Your client has just forwarded you a message from the Income Tax Department saying that 1% TDS was deducted on a crypto transaction, but that transaction is missing from their tax return. Naturally, they are worried and want to know whether they are in trouble. Fortunately, the answer is no. This message is not a legal notice, and it does not mean a penalty or prosecution is already underway.
Instead, it is an automatic reminder sent by the department when it notices a mismatch. In simple terms, the crypto exchange reported the transaction and the TDS deducted on it, but the same transaction was not reported in Schedule VDA of the return. As a result, the department’s system flagged the difference and generated the message.
So, the department is already aware that something does not match. However, this also means there is still time to fix the issue before any formal proceedings begin. Therefore, the most important thing right now is to understand why the mismatch happened and correct it voluntarily. This article explains the step-by-step approach that CAs can follow when dealing with this situation.
Key Takeaways
- The NUDGE SMS is not a formal income tax notice, it is a pre-enforcement compliance trigger generated by an automated TDS-to-ITR mismatch, giving clients a voluntary correction window before scrutiny begins.
- Three distinct filing errors produce this mismatch: Schedule VDA omitted entirely from the ITR, VDA income declared at the wrong tax rate, or cost indexation incorrectly applied to VDA gains under Section 115BBH.
- A revised return under Section 139(5) applies where the original return was filed and the revision deadline remains open; an updated return under Section 139(8A) applies where the deadline has passed or no return was filed.
- Filing an updated return under Section 139(8A) attracts additional tax under Section 140B, 25% of aggregate tax and interest if filed within 12 months of the AY end, 50% between 12 and 24 months, 60% between 24 and 36 months, and 70% between 36 and 48 months.
- Ignoring the NUDGE SMS escalates the matter, the ITD’s next step is a Section 133(6) notice, followed by Section 143(2) scrutiny or Section 148 reassessment, each carrying significantly higher penalty exposure than voluntary correction.
Why Does Crypto TDS Appear in Your Client’s Form 26AS But Not in Their ITR?
The mismatch almost always traces back to one of three filing errors. Understanding which error applies to the client is the starting point, because the correction route, the tax computation, and the documentation required all depend on it.
The Three Filing Errors That Can Trigger Crypto Notice For Your Client
Three specific filing errors explained below produce this mismatch. Each requires a different correction approach, which is why identifying the correct error type before filing any revised or updated return is essential.
Error 1: Schedule VDA Omitted Entirely:
The client completed a VDA trade, the exchange deducted 1% TDS under Section 194S and reported it to the ITD, but the ITR was filed without any Schedule VDA entry. The TDS credit sits in Form 26AS with no corresponding income declaration anywhere in the return. The credit exists; the income does not.
Error 2: VDA Income Reported at the Wrong Tax Rate:
The client reported the crypto profit in Schedule VDA but used a lower tax rate instead of the required 30%. Meanwhile, the exchange had already reported TDS on the full transaction value under Section 194S.
Hence, the Income Tax Department can easily compare both records. When the tax rate in the return does not match the TDS information, the mismatch becomes visible automatically and may trigger further scrutiny.
Error 3: Cost Indexation Claimed on VDA Gains:
The client reported crypto income but reduced the taxable profit by using indexation. However, Section 115BBH does not allow indexation for crypto gains. At the same time, the exchange deducted TDS on the full transaction value.
As a result, the income shown in the tax return appears lower than what the TDS records suggest. When the Income Tax Department compares both records, this difference can easily trigger a scrutiny flag.
How the ITD's Cross-Verification Engine Works?
Each of the three errors above becomes visible to the ITD through the same mechanism. Under Section 194S of the Income Tax Act, 1961, every registered crypto exchange must deduct 1% TDS on each VDA transfer and file a TDS return with the ITD.
That filing creates a record in the client’s Form 26AS. The ITD’s Project Insight analytics platform then cross-matches that record against Schedule VDA in the client’s ITR automatically, with no human intervention required. Where the TDS credit and the ITR declaration do not reconcile, the mismatch is flagged and the NUDGE communication is generated.
What is the NUDGE Notice and Why Acting on It Early Matters?
Before advising a client on a course of action, you, as their CA, must be clear on what the NUDGE communication actually is, and what formal notices could follow if your client ignores it.
NUDGE as a Compliance Trigger, Not a Legal Proceeding
![A tax notice addressed to a taxpayer from the Income Tax Department, with [redacted] PAN and name, explaining VDAs transactions and TDS details.](https://new-blog.koinx.com/wp-content/uploads/2026/06/notice-on-vda.png)
The NUDGE SMS carries no section number and creates no immediate legal obligation on your client. It is a data-driven prompt from the Central Board of Direct Taxes (CBDT), generated when its analytics identify a discrepancy between TDS records filed by exchanges and ITR declarations filed by taxpayers.
At this stage, your client has not been charged, assessed, or prosecuted. The mismatch that triggered the SMS, however, already exists in the ITD’s system and will not resolve on its own. Voluntary correction upon receipt of the message is always less costly than waiting around for a formal proceeding.
What Happens If Your Client Does Nothing?
Ignoring the NUDGE SMS will lead to the ITD following a sequential escalation path mentioned below:
- Section 133(6) Notice: The ITD may require your client to explain the discrepancy with supporting documents within a specified period. Failure to comply attracts a penalty of INR 10,000 per instance of non-compliance under Section 272A(2)(c).
- Section 142(1) Notice: The Assessing Officer may require additional information or documents for verification. Deliberate non-compliance can lead to prosecution under Section 276D, which provides for imprisonment of up to one year and imposes a monetary penalty.
- Section 143(1) Intimation: The Central Processing Centre may issue a demand for the tax shortfall directly, based on the mismatch identified, without any further opportunity for your client to explain.
- Section 143(2) Scrutiny Notice: The return may be selected for full scrutiny. This initiates a formal assessment proceeding requiring detailed documentation and representation.
- Section 148 Reassessment: If the ITD determines that income has escaped assessment, a reassessment notice may be issued, covering up to three years for standard cases, and up to ten years where escaped income exceeds INR 50 lakh.
How to Identify Which Error Applies to Your Client?
Now that you know the problem, the correction route depends entirely on which error produced the mismatch and where the client’s assessment year currently stands. Mapping the scenario explained below accurately before filing any correction is essential, as using the wrong route creates a second compliance problem.
Scenario 1: ITR Filed, Schedule VDA Missing Entirely
A common issue identified through the NUDGE campaign involves taxpayers who completed VDA transactions during the financial year and had TDS deducted under Section 194S, but failed to report the corresponding income in Schedule VDA.
As a result, the TDS credit appears in Form 26AS without any matching crypto income in the return. Depending on the filing timeline, the correction may require either a revised return under Section 139(5) or an updated return under Section 139(8A), as explained in the next section.
Scenario 2: ITR Filed, VDA Income Declared Incorrectly
Another common issue arises when you report your crypto gains in Schedule VDA but apply a tax rate below 30% or claim indexation benefits. Meanwhile, the exchange reports TDS under Section 194S on the full transaction value. As a result, the Income Tax Department compares both records and identifies a mismatch because the TDS data suggests a higher taxable amount than what you declared.
Therefore, you need to recalculate the gain under Section 115BBH, remove any indexation claimed, and pay the additional tax due. Depending on the assessment year, you can then file either a revised return under Section 139(5) or an updated return under Section 139(8A).
Scenario 3: ITR Not Filed At All
Some taxpayers carried out VDA transactions during the financial year and had TDS deducted by the exchange, with the credit appearing in Form 26AS, but never filed an ITR for the relevant assessment year. In such cases, a belated return under Section 139(4) may still be available if the statutory deadline has not expired.
However, once the belated return window closes, the taxpayer must then rely on an updated return under Section 139(8A), which can generally be filed within 48 months from the end of the relevant assessment year, as no other self-initiated correction route remains available.
Section 139(5) or Section 139(8A): Which Correction Route Applies?
Once the scenario is confirmed, as a CA, you must determine which statutory route is available, and calculate the additional tax under Section 140B where the updated return route applies.
The table below maps the two correction routes side by side for quick reference:
Section 139(5) – Revised Return | Section 139(8A) – Updated Return | |
Precondition | Original ITR must have been filed | Can be filed even if no original ITR was filed |
Deadline | At any time three months prior to the end of the relevant assessment year or before the completion of the assessment, whichever is earlier | Within 48 months of end of relevant AY |
AY 2024-25 deadline | 31st December 2024 | 31st March 2029 |
AY 2025-26 deadline | 31st December 2025 | 31st March 2030 |
AY 2026-27 deadline | 31st December 2026 | 31st March 2031 |
Additional tax | None, only correct tax plus interest under 234A/234B | Section 140B(3), 25%, 50%, 60%, or 70% of aggregate tax and interest, depending on the filing window |
Can it reduce tax liability? | No | No |
Can it result in a refund? | No | No |
Limit per AY | No restriction | One updated return per assessment year only |
Section 139(5): The Revised Return Route
A revised return can be filed when your client has already submitted an ITR but later identifies an omission or incorrect statement. This option remains available until three months before the end of the relevant assessment year or until the assessment is completed, whichever occurs first.
Since the correction is made within the permitted revision window, no additional tax is imposed under this route. However, your client must pay the applicable tax on VDA income along with 1% per month (or part thereof) under Section 234A and 1% per month (or part thereof) under Section 234B.
Section 139(8A): The Updated Return Route
Where the revised return deadline has expired, or no original return was filed, your client may use the updated return facility under Section 139(8A). This option allows taxpayers to voluntarily correct omissions and report additional income within 48 months from the end of the relevant assessment year.
However, an updated return comes with important restrictions. It cannot be used to reduce an existing tax liability, declare a loss, or increase a refund claim. Moreover, only one updated return is permitted for each assessment year, making it essential to verify that all corrections are complete before filing.
Additional Tax Under Section 140B
When filing an updated return under Section 139(8A), Section 140B requires additional tax on top of the regular tax liability and interest. The additional tax is calculated as a percentage of the aggregate of tax payable and interest under Sections 234A, 234B, and 234C, and the rate depends entirely on when the updated return is filed.
Filing window | Additional tax rate |
Within 12 months of AY end | 25% |
12 to 24 months of AY end | 50% |
24 to 36 months of AY end | 60% |
36 to 48 months of AY end | 70% |
The 60% and 70% slabs were introduced by the Finance Act 2025, which simultaneously extended the updated return window from 24 months to 48 months (effective 1st April 2025). The extended window gives traders more time to correct offshore non-disclosures, but filing later costs significantly more.
One important restriction applies specifically to individuals with crypto income: if the ITD has issued a notice under Section 148A after 36 months from the end of the relevant assessment year, the updated return route is blocked entirely. In that situation, the matter proceeds through the reassessment process, not voluntary correction.
What to Do When Neither Route is Available?
The updated return facility under Section 139(8A) is not available where assessment, reassessment, recomputation, or revision proceedings are already pending or have been completed for the relevant assessment year. The restriction also applies if your client is subject to a search under Section 132, a survey under Section 133A, or prosecution proceedings under Chapter XXII.
Once a matter reaches that stage, the focus shifts from voluntary correction to direct compliance with the ongoing proceedings. In such cases, a CA must respond to the relevant notice, such as under Section 133(6) or Section 143(2), and support the position with complete documentation. Filing an updated return is no longer a statutory remedy.
Traded All Year? Now File in Minutes.
Get ITR-ready tax reports now.
How CAs Should Verify the Mismatch Before Filing Any Correction?
Before preparing any correction return, you must independently verify the mismatch using primary source documents; do not just rely on your client’s memory or a screenshot of the NUDGE SMS. Or, filing a correction based on incomplete data will lead to a second mismatch.
Step 1: Download AIS and Form 26AS
Before preparing any correction, a CA should obtain and review both the Annual Information Statement (AIS) and Form 26AS for the relevant assessment year. These documents provide the ITD’s reported view of your client’s crypto activity and tax credits.
Key information you should verify includes:
- VDA transaction values reported by exchanges in the AIS
- Transaction dates and related reporting details
- TDS deducted on crypto transactions
- TDS credits reflected in Form 26AS and deposited with the government
Once both documents are reviewed, the figures should be reconciled against your client’s records. Any mismatch between AIS and Form 26AS must be resolved before you file a revised or updated return to avoid further discrepancies during assessment.
Step 2: Map Every TDS Credit to a Schedule VDA Entry
The next step is to match every Section 194S TDS credit appearing in Form 26AS with the corresponding Schedule VDA entry in your client’s ITR. This exercise helps identify the exact nature of the reporting gap that triggered the NUDGE communication.
Common issues include:
- A Section 194S TDS credit exists, but the corresponding VDA income is missing from Schedule VDA
- A Schedule VDA entry has been reported, but the gain calculation is incorrect
- The wrong tax treatment or tax rate has been applied to the transaction
Each TDS credit should be mapped and verified individually before filing a correction return. Addressing only part of the mismatch may result in additional discrepancy flags for the same assessment year.
Step 3: Compute the Correct Tax Liability
Once all VDA transactions have been identified and reconciled, the final step is to calculate the correct tax liability. Crypto profits are taxed at a flat 30% under Section 115BBH, along with a 4% health and education cess. Apart from the cost of acquisition, no deductions are allowed, no indexation benefit is available, and losses cannot be set off against any other head of income.
The computation should include:
- Tax on the net VDA gain at the prescribed rate
- Interest under Section 234A for delayed filing, where applicable
- Interest under Section 234B for any advance tax shortfall
- Additional tax under Section 140B, if an updated return is being filed
Where Section 139(8A) applies, the Section 140B levy is calculated at 25%, 50%, 60%, or 70% of the aggregate tax and interest amount, depending on the timing of the updated return. These figures together determine the total amount payable before the correction is filed.
What CAs Should Do to Prevent this Mismatch in Future Filings?
Here’s a simpler version:
The NUDGE campaign doesn’t stop after one year. The Income Tax Department uses the same system every year, it matches TDS deducted under Section 194S against what taxpayers report in Schedule VDA.
So, a client who had no issues in FY 2025-26 can still receive a NUDGE notice in FY 2026-27 if they make the same mistakes. This means CAs can no longer treat NUDGE compliance as a one-time fix. It is now an ongoing responsibility, something to monitor and advise on every filing season.
Run AIS Reconciliation as a Standard Pre-Filing Step
For every client with crypto activity, download their AIS and review it before preparing their Schedule VDA. Each VDA transaction reported in the AIS must be matched against the records used for the return to identify any omissions or inconsistencies.
If a transaction appearing in the AIS has not been reported by the client, investigate it before filing. Similarly, where an AIS entry is incorrect or disputed, formal feedback should be submitted on the income tax portal rather than leaving the discrepancy unresolved.
Address the Foreign Platform Gap Proactively
Indian exchanges deduct Section 194S TDS and report these transactions directly to the ITD. In contrast, trades executed on foreign exchanges, such as Binance, Bybit, and Kraken, or through decentralised platforms, generally do not generate TDS credits in Form 26AS. However, the absence of TDS reporting should not be treated as evidence that the transaction is invisible to tax authorities.
Moreover, growing reporting obligations under PMLA, FIU-IND compliance requirements, and international information-sharing frameworks are increasing the ITD’s visibility into offshore crypto activity. Therefore, every VDA transaction must be reviewed and reported in Schedule VDA, irrespective of the platform used or whether TDS was deducted.
Treat Rate and Deduction Compliance as Non-Negotiable
Many of the errors highlighted by the CBDT’s NUDGE campaign can be avoided through proper return preparation. Every VDA gain is taxed at 30% under Section 115BBH, irrespective of the holding period. Additionally, indexation benefits are not available, and no deductions are permitted other than the cost of acquisition. These checks should be verified for every Schedule VDA entry before filing.
However, performing these validations manually across multiple clients can become time-consuming during peak filing season. Reviewing AIS records, reconciling TDS credits, and calculating additional tax liabilities under Section 140B create numerous opportunities for mistakes. KoinX for Tax Professionals helps streamline these processes, enabling accurate crypto tax compliance at scale.
How KoinX for Tax Professionals Can Help CAs Resolve Crypto TDS Mismatches?
When a CA is managing multiple crypto-active clients during filing season, the volume of AIS checks, Schedule VDA entries, and Section 194S TDS credits becomes difficult to handle manually without errors. KoinX for Tax Professionals is a multi-client dashboard that gives CAs direct access to every client’s crypto data, tax computations, and ITR-ready reports, all in one place, without repeated authentication.
AIS-Matched Transaction Reports
KoinX generates ITR-ready Schedule VDA reports that are built from your client’s actual transaction data, imported directly from connected exchanges. For Indian clients, the platform maps every VDA disposal to a Schedule VDA entry and flags any transaction visible in the AIS that has not been accounted for in the report. This gives a CA a pre-filing reconciliation output without manual line-by-line cross-checking.
Section 194S TDS Tracking
KoinX tracks every Section 194S TDS deduction made by connected Indian exchanges against the corresponding transaction in the client’s record. For each disposal, the platform identifies the TDS amount deducted, the exchange that filed it, and the transaction value it corresponds to. This allows a CA to verify, before submitting any return, that every TDS credit in Form 26AS maps to a declared entry in Schedule VDA.
KoinX Connect with Automatic Data Import
KoinX Connect is an AI-powered agent that fetches transaction data from connected exchanges automatically, no manual CSV downloads, no API configuration required. For CAs managing clients active across CoinDCX, WazirX, Binance, and other supported platforms, Connect consolidates all activity into a single, verified transaction record.
The result is a clean data set that reflects what the ITD’s system already holds, reducing the risk of a mismatch before filing begins.
Multi-Client Dashboard for CAs
KoinX for Tax Professionals provides one-click access to every client account from a single dashboard. CAs can generate, review, and download Schedule VDA reports for multiple clients without logging in and out repeatedly. Bulk report generation and a full transaction audit trail, including edit history and revert functionality, give CAs the documentation they need for both filing and any subsequent ITD inquiry.
Managing crypto TDS mismatches across a growing client base is faster and more accurate with the right infrastructure behind you. Explore KoinX for Tax Professionals to understand how it fits your practice’s filing workflow.
End The Tax Panic Before It Starts
Use code TAXNOW and get FLAT 30% off.
Conclusion
When a client receives a NUDGE SMS, it is just the beginning. Ignoring it can lead to Section 133(6) notices, scrutiny under Section 143(2), and even reassessment under Section 148, with penalties up to 200% of the tax shortfall. The correction window is narrow: pull the AIS and Form 26AS, identify the error, and file a revised or updated return with the correct tax liability before the assessment year closes.
This is where KoinX for Tax Professionals helps. It generates accurate Schedule VDA reports, maps TDS data, and handles multiple clients at once, so CAs can act fast, file correctly, and stay ahead every season.
Frequently Asked Questions
My Client Received a NUDGE SMS but Has Not Filed an ITR at All, What is the First Step?
The first step is to check whether the belated return deadline under Section 139(4) is still open for that assessment year. If it is, a belated return can be filed. If the deadline has passed, the only available route is an updated return under Section 139(8A), provided no assessment proceedings have been initiated. Pull the client’s AIS and Form 26AS first to confirm the full scope of the VDA activity before filing anything.
The Revision Deadline for My Client's Assessment Year Has Passed, Can We Still Correct the Mismatch?
Yes, provided no assessment or reassessment proceeding is pending or completed for that year, and no search or survey has been initiated. An updated return under Section 139(8A) is available within 48 months of the end of the relevant assessment year. Additional tax under Section 140B, 25% to 70% of aggregate tax and interest, depending on when the return is filed, will apply on top of the regular liability.
My Client Declared VDA Income but Used the Wrong Tax Rate, Does Section 139(8A) Apply Even Though Something Was Filed?
Yes. Section 139(8A) is available where any income has been under-reported or incorrectly reported, not only where the return is missing. The client’s existing ITR declared VDA income at the wrong rate, which constitutes a wrong statement within the meaning of the provision. The updated return must recompute the gain at 30% under Section 115BBH, remove any indexation claimed, and pay the resulting shortfall along with Section 140B additional tax.
How is the Section 140B Additional Tax Calculated If My Client Has Interest Under Both Section 234A and 234B?
The additional tax is calculated on the aggregate of the tax payable on the additional income being declared and the interest under both sections combined. If the updated return is filed within 12 months, it is 25%; between 12 and 24 months, it is 50%; between 24 and 36 months, it is 60%; and between 36 and 48 months, it is 70%. So, the total payment before submission is: tax on VDA income + Section 234A interest + Section 234B interest + 25%, 50%, 60% or 70% additional tax on the combined figure.
The AIS Shows a VDA Transaction My Client Says They Did Not Execute, What Do We Do?
Do not file the ITR ignoring the AIS entry. The correct approach is to raise a formal feedback on the Annual Information Statement through the income tax portal, marking the entry as incorrect and providing a brief explanation. If the entry remains after the ITD reviews the feedback, document your client’s position with supporting exchange records or wallet statements before filing. Filing without addressing the discrepancy risks a mismatch notice on the same entry.
