The department's crypto cases are built from data, not suspicion. Every registered exchange reports TDS and transactions against your PAN; your bank reports remittances abroad under LRS; the AIS assembles it; and an algorithm compares it with the return. A return that shows no VDA income against ₹40 lakh of exchange turnover produces a query without anyone having looked at the file. Here is how the sequence runs and how to deal with each stage.
Quick answer
- Data-driven matching: Exchange TDS under section 393 (194S of the 1961 Act), LRS remittances and other entries are assembled in the AIS, and an algorithm compares them with your return.
- Portal query comes first: The first contact is usually an e-Verification query on the Compliance Portal asking you to confirm, explain or deny an AIS entry, the cheapest point in the process.
- Evidence decides the response: A good response includes complete trade histories, a per-asset FIFO computation, a reconciliation to Form 26AS and AIS, bank statements and proof of own-wallet moves.
- Updated return before notice: If no notice has yet been issued, an updated return within 48 months of the end of the assessment year is almost always cheaper than waiting.
Where the data comes from
- TDS under section 393 (194S). Every transfer through an Indian or FIU-registered offshore exchange is reported with the consideration. A user with ₹1 lakh of TDS has ₹1 crore of turnover on record.
- The Annual Information Statement. Exchange entries, bank interest, LRS remittances, card spends abroad and high-value transactions, shown against the PAN before the return is filed.
- LRS remittances by purpose code, matched against declared foreign assets and income.
- Reporting-entity statements of crypto-asset transactions, furnished to the department from 1 April 2026.
- CARF exchange from 1 April 2027 — foreign exchanges' records of Indian residents delivered to the department by the other country's tax authority.
The notices, in order
e-Verification on the Compliance Portal. The first contact is usually not a notice at all: a query on the portal asking you to confirm, explain or deny an AIS entry — "TDS under section 393 (194S) of ₹62,000 reported, no VDA income in return". Respond within the time given, with the option of filing an updated return if the income was omitted. This is the cheapest point in the process.
Intimation under section 270 (143(1) of the 1961 Act). Where the return reports VDA income but the arithmetic is wrong — losses netted, expenses deducted, TDS claimed that does not match — the processing centre adjusts and raises a demand. Rectify under section 287 (154 of the 1961 Act) if the adjustment is wrong; pay if it is right.
Show-cause under section 281 (148A of the 1961 Act). Where income appears to have escaped assessment for an earlier year, the Assessing Officer issues a notice setting out the information — typically the exchange data — and asks why reassessment should not be opened. The reply is due within the period stated in the notice; since September 2024 the law no longer fixes a seven-day minimum. A complete response at this stage, with the computation and evidence, is the best chance of closing the matter. Reassessment can be opened for three years, or five where the escaped income represented by the transactions is ₹50 lakh or more.
Scrutiny under section 270 (143(2)). The return for the year is selected, and requisitions under section 268 (142(1) of the 1961 Act) follow: trade histories, wallet addresses, bank statements, source of funds for the purchases, and the computation. Proceedings are faceless and written; a video hearing can be requested.
What a good response contains
| Item | Why it matters |
|---|---|
| Complete trade history from every exchange and wallet, for the year and the years in which the assets were acquired | Cost of acquisition cannot be proved without it; unproved cost is treated as nil and the whole sale price is taxed |
| A per-asset computation on FIFO, matching each disposal to acquisitions | The 30% applies transfer by transfer; the department will not accept a net figure |
| Reconciliation of the computation to TDS in Form 26AS and to AIS entries, with reasons for each difference | Differences are the whole basis of the notice; unexplained ones become additions |
| Bank statements showing fiat in and out, and LRS advices for foreign platforms | Establishes source of funds and rebuts unexplained-investment additions under section 103 (69 of the 1961 Act) |
| Evidence that wallet-to-wallet moves were between your own accounts | Otherwise each move is treated as a transfer at market value |
| Schedule FA position for each year, with balances at 31 December | Separates a tax computation issue from a Black Money Act issue, which is far more serious |
What the adjustment looks like
Where the return is wrong, the recomputation applies the VDA rules strictly: gains per transfer at 30%, losses ignored, expenses disallowed, receipts in kind taxed at market value on receipt, and unexplained credits taxed under section 104 (69A of the 1961 Act) at 60% plus surcharge — the rate for unexplained money — where the source of funds cannot be shown. Interest under section 423 (234A of the 1961 Act)/B/C runs from the original due dates. Penalty under section 439 (270A of the 1961 Act) is 50% of the tax on under-reported income, or 200% where it is misreporting; immunity can be sought under section 440 (270AA of the 1961 Act) where the tax and interest are paid within the time allowed and no appeal is filed, and, since the Finance Act 2026, in misreporting cases only on paying additional tax equal to 100% of the tax on the misreported income. Undisclosed foreign accounts are dealt with separately under the Black Money Act, where the ₹10 lakh per-year penalty for non-disclosure applies even if the income itself has been taxed.
When an updated return is the better route
If you know the return is wrong and no notice has yet been issued, an updated return within 48 months of the end of the assessment year — with additional tax of 25% in the first year rising to 70% by the fourth — is almost always cheaper than waiting. Since the Finance Act 2026 it can also be filed after a reassessment notice, within the time the notice allows, at additional tax 10 percentage points higher; search and survey cases need specific advice, and it cannot reduce tax or claim a refund. With CARF data arriving from 2027, the window for voluntary correction of foreign-exchange years is finite.
Questions we are asked
How long do I have to reply to a section 281 (148A) crypto show-cause notice? Within the period stated in the notice; since September 2024 the law no longer fixes a seven-day minimum. A section 281 (148A) notice sets out the information, typically exchange data, and asks why reassessment should not be opened; a complete response with the computation and evidence is the best chance of closing the matter.
How many years back can the tax department reopen undisclosed crypto income? Generally three years from the end of the relevant assessment year, or five years where the escaped income is ₹50 lakh or more. Undisclosed foreign accounts can also be pursued separately under the Black Money Act. Reassessment follows a show-cause notice under section 281 (148A).
What penalty applies if crypto income is under-reported in an Indian tax return? Penalty under section 439 (270A) is 50% of the tax on under-reported income, or 200% where it is misreporting. Immunity can be sought under section 440 (270AA) where the tax and interest are paid within the time allowed and no appeal is filed; misreporting cases qualify only since the Finance Act 2026, and only on paying additional tax equal to 100% of the tax on the misreported income.
Can I file an updated return after a crypto reassessment has started? Yes, since the Finance Act 2026: after a reassessment notice an updated return can be filed within the time the notice allows, with additional tax 10 percentage points higher than the usual 25% to 70%. It still cannot reduce tax or claim a refund, and search and survey cases need specific advice.
Send us the notice and the exports
We check the notice's validity and time limit, reconstruct the computation from the exchange data, and prepare the response with the documents that decide it — or the updated return where that is the better course. Crypto and digital assets or contact us.
Disclaimer
This note is for general information and knowledge purposes only. It describes the position as at 9 November 2026 and is not legal, tax or professional advice. Tax law changes frequently; please confirm the current position with us before acting.
Tax, GST and business setup advisors — Mumbai and Thane. Contact us to discuss your situation.
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