Synopsis: This article explains TDS and its impact on long-term crypto investors in India. It covers the TDS regulations, tax obligations, and how these requirements affect investment strategies. Read on to understand the complete framework.
What is TDS?
Tax Deducted at Source (TDS) is a mechanism where the Indian government collects at the time a payment is made. The payer has the legal responsibility to deduct TDS before transferring funds. TDS is deducted at 1% by crypto exchanges on sales of more than Rs 10,000 annually and Rs 50,000 for some individuals.
Other tax obligations involve the application of Section 115BBH of The Income Tax Act. In this section, there will be a flat tax of 30% levied on the transfer of crypto. This means crypto investors face both 30% tax and 1% TDS when income is earned through cryptocurrencies.
Why Was TDS Introduced?
- To monitor the supply and distribution of crypto in the economy
- To mitigate tax evasion from anonymous transactions involving crypto
- To regulate crypto by including it under the definition of “Digital assets.”
TDS under 194S is related to cryptocurrencies. If you hold these assets and involve yourself in selling them for profit, crypto swaps, gifts over limits, you are liable to pay TDS. Crypto exchanges take 1% of the sale value and credit it to your PAN for ITR claims. This deducted amount reduces liquidity immediately.
Impact on Long-Term Investors
Cash flow is one of the main issues faced by long-term investors. In case the amount was deducted wrongly, refunds can be claimed through filing the ITR. The refund will be provided within 6 to 12 months. This time gap can take away the reinvestment opportunity for the long term crypto investors in India. When high-value sales are executed, this can erode both short-term gains and long-term strategy, as most of the crypto investors are involved in the HODL strategy.
In crypto, there are no benefits like those enjoyed from capital gains. No deduction is allowed for transaction fees, storage costs, or other expenses; only the cost of acquisition can be offset against profits.
Also Read: Is Crypto Trading Legal in India? Latest Rules Explained
When TDS Applies:
Sales transactions
When you sell cryptocurrency, 1% TDS is automatically deducted from the sale proceeds. For example, you bought BTC worth Rs 10,00,000 and sold it for Rs 12,00,000. Out of Rs 12,00,000, 1% goes to TDS. So, there is a TDS of Rs 12,000, and this amount will be deducted. Net Amount received by you after TDS is Rs 11,88,000.
Crypto swaps
Each swap between cryptocurrencies is treated as a sale, triggering TDS. If you swap Ethereum for Bitcoin and then sell Bitcoin, you incur TDS twice. Many long-term investors avoid frequent swaps to minimize this double taxation effect.
P2P/ off exchange
In peer-to-peer transactions, the buyer must deduct TDS if the platform doesn’t handle it automatically. Evading TDS on such transactions can result in penalties up to 200% of the tax amount under Section 270A of The Income Tax Act, 1961.
If tax is not paid on crypto gains whenever required, the person will have to pay interest under Section 234A, Section 234B, and Section 234C. If the person can also face prosecution under Section 276C, leading to imprisonment from 3 months to 7 years. The fines can even add up to Rs 25 lakhs.
TDS Exemptions
- No TDS is applicable if the sale value is below Rs 10,000 (Rs 50,000 in special circumstances)
- Genuine gifts from the spouse, siblings, parents, children, lineal ascendants/ descendants do not require TDS to be deducted.
- If the crypto is received through inheritance, then no TDS is applicable.
Written by Parvati Anilkumar
