India's income tax authorities are intensifying efforts to ensure taxpayers report their income and deductions accurately, launching a major compliance drive as growth in direct tax collections shows signs of moderation. The department is leveraging data analytics and sending targeted communications to encourage voluntary corrections, marking a strategic shift in enforcement.
Slower Growth Triggers Compliance Push
The government, in its Union budget presented in February, projected a robust 13% growth in direct tax collections for the current financial year (FY26). This optimism was based on strong tax buoyancy in recent years, including a 43% post-pandemic rebound in personal income tax in FY22, followed by growth rates exceeding 20%.
However, data from April to mid-December reveals a different picture. Overall direct tax receipts have grown by approximately 8% during this period. While corporate tax receipts increased by 10.5%, non-corporate tax collections—primarily personal income tax—saw a much slower growth of just 6.4%. This is notably below the budget estimate of a 14.4% growth in personal income tax collection for the year.
Despite the gap, the tax department remains confident of meeting its full-year target of ₹25.2 trillion. However, the moderating growth rate has prompted what officials term as "administrative intervention" to safeguard revenues and broaden the tax base.
The 'Nudge' Campaign: A Softer Enforcement Approach
In response, the Income Tax (IT) department has initiated a non-intrusive campaign to guide taxpayers towards better compliance. Historically, deductions claimed by individuals were not a primary enforcement focus except in select scrutiny cases. This has changed.
The campaign, officially named the 'Non-intrusive usage of data to guide and enable (Nudge)', involves sending emails and text messages to identified taxpayers. These communications encourage them to update or revise their tax returns to correct any inaccuracies in reported income or deductions claimed.
According to the Central Board of Direct Taxes (CBDT), this drive has already prompted 3.6 million individuals to update or revise their returns in FY26. The campaign specifically urges honesty in several key areas:
- Accuracy of Deductions: Taxpayers are nudged to ensure claims for exemptions and deductions are legitimate and properly documented.
- Bogus Donations: Individuals are encouraged to come clean on donations made to unrecognized political parties, which are sometimes used to route unaccounted money.
- Foreign Income & Assets: The department is focusing on individuals who have not reported foreign income or assets, urging them to include these in their Indian tax returns.
"A key focus has been on leveraging data analytics to identify reporting gaps and encourage timely corrections," said Amit Maheshwari, managing partner at AKM Global, a tax consulting firm. "Taxpayers are being prompted through soft alerts to voluntarily reconcile mismatches... rather than facing immediate scrutiny through formal notice."
The Road Ahead: Simplified Laws and a Broader Base
This compliance push aligns with the broader direction of direct taxation policy under the NDA administration. The strategy has been to lower tax rates while expanding the tax base through economic formalization. Measures like restricting large cash payments, promoting digital transactions, and expanding the Tax Deducted at Source (TDS) net have provided the department with extensive transaction data for better monitoring.
A significant change is on the horizon. A new simplified Income Tax Act is set to take effect from 1 April. This new regime is expected to feature fewer tax exemptions, simpler laws, and lower rates. The government anticipates that this combination will reduce litigation, make the system more investor-friendly, and ultimately sustain healthy revenue collection through improved compliance, not just higher rates.
For now, the department's 'Nudge' campaign represents a modern, data-driven approach to tax administration. It emphasizes voluntary compliance enabled by technology, aiming to bridge the revenue gap while preparing the ground for the upcoming simplified tax ecosystem.
