Why and when income tax officers may ask for your grocery, restaurant bills; experts explain

The middle class has been facing challenges with income tax, which was a hot topic of discussion before the Union Budget 2025. However, a recent social media post has raised concerns regarding a notice from the Income Tax Department, causing many to question the government's tactics. The notice in question seems to request extensive details about a taxpayer's personal expenditures, leading to frustration among the public.

Numerous news reports have indicated that the Income Tax Department is seeking a breakdown of monthly ration expenses from taxpayers, including the quantity and price of each item. Additionally, the notice surprisingly includes a request for information on seemingly trivial expenses such as the cost of haircuts.

Can the Income Tax Department seek such information?

According to tax experts, income tax officials may conduct an examination of an individual's declared expenses in comparison to their bank records, which include card transactions and cash withdrawals. This is done to verify adherence to tax regulations and uncover any undisclosed income. This investigation entails a comparison of spending habits with documented financial transactions. 

"The Income Tax Department's recent scrutiny of high-income individuals with minimal bank withdrawals signals a tightening grip on unreported cash transactions. Notices are being issued, demanding a detailed breakdown of monthly expenses - including groceries, dining, clothing, and education. For instance, if a taxpayer declares Rs 50 lakh in income but withdraws only Rs 10,000 monthly, it raises concerns about undeclared income. With AI-driven analysis and digital payment tracking, discrepancies between declared income and actual spending are more visible than ever. This shift underscores the need for accurate financial disclosures to avoid unwanted scrutiny," said Niyati Shah, Vertical Head – Personal Tax at 1 Finance.

Individuals may be required to provide a detailed breakdown of their expenses if their spending appears to exceed what can be explained by their records. This request is made to confirm the source of funds and to check for any unreported income, especially in the form of cash. Discrepancies between stated expenses and financial transactions that can be traced may raise concerns about undisclosed cash income that should have been reported for tax purposes.

While the Income Tax Department may ask for information on significant expenditures like medical bills, travel abroad, living costs (dining, entertainment), household expenses (groceries, utilities, salaries), and investments (real estate, stocks, jewellery), some experts argue that delving into too much detail may be seen as an unjustified intrusion.

Section 142 (1) of the Income Tax Act

During scrutiny, the evaluating officer, under section 142 (1) of the Income Tax Act, requested a breakdown of the quantity and cost of various household expenses such as groceries, utilities, clothing, personal care items, entertainment, education, transportation, insurance, housing, and miscellaneous expenditures.

"If expenses appear significantly higher than what can be accounted for by these records, individuals may be required to provide detailed expense breakdowns. This request aims to verify the source of funds and determine if any income, particularly cash, has been earned without proper tax reporting. Discrepancies between reported spending and traceable financial activity can trigger inquiries, as they may indicate undisclosed cash income subject to taxation," Ritika Nayyar, Partner, Singhania & Co., told Business Standard.

Based on government data, just 1% of all filed returns undergo extensive review. Out of the 72.8 million individuals who filed income tax returns for the fiscal year ending March 2024, a comprehensive notice requesting a detailed breakdown of spending may be issued if the tax officer suspects discrepancies between the reported income and the taxpayer's lifestyle.

"The tax department is concerned about wealthy individuals showing a high standard of living despite minimal documented withdrawals. Instances have come to notice in random scrutiny cases wherein documented withdrawals are insufficient to cover essential living costs. This raises suspicion of unaccounted income. By asking for these details, Assessing Officers try to detect undeposited and unaccounted cash or transaction,” a government official told CNBC TV18.