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.
What is tax evasion?
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.
- Tax planning: A legal way of reducing your tax bill by optimizing tax deductions, exemptions, planned expenses, rebates, and so on.
- Tax avoidance: Tax avoidance involves taking advantage of loopholes or gaps in the existing tax laws to reduce tax liability. It’s not illegal, but without advice and guidance from an experienced accountant, it’s easy to cross the line into evasion.
- Tax evasion: Illegal and punishable offense. Taxpayers who misreport, underreport or don’t report income are committing tax evasion, as well as taxpayers who claim higher expenses than they actually have.
Now we’ve got the basics, let’s take a quick look at the existing guidance on crypto taxes from the Income Tax Department:
- Investors must report their crypto trades in the Schedule VDA section of the Income Tax return.
- All cryptocurrency exchanges, as well as P2P traders, are required to file TDS returns for their crypto transactions.
- Currently, it is not possible to reduce your crypto tax bill in India as you may not offset crypto losses against gains from crypto.
- Evading crypto taxes is an offense and those found guilty of tax evasion may pay interest, late fees, and penalties, as well as face imprisonment depending on the severity of the offense.
- The ITD has been proactively issuing notices to Indian crypto investors who have not declared their crypto transactions in their Income Tax returns.
What happens if I don’t report crypto on my taxes?
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.
What is the penalty for tax evasion in India?
The penalties for crypto tax evasion in India depend on the tax avoided and the severity of the offense, but as a brief overview:
- The penalty for under-reporting or misreporting income in India ranges between a fine of 50% to 200% of the tax due, as well as a potential prison sentence of up to 7 years.
- Filing an Income Tax return late will result in an interest charge of 1% per month, late fees ranging from RS1,000 to RS5,000, and a potential prison sentence of up to 7 years.
- Failure to deduct TDS, or to deposit TDS with the government following deduction, will result in both interest charges and late fees.
- Failure to file a TDS return will result in a late fee of RS200 per day.
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:
- Failure to file an Income Tax return (ITR)
- Under-reporting or misreporting of income in an ITR
- Investments not disclosed in books of accounts
Failure to file an Income Tax return
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 or misreporting income in an ITR
Underreporting and misreporting have very different penalties, so it's important to understand the differences. As per the Income Tax Act, misreporting means:
- misrepresentation or suppression of facts
- failure to record investments in the books of account
- a claim of expenditure not substantiated by any evidence
- recording of any false entry in the books of account
- failure to record any receipt in books of account having a bearing on total income
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.
Investments not disclosed in books of accounts
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%.
What happens if I don’t pay TDS on crypto?
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:
- If any crypto transfer takes place on an Indian crypto exchange, you don’t need to deduct TDS or file a TDS return when you buy crypto as all deductions and reporting requirements are met by the exchange on your behalf. It is only when you’re using international exchanges or conducting P2P trades that you’ll need to follow TDS reporting requirements.
- As per section 194S, TDS must be deducted by the buyer at a rate of 1% of the transaction value before making the payment to the seller. Then this amount of TDS must be deposited with the government in form 26QE (if the buyer is a specified person), or else in form 26Q.
- If the buyer is required to file form 26Q, then it is mandatory to obtain a TAN (tax deduction and collection account number) and deposit the TDS due by the 7th of the following month, and file a TDS return quarterly.
- If the buyer is a specified person, they do not need to obtain a TAN. They can directly file form 26QE with PAN and deposit the TDS while filing this form.
There are a few different penalties you can face for failing to follow TDS reporting requirements, including:
- Failure to obtain a TAN
- Failure to deduct TDS
- Failure to deposit TDS
- Failure to file a TDS return
Failure to obtain TAN
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
Failure to deduct TDS
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.
Failure to deposit 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.
Failure to file a TDS return
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.
How does the Income Tax Department know if I have crypto?
- The ITD has been collecting data from Indian exchanges, even before the introduction of TDS in the 2022 budget.
- TDS helps the ITD track your crypto investments at the point of purchase. It applies to all crypto transactions - whether that’s NFTs, stablecoins, or tokens. The reporting requirements for TDS ensure the ITD not only has transaction data from Indian exchanges but also from P2P transactions and transactions on international exchanges.
- Many investors have already received notices for failing to report crypto income or avoiding tax on crypto income for the 2018-19 and 2019-20 financial years.
What happens if I previously avoided crypto taxes?
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.
Use Koinly to help you calculate your crypto taxes
Koinly is a free crypto tax calculator in India that 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.
More questions about tax evasion in India? We have you covered.
How do I report tax evasion in India?
You can report suspected tax evasion by going to the Income Tax Department website and then finding the option to submit a tax evasion petition. You can then fill out a complaint with the relevant details and submit it to the ITD.
Is tax evasion legal in India?
No. Tax evasion is illegal in India with penalties of up to 7 years in prison.
What happens if I don’t pay tax in India?
Once the Income Tax Department catches up with you, you'll face an investigation and subsequent penalties, fines, and even imprisonment.
Which people do not pay tax in India?
You'll only pay tax in India if you make income over the taxable threshold (currently RS250,000). While this threshold is very low, there are many low-income earners who will make less than this amount annually. As well as this there are certain kinds of income you won’t pay tax on or you’ll pay reduced tax on, for example, agricultural income.
How do I avoid crypto tax in India?
You can't avoid crypto tax in India - or not without facing significant penalties. Whether you're thinking of avoiding tax on your gains, or TDS, the ITD will catch up with you. The agency has a data sharing program with Indian exchanges to share customer data and ensure guidance is followed and any tax due is paid.
What happens if you don’t pay tax for 3 years in India?
If you fail to report income, or indeed misreport income, you’ll be issued with a notice for income escaping assessment. Once the notice is issued, the ITD will reassess your income. If you're found to have failed to pay tax on income, you may face penalties, fines, and even imprisonment.
How many years can you file back taxes in India?
You can file late returns for the previous two years (preceding the current financial year). For example, if you wanted to file an ITR for the FY2020-21 then you must do so by the end of the FY2022-23.
Does everyone have to file a tax return in India?
You must file an Income Tax Return if your gross total income exceeds the basic exemption limit (RS2.5 lakh for the new, concessional income tax regime for FY2022-2023). Under the old tax regime, senior citizens have higher exemption limits.
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