Cryptocurrency has recently gained immense popularity in India, creating new opportunities for investors and traders. Due to its decentralised nature, the government of India imposed taxes to track the transactions. In the Finance Bill of 2022, the Finance Department introduced crypto taxes in India, giving a detailed section for the classification of VDAs (Virtual Digital Assets).
The tax on crypto gains stands at a flat 30% plus a 4% cess. While the majority will comply with the taxes, some will find ways to commit crypto tax evasion in India, which attracts hefty penalties and jail terms.
This article will detail all potential risks and penalties you can face if you commit the said type of tax evasion. So whether you are a seasoned investor or just a crypto enthusiast, this article will help you to learn the different aspects of crypto tax evasions and how to rectify them.
Understanding Tax Evasion
Before discussing the tax evasion punishment in India, let’s understand its concept.
Tax evasion is the deliberate act of concealing income or assets to reduce tax liability. This can involve hiding income sources, underreporting income amounts, claiming false deductions, or creating fictitious expenses.
However, there is a fragile line between tax planning, tax avoidance, and tax evasion. Here’s a breakdown for you:
Tax Planning
Tax planning is a pile of legal strategies that minimise your tax burden by taking advantage of deductions, exemptions, and tax-advantaged investment options. This proactive approach ensures you comply with all tax laws while maximising your after-tax income. It’s a responsible way to finance management.
Tax Avoidance
On the other hand, tax avoidance exploits loopholes and grey areas within tax codes to minimise tax liability. While often legal, it can border on unethical territory and may attract scrutiny from tax authorities.
Tax Evasion
Tax Evasion is the illegal act of deliberately underreporting or concealing income to reduce tax liability. It is a serious offence with significant tax evasion punishment in India, including hefty fines, imprisonment, and damage to your reputation.
The key distinction lies in intent. Tax planning and avoidance aim to reduce your tax bill within the legal framework, while tax evasion actively deceives the government to escape tax obligations.
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When you fail to report cryptocurrency in your ITR filing, the Income Tax Department (ITD) issues a notice under section 148/148A of the Income Tax Act.
A ‘Notice for income escaping assessment‘ is dispatched when an Income Tax Officer (ITO) suspects a taxpayer has inaccurately disclosed their income, evading their entire tax liability. The process involves two stages.
Firstly, before issuing a notice under section 148, the ITO will serve the taxpayer with a 148A notice. This preliminary communication allows the taxpayer to provide explanations or arguments as to why a Section 148 notice should not be issued.
Should an ITO find grounds to believe that cryptocurrency or any other income has been unreported, it can issue a 148 notice up to three years from the conclusion of the relevant assessment year.
However, if the evaded income exceeds INR 50,00,000, this period extends to 10 years from the end of the relevant assessment year.
Following the issuance of a notice, the ITO will proceed to reassess the taxpayer’s income under section 147 of the Income Tax Act.
Penalties For Potential Crypto Tax Evasion In India
The punishment for tax evasion in India varies depending on the extent of the tax evasion and the gravity of the violation. Here’s a brief overview:
Under-reporting or misreporting income may incur a penalty ranging from 50% to 200% of the Tax due. Additionally, you may face imprisonment for up to 7 years.
Filing an Income Tax return after the deadline attracts an interest charge of 1% per month, along with late fees ranging from INR 1,000 to INR 5,000. Like under-reporting, this offence may lead to imprisonment for up to 7 years.
Refrain from deducting Tax Deducted at Source (TDS) or failing to deposit TDS with the government after deduction will result in interest charges and late fees.
If a TDS return is not filed on time, you will face a late fee of INR 200 per day.
Penalties Related To Income Tax Evasion In India
As the above section demonstrates, you can face severe penalties for crypto tax evasion in India. In terms of income tax, you can face punishment for not paying income tax or misreporting income.
In this section, we will see how different income tax evasion results and what penalties are involved.
Delay In Filing Of Income Tax Return
Failure to submit your ITR by the stipulated deadline can result in financial penalties. If your income exceeds INR 5,00,000, you may face late fees of up to INR 5,000. However, the late fee is capped at INR 1,000 if your income exceeds this threshold.
Moreover, you will also incur interest charges under sections 234A and 234B of the Income Tax Act. Interest accrues from April 1st until the date of payment of the outstanding tax at a rate of 1% per month under section 234B.
Additionally, under section 234A, interest is levied at a monthly rate of 1% from the last due date for filing the ITR until the actual filing date. Adhering to the tax filing deadlines is crucial to avoid these penalties and interest charges.
Non-Filing Of Income Tax Return
Failure or refusal to file your ITR can result in penalties, including fines and possible imprisonment. If the amount of tax evaded exceeds INR 25,00,000, the potential prison term, in addition to a fine, ranges from 6 months to 7 years.
For cases where the evaded tax is less than INR 25,00,000, the potential prison sentence ranges from 3 months to 2 years, alongside a hefty fine.
Misreporting Or Underreporting Of Crypto Income In Income Tax Return
Understanding the difference between underreporting and misreporting is crucial due to the differing penalties outlined in Section 270A of the Income Tax Act. Misreporting, according to the Act, encompasses several actions:
- Suppression or misrepresentation of facts.
- Failure to record investments in the books of account.
- Claiming expenditure without substantiated evidence.
- Recording false entries in the books of account.
- Failing to record any receipt in the books of account that affects total income.
If you underreport income in your ITR, you will face a penalty equivalent to 50% of the tax due on the underreported income. Conversely, the penalty for misreporting income amounts to 200% of the tax owing on the misreported income.
Moreover, you may face severe penalties if you willfully engage in tax evasion in India. If found guilty, you may face imprisonment ranging from 6 months to 7 years, alongside a fine, for evading taxes exceeding INR 25,00,000.
For crypto tax evasion of less than INR 25,00,000, the potential prison term, in addition to a fine, ranges from 3 months to 2 years.
Crypto Investment Not Disclosed In Books Of Accounts
If a taxpayer has invested in cryptocurrencies but fails to document them in their financial records, or if the expenditure surpasses the recorded amount without justification for the additional income, the exceeding sum will be considered taxable.
This taxable amount will be subject to a 60% tax rate, a 25% surcharge, and a 4% cess, resulting in an overall effective tax rate of 78%.
Moreover, a penalty of 10% of the taxable sum may also be imposed.
Reporting Of Tax Deducted At Source (TDS) On Crypto Transactions
TDS can sometimes be burdensome for many taxpayers. Yet, the consequence of non-compliance with TDS can result in weighty penalties. Let’s delve into the essential aspects of TDS reporting in terms of cryptocurrencies:
When engaging in crypto transactions on an Indian crypto exchange, the exchange is responsible for TDS deduction and reporting. As a result, when buying crypto on such platforms, you are not required to deduct TDS or file TDS returns. However, adherence to TDS reporting obligations becomes necessary when utilising international exchanges or engaging in peer-to-peer (P2P) trades.
According to section 194S of the Income Tax Act, the buyer must deduct TDS at 1% of the transaction value before remitting payment to the seller. Subsequently, this TDS amount must be remitted to the government using Form 26QE if the buyer qualifies as a specified person or via Form 26Q otherwise.
A buyer must obtain a TAN (Tax Deduction and Collection Account Number) to file Form 26Q. They must remit the TDS by the 7th of the month and file quarterly TDS returns.
However, if the buyer is designated as a person rather than a company, then a TAN is not requested in such a case. They can file Form 26QE with their PAN (Permanent Account Number) and deposit the TDS while filing the form.
Penalties On Failure To Report TDS Deductions
As per the Income Tax Act, different penalties underlie the reporting of TDS deductions. Let’s get into the details of these failures:
Failure To Procure A TAN
If a taxpayer fails to procure a TAN, they will be liable to pay a fine of up to INR 10,000.
Failure To Deduct TDS
If the buyer fails to deduct TDS when required, they may have to pay interest at a rate of 1% per month from the due date of deduction until the actual deduction occurs. Additionally, the buyer might incur penalties equivalent to the amount not deducted as TDS.
Failure To Deposit TDS
If the buyer fails to remit the TDS amount to the government, they will be subject to an interest rate of 1.5% from the deduction date until the deposit is made. In addition to a monetary fine, imprisonment can range from 3 months to 7 years.
Failure To File A TDS Return
Another critical aspect is the obligation to file a TDS return using either form 26Q or form 26QE. Failure to do so attracts a late fee of INR 200 per day. However, it’s crucial to understand that the maximum late fee imposed must be at most the outstanding TDS amount.
Moreover, the taxpayer may be subject to a penalty ranging from INR 10,000 to INR 1,00,000 for late or non-filing TDS returns.
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Can The Income Tax Department Track My Cryptocurrency Transactions?
Yes! The income tax department can track your cryptocurrency transactions. The department is actively gathering data from Indian cryptocurrency exchanges even before implementing Tax Deducted at Source (TDS) as outlined in the Finacial Act 2022.
The TDS serves as a mechanism for the tax department to monitor crypto investments at the moment of acquisition. It is pertinent to note that TDS applies to all crypto transactions, encompassing NFTs, stablecoins, and tokens.
The reporting conditions associated with TDS ensure that the ITD accesses transactional data from domestic exchanges and peer-to-peer transactions and activities on international exchanges.
To ensure TDS compliance on international exchanges, the Financial Intelligence Unit (FIU) India, on 28th December 2023, sent a notice to 9 foreign crypto exchanges to enforce a ban on their crypto operations for non-compliance with anti-money laundering policies. These exchanges were Binance, KuCoin, Huobi, Gate, Bittrex, MEXC, Kraken, Bitstamp and Bitfinex.
Hence, the Finance Ministry of India and the ITD continuously ensure proper tracking and listing of VDA transactions nationwide.
What to Expect If You've Avoided Crypto Tax Before?
Suppose you must still report your cryptocurrency transactions in a previous income tax return. In that case, you can take specific steps to rectify the situation, although penalties may still apply.
Firstly, you must file an updated return under section 139(8A) using Form ITR-U and the relevant ITR form. It’s crucial to emphasise that you can only file an updated return in ITR-U if you have taxable gains from cryptocurrency transactions during the relevant financial year.
Conversely, if you have incurred a net loss, you are not eligible to file an updated return as these losses are not deductible for this purpose.
It’s important to note that the window for filing an updated return is limited to 24 months from the end of the tax year. For instance, the deadline for filing ITR-U for the assessment year 2023-24 (FY 2022-23) is March 31, 2026.
Although you have filed an updated return, this does not absolve you from a punishment for not paying income tax. However, the penalties are likely less severe than potential penalties imposed by the ITD if they discover discrepancies later.
If you file your ITR-U within 12 months from the end of the tax year, you will incur a penalty equal to 25% of the outstanding tax amount, in addition to applicable interest charges.
However, if you file your ITR after 12 months but before 24 months from the end of the tax year, the penalty increases to 50% of the outstanding tax amount, along with interest charges.
How Can KoinX Help You To Calculate Crypto Taxes In India?
KoinX offers you a free crypto tax calculator in India, which you can use to determine your crypto gains and income. You can also use KoinX to generate accurate crypto tax reports, which can help file your income tax returns. Here are some of the advantages of using KoinX:
Accurate Preview Of Transactions: You can effortlessly track your crypto capital gains with a clear summary of all transactions by integrating your wallet or blockchain or simply uploading a .csv file of your portfolio.
Automatic Classification Of Transactions: All trade history transactions are automatically categorised into airdrops, mining, and staking categories. This makes it easier to check your capital gains and taxes by category.
Generation Of Reliable Crypto Tax Report: You can access comprehensive tax reports, which you can use to file your taxes or share them with your accountant.
The detailed crypto tax report from KoinX will help you calculate your crypto gains and ensure you meet all the required reporting requirements with the Income Tax Department. So, join KoinX today and stay compliant with India’s crypto taxes.
Conclusion
While cryptocurrency offers exciting opportunities, crypto tax evasion in India can lead to severe consequences. By understanding the tax regulations and potential penalties, you can confidently navigate the crypto landscape.
Remember, staying compliant is about avoiding fines and jail time and building a secure financial future. This is where you can use KoinX to obtain a detailed crypto tax report. The platform automatically classifies all the transactions based on their nature, generating an accurate tax report.
You can use this report to file your ITR perfectly and save yourself from crypto tax evasion. So, bid your tax calculating troubles goodbye and join KoinX today!
Frequently Asked Questions
How Can I Avoid Crypto Tax In India?
There aren’t any methods to avoid crypto tax in India without paying severe penalties. Through a data-sharing program with Indian exchanges, the ITD obtains customer data to verify adherence to tax regulations and ensure any applicable taxes are duly paid.
What If You Do Not Pay Taxes For Three Years?
Accurate and transparent income reporting is essential to avoid legal repercussions and financial penalties. Failure to report income accurately can result in a notice from the Income Tax Department. If they find you have not paid taxes on your income, they may reassess your income and impose penalties, fines, and potentially even imprisonment.
For How Many Years Can You File Back Taxes?
You can file late returns for up to two preceding financial years. For instance, if you plan to file an ITR for FY2022-23, you must do so by the end of FY2024-25.
Is Everyone Required To File Taxes in India?
Yes, if you have an income above INR 2,50,000 in India, you must file an income tax return in India.
