How to Address Income Tax Discrepancies for VDAs
Ajay: I just want to ask what this is, what it means, and what I should do?
Replied: An SMS or an email, from the Income Tax Department.
Here’s a breakdown of what it is, what it means, and what you should do:
What this is:
This is an intimation or notification from the Indian Income Tax Department. It’s an automated message generated when there’s a discrepancy between the financial data they have for you and the information you’ve declared in your Income Tax Return (ITR).
What it means:
- “It is observed that you have made transactions in Virtual Digital Assets (VDAs) of Rs.115128.93″: This means the Income Tax Department has records indicating that you engaged in transactions involving Virtual Digital Assets (like cryptocurrencies, NFTs, etc.) for a total value of Rs. 1,15,128.93 during the relevant period.
- “on which TDS u/s 194S deducted”: This is crucial. Section 194S of the Income Tax Act mandates Tax Deducted at Source (TDS) on payments made on transfer of Virtual Digital Assets. This means that a certain percentage of your VDA transactions was withheld as tax by the platform or exchange you used.
- “but the same transactions have been not declared in the Schedule-VDA in your ITR for A.Y. 2023-24″: This is the core of the issue. A.Y. 2023-24 refers to the Assessment Year 2023-24, which corresponds to the Financial Year 2022-23 (i.e., income earned between April 1, 2022, and March 31, 2023). The message states that while TDS was deducted on your VDA transactions, you did not report these transactions in the specific “Schedule-VDA” (a part of the ITR form dedicated to Virtual Digital Assets) when you filed your ITR for that assessment year.
- “It is requested that the ITR filed may be reviewed and mistake, if any, may be corrected by updating the ITR u/s 139(8A)”: This is the instruction. The department is asking you to review your previously filed ITR for A.Y. 2023-24. If you indeed made an omission by not declaring these VDA transactions, you are advised to correct it by filing an “Updated Return” under Section 139(8A) of the Income Tax Act.
In simple terms: The Income Tax Department knows you dealt in crypto/VDAs and paid some TDS on it, but you didn’t mention it in your tax return. They want you to fix it.
What you should do:
This is a serious matter and you should address it promptly. Here’s a step-by-step guide:
- Verify the Information:
- Access your AIS/TIS: Log in to your Income Tax e-filing account (on the official income tax portal: incometax.gov.in). Look for “AIS” (Annual Information Statement) or “TIS” (Taxpayer Information Summary). These statements will show all financial transactions reported to the Income Tax Department under your PAN, including VDA transactions and TDS deducted. Check if the amount Rs. 1,15,128.93 (or close to it) and the TDS under Section 194S are reflected there for A.Y. 2023-24. This will confirm the department’s data.
- Review your records: Check your own records of VDA transactions (from exchanges, wallets, etc.) for the financial year 2022-23 (April 1, 2022, to March 31, 2023) to confirm the transactions and the TDS deducted.
- Determine if you need to file an Updated Return (ITR-U):
- If you did make VDA transactions during FY 2022-23 and did not declare them in Schedule-VDA of your ITR for A.Y. 2023-24, then you must file an Updated Return (ITR-U) under Section 139(8A).
- Even if the TDS was deducted, you still need to report the gross value of the transactions and any gains/losses in Schedule-VDA.
- Consult a Tax Professional:
- Given the complexities of VDA taxation and filing an Updated Return, it is highly recommended that you consult a Chartered Accountant (CA) or a tax advisor. They can help you:
- Accurately calculate your VDA income (gains or losses).
- Understand the nuances of VDA taxation (e.g., flat 30% tax on gains, no set-off of losses, gift tax implications).
- Correctly prepare and file the Updated Return (ITR-U).
- Ensure compliance and avoid future penalties.
- Given the complexities of VDA taxation and filing an Updated Return, it is highly recommended that you consult a Chartered Accountant (CA) or a tax advisor. They can help you:
- How to file an Updated Return (ITR-U):
- An ITR-U allows taxpayers to update their returns within two years from the end of the relevant assessment year. For A.Y. 2023-24, you have until March 31, 2026, to file an ITR-U.
- You will need to pay additional tax (if any) along with interest and a penalty (which is 25% if filed within 12 months from the end of the relevant assessment year, and 50% if filed after 12 months but before 24 months).
- The CA will guide you through the process on the e-filing portal.
Important Considerations:
- Don’t ignore it: Ignoring this message can lead to further scrutiny, notices, and potentially higher penalties from the Income Tax Department.
- Accuracy is key: Ensure all information in your Updated Return is accurate and complete.
- VDA Taxation: Remember that income from VDA is taxed at a flat rate of 30% plus cess, without any deduction for expenses (except the cost of acquisition). Losses from VDA cannot be set off against any other income.
- Future Compliance: Ensure that for current and future financial years, you accurately declare all VDA transactions in your ITR.
In summary, this is a clear indication that the Income Tax Department has identified undeclared VDA transactions in your past tax filing. You need to verify this information and, if confirmed, file an Updated Return (ITR-U) for A.Y. 2023-24, preferably with the assistance of a tax professional.