Responding to a Crypto Tax Notice in India
Why the Indian tax department sends crypto notices, what each section means, how to respond, and the mismatches that cause them
India taxes income from Virtual Digital Assets under Section 115BBH of the Income-tax Act 1961, introduced by the Finance Act 2022 and effective from Assessment Year 2023-24.
The rate is a flat 30% plus applicable surcharge and 4% cess, regardless of your income slab. A separate provision, Section 194S, requires 1% TDS on the transfer of a VDA, in force since 1 July 2022.
Why crypto notices happen
The department receives data about your crypto activity from several directions: Section 194S TDS reporting by Indian exchanges, the Annual Information Statement, bank transaction reporting, and increasingly international information exchange.
A notice usually means one of those data points does not agree with your return. It is a reconciliation query far more often than an accusation.
What the common sections mean
| Provision | What it is |
|---|---|
| Section 143(1) | Intimation after processing — often an arithmetical or mismatch adjustment rather than a full enquiry |
| Section 139(9) | Defective return — something required is missing or inconsistent; usually curable within the time allowed |
| Section 142(1) | Enquiry before assessment — a request for information or documents |
| Section 143(2) | Scrutiny — a substantive examination of the return |
| Section 148 | Income escaping assessment — reopening of an earlier year |
What to do
- Note the deadline. Each notice specifies a response period. Missing it converts a manageable query into a much harder position.
- Identify the mismatch. Compare the AIS and Form 26AS against your own transaction records line by line.
- Assemble the evidence. Exchange statements, bank records, wallet addresses and transaction hashes where relevant.
- Respond through the portal. Responses are filed on the income tax e-filing portal against the specific notice.
- Engage a chartered accountant for anything beyond a simple mismatch — particularly for 143(2) or 148.
The most common causes
- Omitted crypto-to-crypto trades. Very common, because no rupees moved and it did not feel like a disposal.
- Losses set off against gains. Disallowed under Section 115BBH(2), but frequently claimed in error.
- Fees deducted from gains. Generally not permitted under 115BBH.
- Unreported foreign platform activity. See foreign exchange obligations — this is the higher-risk category.
- Wrong ITR form. Filing ITR-1 with crypto income can produce a defective return notice.
If you find an error before the department does
Where the mistake is yours and the time limit permits, filing a revised or updated return is generally a considerably better position than waiting. The mechanisms and time limits differ — a revised return under Section 139(5) and an updated return under Section 139(8A) have different windows and different costs — so confirm which is open to you before acting.
Do not ignore a notice on the basis that the amount is small. The response cost of an unanswered notice escalates far faster than the tax at stake.
What a response should contain
A good response is narrow and evidenced. It addresses the specific discrepancy raised, attaches the documents that establish the position, and does not volunteer unrelated material.
- A clear statement of what the department's data shows and what your records show.
- The reconciliation between the two, transaction by transaction where the query is transaction-specific.
- Supporting exchange statements, bank records and TDS certificates.
- Where you accept an error, a clear acknowledgement and the corrected computation.
Where you accept the department is right, saying so plainly and paying is nearly always cheaper than contesting. Where you believe it is wrong, the reconciliation is the argument — assertions without documents rarely resolve anything.
Timelines to watch
| Notice | Typical response window |
|---|---|
| Section 143(1) intimation | 30 days to respond to the adjustment proposed |
| Section 139(9) defective return | 15 days, extendable on request |
| Section 142(1) enquiry | As specified in the notice |
| Section 143(2) scrutiny | As specified; proceedings run from there |
These are indicative; the notice itself governs. Diarise the date in the notice rather than relying on a general rule.
Reducing the chance of a notice next year
- Reconcile against the AIS and Form 26AS before filing, not after.
- Report every transfer, including crypto-to-crypto swaps.
- Do not net losses against gains, which 115BBH(2) prohibits.
- Use the right ITR form for the year.
- Keep the working papers that support each figure, so a query can be answered in days rather than weeks.
Related guides
- Crypto tax in India: the complete guide
- Crypto tax calculator for India
- Tracking crypto for Indian tax records
- Best crypto exchanges in India
This page is educational and not tax advice. Indian tax law changes and individual circumstances differ. Confirm your position with a qualified chartered accountant before filing.
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