IT Notice - 10AA and 115BAC

• Leave encashment exemption is legally valid and defensible

• New tax regime applies automatically due to late filing

• Demand (if any) will adjust against refund

• Rectification is your backup remedy

• This notice is procedural, not punitive

I replied them the very next day, it's been more than 1.5 months since my reply, I haven't heard back anything, processing is still pending. Can I proactively do something or should wait?

Getting a notice combining 10AA and 115BAC usually means the department flagged a conflict: Section 10AA export deductions are specifically not available under the new tax regime (115BAC), so any return that claimed 10AA while opting 115BAC will attract a disallowance notice.

The reply needs to clarify whether you actually opted for the old regime (and the 115BAC flag is a mis-read) or filed under the new regime and incorrectly claimed 10AA. For a breakdown of regime selection rules and which deductions survive under each, this [ITR-2 AY 2026-27 guide](https://taxgarden.in/blog/itr-2-ay-2026-27-who-can-file-changes-deadline) covers the key points.

What has happened:

• For AY 2025-26, the old regime could be chosen only in a return filed under Sec 139(1) (by the due date). Since the return was filed late, the new regime applies by default (Sec 115BAC(1A)/(6)). Exemptions like HRA (10(13A)), LTA (10(5)) and special allowances under 10(14) are therefore disallowed.

• Note: "10AA" in the notice is likely a typo or system code for leave encashment, Sec 10(10AA). Leave encashment exemption on retirement or resignation is allowed even under the new regime (not in the Sec 115BAC(2) list of excluded exemptions). If it was disallowed, that part is wrong. Respond with the employer's certificate and Form 16 bifurcation.

• Allowed in the new regime: standard deduction Rs 75,000, 10(10AA) leave encashment, 10(10) gratuity, 10(10C) VRS, 80CCD(2) employer NPS, transport allowance for specially-abled employees.

• Not allowed: HRA, LTA, 80C/80D etc.

• Pending processing: if there's no response for long, raise a grievance on e-Nivaran. If an intimation issues with a wrong disallowance, file a rectification under Sec 154, or appeal to CIT(A) within 30 days.

First distinguish whether this is a proposed adjustment or a final intimation. If it is a notice under section 143(1)(a), respond through the e-filing portal by the stated deadline, selecting “Disagree” for the proposed salary adjustment and explaining the Form 16 reconciliation. If the leave encashment is exempt under section 10(10AA), identify the amount, show where it appears in Form 16 and your ITR, and clarify that it was omitted from the salary-exemption schedule in error. Attach Form 16 and the relevant computation/payment details if the response facility permits. The reference to section 10AA in your return may mean the exemption was reported under the wrong provision; section 10AA concerns SEZ profits, not leave encashment. Confirm the exact return schedules and notice wording before replying.

• For AY 2025–26, a belated return generally cannot opt out of the default new regime under section 115BAC(6). Form 10-IEA is relevant to opting out, not opting into the new regime. If you have no business or professional income, the new regime applies by default; filing Form 10-IEA does not itself switch you to it. Your employment status does not change this. The notice’s statement appears to mean that old-regime-only exemptions/deductions were not allowed because a valid opt-out was unavailable.
• If the notice is a proposed adjustment, respond first; it is not itself a demand. The processing outcome may accept your explanation, make the adjustment, or raise a demand/refund reduction. A refund may be adjusted against an outstanding demand after the prescribed process, but do not assume a proposed demand has already been adjusted.
• A revised return is for correcting an original return within the statutory time limit; for AY 2025–26 that deadline has generally passed. Rectification under section 154 is for a mistake apparent from the record in an order/intimation already issued, not a substitute for a revised return or a way to contest a debatable issue. If a final intimation disallows the exemption, consider rectification only if the record clearly establishes the mistake; otherwise the appropriate challenge route may differ. Check the notice type, response deadline and CPC computation before choosing.

Reconciling Form 16 with the salary and exemption schedules is central to resolving this adjustment and protecting the refund. Manual return reviews can be difficult, and automation reduces repetitive checking while professional judgment remains in control. At Jir AI we provide 2,000+ AI agents and 650+ integrations to streamline your practice’s day-to-day workload. For help streamlining tax workflows, connect with us on WhatsApp: https://wa.me/message/3HVOZ7HIY4ESC1