The Income Tax Department’s latest changes in the 2023 Budget bring severe penalties for Indian investors who don't collect or pay TDS on their crypto, and that's not the only penalty you might pay if you avoid the 30% tax on crypto. 🚨👮
Thinking of avoiding crypto tax? Think again. Your crypto is taxed (you can learn more about how in our India crypto tax guide) and failing to pay tax on it is tax evasion. Learn more in our crypto tax evasion guide and about the penalties you might face.
There’s a thin line between strategically planning in order to pay the lowest amount of tax and tax evasion, so let’s break it down.
Now we’ve got the basics, let’s take a quick look at the existing guidance on crypto taxes from the Income Tax Department:
If you fail to report crypto income in your Income Tax return, then the ITD may issue a notice under section 148/148A of the Income Tax Act.
Known as a ‘notice for income escaping assessment’, this notice will be issued whenever an Income Tax Officer (ITO) has reason to believe a taxpayer has not disclosed their income correctly and therefore has not paid their full tax liability.
There are two steps to this process, Before issuing a notice under section 148, the ITO will contact the taxpayer with a 148A notice. This initial contact gives the taxpayer an opportunity to explain or argue why a section 148 notice should not be issued.
If an ITO believes you’ve failed to report crypto or any other income, they have up to 3 years from the end of the relevant assessment year to issue a 148 notice, or up to 10 years from the end of the relevant assessment year if more than RS50 lakhs has escaped assessment.
Once a notice has been issued, the ITO will reassess your income under section 147 of the Income Tax Act.
The penalties for crypto tax evasion in India depend on the tax avoided and the severity of the offense, but as a brief overview:
As you can see the fines, penalties, and potential prison time vary a lot depending on the offense committed and the severity, so we’ll take a look in further depth at:
If you fail to file an ITR by the tax deadline, you may be liable for late fees of up to RS5,000 - unless the income is less than RS5,00,000, in which case the late fee is capped at RS1,000.
As well as this, you’ll also be liable to pay interest under section 234B and section 234A. You’ll be charged interest from April 1st until the day you pay the tax due at a rate of 1% a month under section 234B. As well as this, under section 234A, you’ll be charged interest at 1% a month from the last due date for filing the ITR until the date you file your ITR.
If you still fail or refuse to file your ITR, the penalty is a fine and potential imprisonment. If the tax evaded is more than RS25 lakhs, the potential prison sentence is anywhere from 6 months to 7 years, alongside a fine. If the tax evaded is less than RS25 lakhs, the potential prison sentence is anywhere from 3 months to 2 years, alongside a fine.
Rohan had crypto income of RS1,000,000 and failed to file his ITR for FY 2021-22 by the due date of July 31, 2022.
Rohan will need to pay a late fee of RS5,000 and interest at 1% per month on the tax amount until the tax is paid.
Underreporting and misreporting have very different penalties, so it's important to understand the differences. As per the Income Tax Act, misreporting means:
If you underreport your income in your ITR, the penalty is 50% of the tax due on the underreported income.
Meanwhile, if you misreport your income in your ITR, the penalty is 200% of the tax due on the misreported income.
If a taxpayer wilfully attempts to evade tax, they may be imprisoned for a period between 6 months to 7 years, plus the fine, if the tax evaded is more than RS25 lakhs. If the tax evaded is less than RS25 lakhs, the potential prison term is 3 months to 2 years, plus the fine.
Ishaan had crypto income of RS1,000,000 and did not disclose this in his ITR for FY 2021-22 by the due date of July 31, 2022.
In addition to the tax due, Ishaan will be liable to pay a penalty of 50% of the tax avoided. So his tax due would be approximately RS117,000, meaning his penalty would be approximately RS58,500. Ishaan may also be prosecuted and imprisoned for a period of 3 months to 2 years.
If a taxpayer has made investments in crypto and such investments are not recorded in their accounting records, or the amount spent to acquire the assets is more than the amount available that is recorded in their accounting records - and the taxpayer is unable to provide any explanation for the source of the excess income - then this excess amount will be deemed as income and taxed as such.
The amount due will be taxed at a rate of 60%, plus a surcharge of 25% and a cess of 4% - which translates to an effective tax rate of 78%!
In addition to this, a penalty of 10% of the amount due may also be levied.
Hassan had BTC worth RS1,000,000. He could not explain where he’d sourced the money for this investment to the ITD.
Hassan will be liable to pay tax on the entire value of the asset held, so RS1,000,000 at an effective tax rate of 78% along with a potential penalty of 10%.
TDS is a headache - but the penalties for failing to deduct or deposit TDS are worse. Let’s take a quick glance at the TDS reporting requirements first:
There are a few different penalties you can face for failing to follow TDS reporting requirements, including:
If a taxpayer is required to obtain a TAN, but fails to do so, they may be liable to pay a penalty of up to RS10,000
If the buyer fails to deduct TDS when required to, they may be liable to pay interest at a rate of 1% per month from the date the TDS was required to be deducted until the date it is deducted.
As well as this, the buyer may also be liable for a penalty equal to the amount which was not deducted as TDS.
Taxpayers must deposit any TDS with the government. If a buyer fails to deposit TDS with the government, they’ll pay interest at a rate of 1.5% from the date the TDS was deducted until the date it is deposited with the government.
As well as this, they may also face imprisonment. The prison sentence can range between 3 months to 7 years, plus a fine.
If a taxpayer fails to file a TDS return using form 26Q or form 26QE, they’ll be liable to pay a late fee of RS200 per day. However, it is important to note that the maximum late fee that can be levied is restricted to the amount of TDS due. In simple words, the maximum late fee cannot exceed the amount of TDS due.
The taxpayer may also be liable for a penalty ranging from RS10,000 to RS100,000 if a TDS return is filed late or not filed at all.
If you failed to report your crypto on a previous Income Tax return, there are a couple of potential steps you can take, but you might still pay penalties.
You should file an updated return under section 139(8A) in Form ITR-U along with the relevant ITR form. It’s important to note, you can only file an updated return in ITR-U if you have taxable crypto gains during the relevant financial year, so if you have a net loss you cannot file an updated return as these are not deductible.
However, you cannot file an updated return for a period greater than 24 months from the end of the tax year. So the last date for filing ITR-U for the tax year 2020-21(FY 2019-20) is 31 March 2023.
Just because you’ve updated your return doesn’t mean you won’t pay any penalties, but they’ll be less severe than if the ITD catches up with you.
If you file your ITR-U within 12 months from the end of the tax year, you’ll pay a penalty equal to 25% of the amount due, along with interest.
If you file your ITR after 12 months, but before 24 months from the end of the tax year, you’ll pay a penalty equal to 50% of the amount due, along with interest.
Koinly can help you calculate your gains and income from crypto to ensure you always meet your reporting requirements with the ITD. Sign up for a free account today.
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