Taxation of Bitcoins or Crytocurrencies in India

Cryptocurrency in simple terms is “digital money” and Bitcoin is the first decentralized digital currency. It is not yet centrally administered or regulated by any specific body like the RBI which administers physical currency in India. The system works without a central bank or single administration.

India is not isolated from the rising popularity of bitcoins. According to industry sources, nearly 20000-plus crypto-enthusiasts trade daily on Indian bitcoin exchange platforms. Bitcoin trading can be extremely profitable for professionals or beginners. The market is new, highly fragmented with huge spreads. Arbitrage and margin trading are widely available. Therefore, many people make money trading bitcoins.

Thus, many taxpayers in India need to understand the Income Tax nuances of their bitcoin transactions.

Taxation of Bitcoins

Taxation of Bitcoins or Crytocurrencies

The concept of Bitcoins is new in India and there is no such law which lay down any provisions for taxability of Bitcoin gains. The Income Tax act 1962 does not contain any provision relating to cryptocurrencies but has always sought to tax income received irrespective of the form. Hence, Profit arising out of buying or selling of Bitcoin will be considered as Income and taxable in India in the hands of the receiver.

There has also been a debate about under which head income from crypto currency should fall. Let us understand each case one by one:

Trading:

Where there are too many trades in Bitcoins, the owner may be classified as a trader and income will have to be reported as Income from business to which the applicable slab rate of income tax would apply.

Investment:

If the transactions are not frequent and are in nature of investment in the currency, then any gains arising on transfer (ie: sale) should be characterized as Capital Gains. Accordingly these can be classified as long-term when held for more than 3 years and short-term when held for less than 3 years. Long-term capital gains will be taxed at 20% and short-term capital gains at 30%.

Indexation benefit (which is an adjustment to account for inflation for the period between purchase and sale of a capital asset) can be availed of. This would reduce the total tax outgo on capital gains.

Mining:

If bitcoins are earned through mining or other online activities, it can be treated as a Capital Asset and subsequent sale would give rise to Capital gains. However, it should be noted that the cost of acquisition of a bitcoin generated through mining, cannot be determined as it is a self-generated asset.


In the absence of specific guidance on the matter, some taxpayers may choose to report this income under the fifth head of income which is ‘Income from Other Sources’.” It is the head where residual income, income which cannot be reported under salary, house property, capital gains, business and profession, is reported.

As the concept of Bitcoin is gradually gaining immense importance in India, the government may soon come out with new Laws laying down provisions for taxability of cryptocurrencies which will dispel all ambiguity around the legality of bitcoins, taxability and disclosure requirements.

DISCLAIMER: This article is only for educational purpose and should not be considered as a legal or taxation advise.

Questions/ Comments can be sent by email to [email protected]

Income Tax Return (ITR) Filing

Be it startups or salaried persons, most people are faced with certain challenges when it comes to managing taxes. Most of us know the basics of it but only a few of us are actually conscious about the nitty-gritties and the best practices.

As a consequence, there is a common misconception among taxpayers that once TDS or advance tax has been paid, the filing of returns is not a very important exercise. However, it is essential to know, you have an unfinished job at hand until you have filed your tax returns. It is in fact our constitutional obligation to file returns at a stipulated time of the year.

What is Income Tax Return (ITR)?

According to the Income Tax Act, 1961, the term ‘return of income’ means proof of income earned by an individual or a business entity. Filing of income tax returns (ITR) is a voluntary but mandatory obligation where one reports his income, capitals gainsed, and other allowances and reliefs claimed for a particular year. It is mandatory for every person to file his ITR as per the taxation rates imposed by the government if his income exceeds the exempted tax bracket.

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Income Tax Return (ITR) Filing

Who is required to file Income Tax Return (ITR)?

The income tax slabs can be categorized as below.

1) Individuals All those individuals whose annual income exceeds the basic exemption tab have to file ITR. Even if you have your investment plan charted out and your tax obligation is NIL, you have to file your returns if you fall under any of the following categories.

▪ Individuals (men and women both) with taxable income exceeding Rs 250,000 p.a.

▪ Senior Citizens with taxable income exceeding Rs 300,000 p.a.

▪ Senior citizens aged more than 80 years with taxable income exceeding Rs. 500,000 p.a.

2) Businesses • Companies, Partnerships, and Proprietorship: Income tax is calculated at a flat 30% on the total income of companies and firms. Tax slabs are not applicable here.

When to file your Income Tax Return (ITR)?

The due date for filing of IT returns is 31st of July every year after the financial year ending 31st March. In case the income/accounts requires an audit, the last date for filing returns is 30th of September of the same assessment year.

Why to file your Income Tax Return (ITR)?

This is the million-dollar question. Providing misleading information or non-filing of returns can amount to tax evasion and lead to penalty or prosecution or both. Under the Income Tax Act, non-filing of ITR can attract a penalty of Rs 5000. While the fear of the dreaded taxman visiting your doorstep is common, the actual benefits lost on non-filing of income tax returns are of greater magnitude.

Here are some reasons why you must make this exercise a part of your annual routine.

1. Your tax history matters As a reward for this yearly routine, you get a powerful financial record. Banks and High commissions of various countries across India refer to your ITR to assess your financial stability and capacity before extending credit (personal, housing business or vehicle loans) or issuing a visa. This is really helpful, especially if you have plans to travel to Europe, the US, Canada, or the UK. Absence of or discrepancy in the ITR of any single year can work against you and the chances of your loan or visa getting sanctioned can decrease. Certain credit card companies too insist on proof of tax return before issuing a card. The same goes for financial institutions, which may rely on ITRs of past few years before undertaking business transactions with you.

2. A sign of value and responsibility Filing returns shows that you are a responsible individual/business. A good record of ITR can reflect strongly on your image as a business when it comes to winning contracts and procuring high-profile projects. Sometimes, tender applications for large-scale infrastructure and other government projects are scrutinized based on the ITRs of past 5–7 years along with other factors.

3. Third party insurance claims and high-value covers In case of accidental death of an insured individual due to road accident, insurance claims are empowered by providing a clean record of ITR. Any missing returns can weaken the claim in case the insurance policy hits a disputed path. The claim amount is calculated as a product of years of life expectancy of the deceased and the annual income as mentioned in the ITR. Life insurance companies ask for ITR documents against high-value policies. A life cover of Rs 1 crore or above, is only available against ITR documents that are proof of your annual income.

4. For startup funding ITRs can be treated as trusted measures of profitability and scalability by angel and seed investors and venture capitalists. Gaining visibility on your cash flows can become easy with a healthy tax record.

5. A repair for your losses Speculative or non-speculative losses, short- or long-term capital losses, or losses of any other type incurred by an individual or a business can be recovered if, and only if, they are accounted for in the tax return filed in that financial year. If not, they cannot be considered for exemption in subsequent years. Considering the above reasons, it seems that this time-consuming affair of filing returns is worth the effort and pain after all. With the deadline of 31st July nearing your door-step, it is time that you step out and seek file your tax returns either by yourself or by taking the assistance of experts and professionals for correct filings.

VenturEasy can provide such Income Tax Return Filing Services with complete assistance and consultancy so that you can keep moving with your business with peace of mind.

Electronic Verification to ease Return Filing for Taxpayers

With an attempt to make e-filing completely paperless, the Central Board of Direct Taxes (CBDT) has come out with the technology of e-verification of assesses by means of their Aadhaar number.

This will relax the requirement of sending physical copies of the return acknowledgment for verification to the Centralised Processing Centre (CPC), Bengaluru and will also do away with the need to digitally sign the return. However, this new system is just an alternative to the existing system. This means, those e-filing returns can continue to send their acknowledgements (ITR-V forms) in physical form to the Bengaluru centre within 120 days of filing the return or use digital signatures. Also, those who do not have an Aadhaar card will also have to use the existing system.

What is EVC and How does it work?

The Electronic Verification Code (EVC) consists of a string of characters in the form of a locator number that gives a unique identifier to electronic documents.

The income tax department intends to link the Income Tax Return submitted by a person to his Aadhaar number by generation of an Electronic Verification Code so that authentication of the return takes place automatically and electronically. Hence, an Aadhaar-based electronic verification code will be given to such taxpayers to authenticate their transaction.

A new row has been provided in the Income Tax Return (ITR) forms for assessment year 2015-16 to enable someone filing e-returns to provide his Aadhaar card number. Once the card number is punched in, the tax-payer will get a one-time password, or OTP, number on his or her mobile phone for verification. This verification number, then, has to be entered on the relevant ITR form to complete the process of e-filing. Visit https://incometaxindiaefiling.gov.in/eFiling/Portal/StaticPDF/e-Verification_User_Manual.pdf to get detailed guidelines on how to generate EVC.

Applicability of EVC

As per the Notification dated 15th April, 2015 issued by CBDT, it has been clarified that the Return of Income shall be furnished in the following manner:

Person Condition Manner of furnishing Return
          Individual or HUF   Accounts are required to be audited under section 44AB of the Act, ie Tax Audit applicable   Electronically under digital signature only
    In all other cases, where Tax Audit not applicable • Electronically under Digital Signature, or • Electronically under EVC, or • Electronically and thereafter submitting the verification of the return in Form ITR-V.
Company In all cases Electronically under digital signature only
    Firm or LLP or any other Association of Persons (AOP) or Co-operative Society   Accounts are required to be audited under section 44AB of the Act, ie Tax Audit applicable   Electronically under digital signature only
    In all other cases, where Tax Audit not applicable • Electronically under Digital Signature, or • Electronically under EVC, or • Electronically and thereafter submitting the verification of the return in Form ITR-V.
Political Parties     In all cases • Electronically under Digital Signature, or • Electronically under EVC, or • Electronically and thereafter submitting the verification of the return in Form ITR-V.
  Charitable Trust, Section 25 Company     In all cases • Electronically under Digital Signature, or • Electronically under EVC, or • Electronically and thereafter submitting the verification of the return in Form ITR-V.

Advantages of e-filing of Income Tax Returns under the EVC mechanism:

  • Online filing of tax returns becomes truly paperless as the EVC mechanism will do away with the need for sending physical copies for verification to the Centralised Processing Centre (CPC), Bengaluru.
  • Possibility of non-receipt or delay in receipt of the acknowledgement (ITR-V) at CPC shall now be completely evaded.
  • For sending the ITR-V, it had to be signed and printed properly so that the bar code was clearly visible. ITR-Vs that did not confirm to these specifications got rejected. The EVC mechanism will solve this problem.
  • Taxpayers will be relieved from the cost of making Digital Signatures.

Get in touch with us to file your Income Tax Returns