Artificial Intelligence (AI) is revolutionizing tax compliance in India. Over the last four years, the Income Tax Department has leveraged a suite of AI tools to nudge more than one crore taxpayers to voluntarily update their returns, resulting in Rs 11,000 crore in additional tax collections. This data-driven approach has also helped identify Rs 29,000 crore worth of previously undisclosed foreign assets and Rs 1,000 crore in foreign income from virtual digital assets (VDAs) during FY 2024-25, according to CBDT Chairman Ravi Agarwal.
Speaking in an interview, Mr. Agarwal outlined how the department has adopted a sophisticated AI framework to enhance tax compliance, detect under-reporting, and minimize evasion. "The AI analysis comprises two parts-the tool itself and the database being analyzed," he said. Vendors were brought in to provide specialized AI solutions tailored to various platforms, including the Centralized Processing Centre in Bengaluru.
AI Identifies Non-Filers and Defaulters
Of India's 40 crore unique taxpayers identified through Annual Information Statements (AIS), only about 9 crore file returns. The AI tools are used to scan the remaining 31 crore records to determine who ought to be filing returns.
In addition, AI reviews the accuracy of returns already filed by cross-checking them against past patterns and known income data. It also flags habitual defaulters, enabling the department to take targeted action.
'NUDGE' Campaign Yields Voluntary Compliance
A crucial part of this strategy is the NUDGE (Non-Intrusive Usage of Data to Guide and Enable) system. This mechanism sends non-threatening emails or SMSs to taxpayers whose filings appear suspicious or incomplete. Taxpayers are encouraged to voluntarily update or revise their returns-or confirm their correctness.
Between 2021-22 and 2024-25, the NUDGE initiative led to over 1 crore updated returns being filed. This resulted in an additional Rs 11,000 crore in revenue for the exchequer.
Recognizing the success of the strategy, the government extended the window to update tax returns from two years to four years, ensuring taxpayers have adequate statutory time to correct errors once flagged.
Foreign Assets and Crypto Income Under Scrutiny
The use of AI also revealed undisclosed foreign holdings worth Rs 29,000 crore and foreign income of Rs 1,000 crore from cryptocurrencies and VDAs in FY 2024-25 alone. These discoveries were made through updated return filings prompted by AI alerts and digital payment trails.
Political Donation Deductions Under the Scanner
Earlier this year, from January to March 2025, the Income Tax Department deployed a targeted NUDGE campaign focused on political donations claimed under Section 80GGC of the Income Tax Act. Taxpayers were asked to re-examine their deduction claims, especially if they did not match the contribution reports submitted by political parties to the Election Commission.
The result: out of 6.25 lakh nudged taxpayers, 35,260 amended their returns, leading to Rs 404.2 crore in additional tax revenue.
Data-Driven Future for Tax Enforcement
Mr. Agarwal emphasized that AI has enabled the tax department to shift from intrusive assessments to a more analytics-driven, taxpayer-friendly approach. "This is not about harassment," he said. "It's about intelligent compliance and giving people a chance to correct their filings."
With the tax base expanding and technology evolving, the Income Tax Department's use of AI appears set to become a cornerstone of its compliance and enforcement strategy going forward.
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