Where a tax NUDGE becomes an unintended and intrusive push
India’s trust-based tax compliance push risks backfiring as automated NUDGE alerts rely too heavily on third-party data, flagging compliant taxpayers and creating anxiety ahead of the revised return deadline.
India’s tax administration is gradually moving away from an enforcement-heavy approach towards one that encourages voluntary compliance. A key step in this transition is the Central Board of Direct Taxes’ (CBDT) NUDGE initiative—short for Non-intrusive Usage of Data to Guide and Enable taxpayers.
Rolled out in phases from 27 November, NUDGE-1 focused on disclosures of foreign assets and income, while NUDGE-2 expanded the scope to domestic income.
Using data analytics, the system sends alerts asking taxpayers to review possible mismatches in their income tax returns (ITRs), reflecting the philosophy of “trust first, scrutinize later".
As the 31 December deadline for filing revised returns approaches, many taxpayers are receiving automated emails and messages advising them to recheck their returns. These communications often state—using standardized language—that transaction data available with the tax department is accurate in most cases and that the return should therefore be revised. This assumption, however, is flawed.
The problem is not one of intent or aggressive enforcement. It lies in how technology is interpreting the vast volumes of data flowing into the system. A subtle but serious presumption appears to be built into the process: that information reported through various compliance channels—financial institutions, government departments and private entities—is sufficient, by itself, to determine the correct tax treatment of a transaction.
Data blind spots
This issue is most visible in the way automated systems interpret tax deducted at source (TDS) and other third-party reported data. Consider transactions involving unlisted shares. Buyers of unlisted shares, following CBDT guidance, deduct tax at source on purchases above ₹50 lakh under section 194Q of the Income Tax Act. This information flows into the seller’s Annual Information Statement (AIS).
Automated systems often interpret this to mean that the receipt must be business income. As a result, salaried individuals and long-term investors—many with no business activity—receive NUDGE alerts suggesting they used the wrong ITR form or understated business income. In most cases, the income has been correctly declared as capital gains.
Data reported by a payer or reporting entity cannot, by itself, determine the nature of income or whether a taxpayer has disclosed it correctly. When this happens, the system moves from flagging potential risk to drawing incorrect conclusions about income understatement—something it was never designed to do.
Mismatch overload
More broadly, nudges are now being issued for perceived mismatches between return disclosures and third-party information across a wide range of transactions. These include foreign remittances captured through tax collected at source (TCS), property purchases reflected through TDS and AIS, securities and mutual fund trades, acquisition of foreign assets, renewal of large bank deposits, foreign travel, and high-value credit card spending.
In many cases, the same transaction appears multiple times in the AIS, inflating reported values and making accurate return disclosures appear inadequate.
AIS data is effectively being used to judge the nature of income in advance, and nudges proceed on the assumption that something is wrong. Compliant taxpayers are left explaining correct filings. Salaried individuals face anxiety and fear of scrutiny, while professionals spend time defending against system-generated assumptions instead of focusing on genuine compliance risks.
The burden of clarifying AIS inaccuracies rests entirely on the taxpayer, with little clarity on whether these explanations influence automated risk assessments. This raises the possibility of repeated alerts or unnecessary scrutiny without a clear resolution mechanism.
Another issue is emerging with foreign remittances. Transactions under the Liberalised Remittance Scheme (LRS), even when funded from fully disclosed and legitimate sources, are increasingly flagged as suspicious. Automated systems tend to focus narrowly on reported income rather than on the source of funds, generating alerts where no real risk exists.
Need recalibration
This was never the purpose of NUDGE. A trust-based compliance system cannot function if technology treats reported data as self-certifying evidence of error. Algorithms should assist human judgment, not replace it.
What is needed now is recalibration—human review where automated alerts flag potential issues, and recognition that third-party reporting should support, not define, a taxpayer’s compliance position.
By combining data analytics with meaningful oversight, the NUDGE system can help taxpayers stay compliant without creating unnecessary stress or defensive work. Done right, it can reinforce trust between taxpayers and the administration, ensuring that alerts guide action rather than penalise those who have already reported accurately.
Mayank Mohanka is founder of TaxAaram India and a partner at S.M. Mohanka & Associates. Views are personal.
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