the allowance, prescribed limits and fulfilment of the relevant conditions. 

Surana says: "A taxpayer cannot simply replace one claim with another unless the latter claim is independently supported by the salary structure, employer records and necessary evidence."

Explaining why swapping should not be done, Surana says that 'swapping' may be viewed as an artificial or incorrect claim if it is not backed by facts. The Income-tax Department increasingly relies on data analytics, Form 16 disclosures, AIS/TIS information, employer-reported salary break-up and past filing patterns to identify inconsistencies. 

Surana says: "Where the claim does not match the employer's salary records or appears unusual having regard to the taxpayer's profile, it may invite verification, adjustment, notice, reassessment or scrutiny."

Further, an incorrect claim may result in additional tax demand, interest and penalty exposure. In serious cases, where a claim is found to be false or made deliberately, it may be treated as under-reporting or misreporting of income, depending on the facts. 

According to Surana, the tax authorities can levy penalties of up to 200% of the tax payable under Section 439 of Income tax Act, 2025 (erstwhile Section 270A of Income Tax Act, 1961) on the incorrect claim, in addition to tax and interest. 

Therefore, taxpayers should claim only those exemptions and deductions for which they are legally eligible and for which adequate supporting documents are available.

What to do now to fix this

Surana says that if a taxpayer has already engaged in 'swapping' (i.e., claiming incorrect or fictitious deductions) and the window for filing a revised or updated return (ITR?U) has expired, the available remedies are limited. 

However, Surana says that it is still prudent to take timely corrective action to mitigate potential legal and financial consequences. Some of which are as follows:

Voluntarily pay the correct tax, interest, and dues. Even if the ITR filing window is closed, taxpayers should compute the correct income and pay the differential tax along with applicable interest immediately. This demonstrates good faith and voluntary compliance, which can help during any potential proceedings.

Approach the Income Tax Department (condonation route). Taxpayers may file an application under Section 239(3)(b) of ITA 2025 [erstwhile Section 119(2)(b) of the ITA 1961] requesting the department to accept a revised return or correction after the deadline on genuine grounds. Although, approval is discretionary and depends on facts, this is a recognised remedy.

Prepare for scrutiny or notice if the department identifies the mismatch, a notice may be issued. In such cases, the taxpayer should fully cooperate, disclose facts, and withdraw the incorrect claim.

Mitigate penalties through voluntary disclosure. Case precedents show that if tax and interest are paid before a notice is issued, taxpayers may have a stronger case to contest or reduce penalties.

[The Economic Times]