Received an Income Tax Notice? A Practical Guide for Doctors and Hospitals
The email arrives on an ordinary Tuesday. It is from the income tax department, it names a year you had half forgotten, and for a few minutes it feels as though something has gone badly wrong.
You run a hospital. The tax law changes every year, and GST sits on top of it. Nobody has time for both.
In short
- Some communications arise from routine mismatches, while others commence scrutiny, reassessment or other proceedings. The section, assessment year and contents of the communication should therefore be checked before replying.
- Check the compliance date stated in the notice immediately. Do not assume that the time begins only when someone in the hospital happens to open the email.
- Old and new section numbers are both in use, because earlier years are still dealt with under the old law. A plain translation of the common ones is at the end of this note.
- A reassessment notice under section 148 is the one to take to a professional before you reply.
Why notices are missed
The notice does not come to your door. It goes to the income tax portal, which you last opened when you filed, and to an email address nobody checks often. It sits there unread while the time to reply runs. A defective return notice gives fifteen days from receipt, or such period as specified in the notice. By the time someone opens it, eight are left, and sometimes there are none left at all. The case itself was never the problem. The problem was that nobody was watching for the notice.
Why a notice comes
Usually, nothing has gone seriously wrong at all. Count your sources of income over a year. The hospital earns from outpatients, the theatre, the laboratory, the scan centre, the pharmacy and the ambulance. You also earn personally: rent, dividends, bank interest, and gains when you sell shares or mutual funds.
Many of these transactions are already reported to the department by banks, brokers, registrars, employers and buyers of property. Your return is compared with that information, and any line that does not agree is picked up. So a notice usually means something did not match: an amount that was missed, or one that belongs to the hospital but appears against your personal PAN. Many such notices close with a proper reconciliation.
Why your GST and income tax figures differ
Your two sets of figures will not agree, and they are not meant to. Your financial statements and income-tax return disclose professional receipts and income according to the applicable accounting and return requirements. Your GST returns must also disclose exempt healthcare receipts, but differences in figures can still arise because the three records classify and report transactions differently. Such differences should be reconciled before they attract a query.
What draws GST, and what does not
| Head of hospital income | GST treatment |
|---|---|
| Consultation, diagnosis, treatment and related clinical services | Ordinarily exempt when supplied as qualifying healthcare services |
| Room rent, ICU or critical care, any amount | Exempt |
| Room rent, non-ICU, up to ₹5,000 a day | Exempt |
| Room rent, non-ICU, above ₹5,000 a day | 5% on the whole room charge, no input credit |
| Medicines supplied as part of inpatient treatment | Ordinarily part of exempt composite healthcare service |
| Medicines sold separately to outpatients or walk-in customers | Taxable at the applicable rate |
Room rent is the exception people miss. A non-ICU room charged above ₹5,000 a day carries GST at 5% on the whole of the room charge, with no input credit, while ICU stays exempt whatever the charge. That boundary has to sit inside the billing software. Where it does not, a year of room charges lands on the wrong side of the return, and the reconciliation has to be built backwards from the bills.
Nothing has been under-reported. The difference still has to be explained, stream by stream. Left unexplained, it can be treated as unreported income.
What a missed amount costs
Most of these are settled without much difficulty, and it is the few that are not which make the rest worth taking seriously. If an amount is added to your income, three things follow: the tax on it, interest from the original due date, and a penalty. The penalty depends on the facts and on how the officer labels them. Broadly it can be 50% of the tax payable on under-reported income, and 200% of the tax payable where the income is treated as misreported. Penalty is not automatic: the explanation, supporting records and disclosure of material facts remain important.
So an amount missed by mistake does not cost only the tax on it. It costs the tax, the interest and the penalty, and an outstanding demand may also affect the processing or release of a refund, subject to the applicable statutory procedure.
None of this is automatic. A genuine mistake, with the facts already on record, need not carry a penalty at all. Immunity from penalty can be applied for after the order, subject to conditions. Ask before you pay a penalty demand.
If you find the mistake yourself
You need not wait for a notice. If you find an error in a return already filed, there are three ways to put it right, depending on the year and the time that has passed.
- A revised return. Where the time limit for that year has not passed, the return is simply filed again with the correction.
- An updated return, ITR-U. Where the time to revise has gone, income left out can still be declared with additional tax on top, up to 48 months from the end of the relevant assessment year. It cannot be used to reduce your tax or to claim a refund. ITR-U is restricted in cases involving search, requisition or survey. The restriction depends upon the relevant assessment year and the applicable statutory conditions. A reopening no longer shuts it out, though the price changes, and that is dealt with below.
- A rectification petition. Where the error is in the department's own working, such as a TDS credit not allowed in an intimation, you apply for the correction. Nothing is refiled.
Choosing the wrong one can close off the right one. Please take advice before filing.
Before you reply to anything, or before seeking professional advice, have these to hand. It shortens the first conversation by days.
- The notice itself, and the acknowledgement or DIN if you have already logged in to view it
- Your filed return and computation for the year named in the notice
- Form 26AS and the Annual Information Statement (AIS) for that year
- Bank statements covering the entries the notice questions
- The hospital's books, or at minimum the receipts and ledger for the head of income in dispute
- GST returns for the same period, if the notice touches turnover
Prevention begins before filing
Nearly all of this can be avoided. It takes work done before the notice arrives.
- Before a transaction. Ask before you sell shares or buy property, so the tax position is settled in advance.
- Before filing. Put all the income together, the hospital's and your own, and compare it with the department's records. A difference you find yourself in June is a correction; the same difference found by the department eight months later is a notice.
- At advance tax time. Your income is uneven. A large gain in one quarter changes the instalment due, and if it is missed, interest starts to run.
- After filing. Someone should check the portal, read the intimation when it comes, and act while there is still time to reply.
Keep records as you go
Keep records as the work happens, not afterwards. The outpatient register written up on the day. The receipt issued when the money is received. When you file papers with the department, file them under a covering letter listing what is given, and keep the acknowledgement. We have seen good cases become difficult at appeal, not because the facts were doubted, but because nothing showed what had been filed and when.
A common example
A doctor sells shares, receives rent and dividends, and buys a second property in the same year. Months later a notice arrives listing all of it, reading like an allegation of undisclosed wealth. In fact everything had been declared, and one set of cash deposits belonged to the hospital and had been shown there. The reply took an afternoon, because the records were in place and the notice was seen within two days.
Questions doctors actually ask us
| What you ask | What it turns on |
|---|---|
| "Do I have to reply, or can I just pay whatever it says?" | Whether the demand is even correct. Paying an intimation without checking it can mean paying tax you do not owe, since automated adjustments are sometimes wrong. |
| "The notice is in my name, but the money is the hospital's. Whose problem is it?" | Whether the receipt has already been shown in the hospital's books. If it has, the reply is a reconciliation, not a dispute about the money itself. |
| "Can this wait until after my OPD hours next week?" | Check the compliance date in the notice, not your calendar. Time does not wait for OPD hours. |
| "If I ignore it, does it go away?" | No. An unanswered notice usually escalates, whether to a best judgment assessment, a defective return being treated as never filed, or a larger reassessment. |
The notice to take seriously
Most notices, attended to early, can be managed without difficulty. Reassessment is not. The department reopens an earlier year on the view that income has escaped assessment, and the first reply decides much of what follows. The first response is important. Questions of limitation, approval, jurisdiction and the correctness of the information relied upon should be examined at the earliest stage. A ground omitted initially may become more difficult to pursue later.
There is now a second choice at that stage. In some cases, an updated return may be available even after a reassessment notice. But filing it involves additional tax and may affect the strategy for challenging the reopening. Do not file it without first examining the notice.
So it is a settlement, and an expensive one. Where the reopening itself looks vulnerable, on limitation or on the approval behind it, paying the levy can be the worse of the two roads. That call has to be taken on the facts and taken early, because the window is the one the notice gives you. If you receive such a notice, speak to us before you reply.
Where we can help
You will remain busy, and your time is better spent on your practice. You could deal with all of this yourselves. The point is that you should not have to, and doing it in a hurry costs far more than having it done properly.
We look at a transaction before it is made. We reconcile the return before it is filed. We work out the advance tax so that it is paid when due. We watch the portal so that a notice is seen while there is still time to answer it.
You treat patients before a problem becomes an emergency, and tax is no different. A notice is easier to prevent than to defend.
A notice with a deadline still running can be sent to us as it stands, before you reply to it yourself.
Questions we are asked
I have received an income tax notice. What is it, and what should I do first?
Do not rush a reply, and do not ignore it. Read which year it is about and the date it wants an answer by, then get it in front of someone who can tell you what it is while there is still time. Most notices are routine once read properly.
What does an intimation under section 143(1) mean?
It is the automated result after your return is processed, showing a refund, a small demand, or nothing. If it shows a demand, check that it is correct before you pay it or dispute it.
How do I respond to a defective return notice under section 139(9)?
Read the defect carefully. You may correct it and refile, explain why the return is not defective, or seek additional time where necessary. The period is fifteen days from receipt or such time as specified in the notice. If no valid response is filed within the permitted time, the return may be treated as invalid.
Why did I get a notice for a mismatch with my AIS?
Your return and the data reported against your name do not line up. Trace each entry to its source and reconcile it. Many such notices close on a proper reconciliation.
Do we pay GST on hospital income, and why are our GST and income tax turnovers so different?
Consultation, diagnosis, treatment and related clinical services are ordinarily exempt when supplied as qualifying healthcare services. Medicines supplied as part of inpatient treatment are ordinarily part of the exempt composite service. Medicines sold separately to outpatients are taxable. Room rent is the exception people miss: a non-ICU room charged above ₹5,000 a day attracts GST at 5% on the whole room charge, with no input credit, while ICU stays exempt. Such differences should be reconciled before they attract a query.
What is the penalty for under-reporting or misreporting income?
The penalty can broadly be 50% of the tax payable on under-reported income and 200% of the tax payable where the income is treated as misreported. Penalty is not automatic: a genuine error with material facts disclosed need not attract it. Immunity from penalty can also be applied for after the order, and from 1 April 2026 that route is open even where the case has been treated as misreporting, on payment of an additional amount of tax in place of the penalty.
I have realised I missed some income. Can I correct it myself?
Often yes. Depending on the year and the time left, you may be able to file a revised return, or an updated return (ITR-U) declaring the income with additional tax, which stays open for 48 months from the end of the relevant assessment year, or a rectification petition where the error is in the department's own working. Each has its own time limit and its own consequences, so please take advice before filing.
Can I file an updated return (ITR-U) after receiving a reassessment notice under section 148?
Yes. A reopening notice used to close this route completely, and the Finance Act, 2026 changed that with effect from 1 March 2026. An updated return can be filed in answer to such a notice, within the time the notice allows, at a further 10% of the aggregate of tax and interest on top of the usual additional tax on an updated return, and the income it covers is kept out of the penalty computation. It does not stop the assessment, which the Assessing Officer can still complete. Where the reopening itself looks vulnerable on limitation or approval, paying the levy can be the worse of the two roads, so please take advice before choosing it.
Does an income tax notice to our partnership firm affect us personally?
A firm and its partners are separately assessed, but a notice to the firm should not be assumed to have no consequence for the partners. The nature of the receipt, the accounting treatment and the statutory liability must be examined. A question can land on the firm or on either of you, and each is answered on its own.
An income-tax notice need not become a crisis. What matters is identifying the proceeding, preserving the deadline and replying with the right records. If you have received a notice, send the complete notice to TaxSmriti before responding or making payment. We will first tell you what it means, what documents are required and what should be done next.
Sources relied on
- Income-tax Act, 2025 as amended by the Finance Act, 2026, full text, covering Section 263 (return of income, including belated, revised, updated and defective returns), Section 267 (tax on updated return), Section 268 (inquiry before assessment), Section 270 (processing of return and assessment), Section 287 (rectification of mistake) and Sections 439 and 440 (penalty for under-reporting and misreporting, and immunity from penalty), incometaxindia.gov.in
- Income-tax Act, 2025, section-wise text and amendments, incometaxindia.gov.in
- Reassessment, Sections 279 to 281, income escaping assessment, notice and the show-cause step, incometax.gov.in
- Transition, Section 536(2)(c), earlier years continue under the 1961 Act, and a defective return for those years is cured under Section 139(9), incometax.gov.in
- Penalties, immunity under Section 270AA with Form 68 and the exclusion from penalty of income declared in an updated return filed in pursuance of a notice under Section 148, both effective 1 March 2026, incometaxindia.gov.in
- Finance Act 2026, insertion of section 140B(3A) requiring a further 10% of the aggregate of tax and interest where an updated return follows a section 148 notice, Gazette of India, 30 March 2026, egazette.gov.in
- Notification No. 04/2022-Central Tax (Rate) dated 13 July 2022, amending Notification No. 12/2017-Central Tax (Rate), health care services and room rent, cbic-gst.gov.in
This note sets out the general position in law as at 13 August 2026 and is written for information only. It is not advice on any particular matter, and it should not be acted on without professional advice on the specific facts. Provisions, rates and time limits change, and the position on your own facts may differ.
