Section 271C: the Penalty for Not Deducting

Section 271C sets a penalty equal to the tax that should have been deducted at source and was not. Applied to a crypto transfer, the 1% you failed to withhold becomes a second 1% on top of the first.

Key highlights

The arithmetic is unusually simple, which is what makes it bite.

100%

Penalty equals the tax never deducted

Section 271C

₹1,000

On a ₹1,00,000 purchase, plus the ₹1,000 itself

Worked at 1%

Buyer

The deductor carries the obligation

P2P and off-exchange trades

What Section 271C Charges

A penalty equal to the amount of tax that should have been deducted. There is no scaling by intent and no discount for a small trade: the figure is the deduction you missed, charged again as a penalty and payable alongside the deduction itself.

Buy a coin peer to peer for ₹1,00,000 and withhold nothing, and the 1% you owed is ₹1,000. The penalty is another ₹1,000, so a trade you thought had no tax cost carries ₹2,000 before interest.

Who Carries the Obligation

The deductor, which in a VDA transfer means the person paying the consideration. On an exchange the platform handles it, which is why most filers never meet this section. Off the exchange, in a peer to peer trade, the buyer is the deductor and the obligation does not disappear because neither side thought about it.

That asymmetry surprises buyers. The seller pays the 30% on the gain; the buyer, who may have made nothing at all, carries the deduction duty and the penalty risk attached to it.

The Provision Next to It

Section 271C covers tax that was never deducted. Section 276B covers a different failure, tax that was deducted and then not paid to the government, and that one is a prosecution provision carrying rigorous imprisonment of three months to seven years and a fine.

Both sit below the harshest rung. Where undisclosed crypto is found in a search, Section 158B brings it into block assessment and Section 113 taxes that income at 60% with surcharge on top.

Frequently Asked Questions

The questions this term raises most often.

The buyer, as the person paying the consideration. Where no exchange sits in the middle, no one else is going to do it, and Section 271C attaches a penalty equal to the tax to the deductor who did not.

Yes. The deduction remains payable and the penalty is a separate amount equal to it, so the cost of missing a ₹1,000 deduction is ₹2,000 before interest.

In practice the exchange deducts and deposits the 1%, so the deductor obligation sits with the platform rather than with you. The section matters most for trades settled off-exchange.

This page states the law and what CryptoKar computes from your trade history. It is not tax advice. Judgment calls belong with a chartered accountant. Sections and dates here were read against the source on 21 August 2026.

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