India's Financial Watchdogs Intensify Scrutiny on Undisclosed Crypto Income Ahead of 2026 Budget

India’s income tax authorities and the Reserve Bank are moving aggressively to close loopholes in digital asset monitoring. Sources indicate that current surveillance mechanisms fail to capture the full scope of cryptocurrency transactions, creating significant gaps in tax collection. The agencies briefed lawmakers in early January about systemic weaknesses in tracking digital coin trades and ownership patterns.

Surveillance Gaps Leave Substantial Tax Revenue at Risk

The core problem lies in cryptocurrency’s inherent characteristics. Digital wallets operate without transparent ownership identifiers, while cross-border transfers bypass traditional banking channels entirely. Private transaction channels and peer-to-peer exchanges leave minimal audit trails, making compliance verification extremely challenging during volatile market swings when trading volumes spike.

Both the Financial Intelligence Unit and Income Tax Department now collaborate on data cross-referencing. They compare exchange-reported transactions against declared income on individual tax filings. This coordinated approach aims to identify inconsistencies before they become entrenched in records. The coordination intensified following alerts about potential money laundering through crypto channels, prompting referrals to the Home Ministry in several instances.

Tax officials have identified problematic patterns across centralized platforms. Investigation findings suggest unusual leveraging practices and potential market manipulation schemes that artificially depress recorded profits. These practices effectively shield true earnings from official tax documentation.

India maintains one of the world’s most stringent crypto tax frameworks. Investors face a 30% tax on capital gains plus 1% tax-deductible source deductions on every transaction. However, ambiguous long-term asset classification rules create uncertainty about future tax treatment. This regulatory haziness paradoxically coexists with expanding retail participation—investment platforms continue expanding operations to capture rising domestic demand.

Enhanced Enforcement and Reporting Framework Reshape Compliance Landscape

Last year’s Union Budget granted authorities expanded investigative authority over virtual assets. Under Section 158B of the Income Tax Act, officials can now scrutinize undisclosed income derived from crypto activities. The lookback period extends 48 months into traders’ historical records, with penalties reaching 70% of unpaid tax obligations for deliberate non-compliance.

Tax authorities announced plans in mid-2024 to deploy artificial intelligence systems and implement international data-sharing protocols through the Crypto Asset Reporting Framework. This system enables real-time matching between exchange data and individual tax returns. Discrepancies exceeding ₹1 lac (approximately $1,200) automatically trigger tax notices. The cross-verification of tax-deducted source amounts reported by platforms will function as a secondary validation mechanism. Once fully operational, the comprehensive system is projected to substantially reduce underreporting across the sector.

This multi-layered enforcement approach reflects New Delhi’s determination to establish cryptocurrency as a transparent, tax-compliant asset class despite ongoing regulatory evolution.