Well i accept bitcoins for many freelancing jobs. Why would it be illegal?
Accepting bitcoins for freelancer job is not illegal, but the question how you are treating them in your tax return and want kind of documentation trail you are keeping in order to support with department queries is what matters.
I am not sure if many people actually go about filing those incomes in their tax returns.
As its hard to know which bitcoin address is whose, it would also be hard for the government to find out unless you trade them for Fiat.
Correct. It is more of a moral issue right now. If you want to report all your BTC income as regular income, you might want to pay tax on it.
But since RBI has no such guideline (how to calculate tax on Bitcoin income), you might just want to report only the amount you convert to fiat.
Having that said, it would be nice to have some guidelines from RBI or income tax department on how taxable BTC is and how much tax to pay.