Synopsis: This article examines India’s regulatory framework for cryptocurrencies and the legal mechanisms available to combat crypto-related fraud. It outlines the legal provisions that empower authorities to take action against scammers while protecting legitimate cryptocurrency users.
India’s approach to cryptocurrency has undergone significant transformation—from complete avoidance to cautious acceptance. While cryptocurrencies don’t function as legal tender like the rupee, Indian citizens can legally hold, trade, and invest in them under specific conditions.
Legal Status and Classification
Under the Income Tax Act of 1961, cryptocurrencies are classified as Virtual Digital Assets (VDAs). This classification establishes that while crypto cannot be used as currency for everyday transactions, there is no complete ban on cryptocurrency activities in India. The framework distinguishes between permissible and prohibited uses.
Permissible Activities
Indian residents may legally:
- Buy, sell, and hold cryptocurrencies
- Trade on domestic exchanges and FIU-IND-registered international platforms
- Invest in cryptocurrencies as digital assets
Prohibited Activities
The following activities remain illegal:
- Using cryptocurrency as payment for goods and services
- Operating unregistered exchanges or wallets
- Evading taxes on crypto transactions
Regulatory Bodies Governing Cryptocurrency: Several government agencies share responsibility for cryptocurrency oversight:
Ministry of Finance: Formulates policy frameworks and taxation regulations for the crypto sector.
Reserve Bank of India (RBI): Regulates monetary policy and oversees India’s digital currency initiatives, including the digital rupee.
Financial Intelligence Unit-India (FIU-IND): Enforces Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements under the Prevention of Money Laundering Act (PMLA).
Central Board of Direct Taxes (CBDT): Oversees tax compliance for cryptocurrency transactions.
Securities and Exchange Board of India (SEBI): Expected to regulate crypto-based securities in the future.
Taxation Framework
India has implemented a strict taxation structure for cryptocurrencies:
- Flat 30% tax on profits from crypto sales
- 1% Tax Deducted at Source (TDS) on transactions above ₹10,000 per year for individuals
- 1% TDS on transactions above ₹50,000 for specified persons (businesses and entities)
- Only the cost of acquisition can be deducted; no other expenses are allowed
- Crypto losses cannot be offset against other income
- All crypto income must be declared in Income Tax Returns
- Holdings on foreign exchanges must comply with the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
- Exchanges are required to share user data with tax authorities
Also Read: Will India Ever Launch a Rupee-Backed Stablecoin?
Common Crypto Scams in India
Indian investors face several types of cryptocurrency fraud:
Ponzi Schemes: Fraudulent investment programs promising unrealistic returns, paid using new investors’ money.
Phishing Attacks: Scammers impersonate legitimate platforms to steal login credentials and private keys.
Fake Exchanges and Wallets: Fraudulent platforms designed to steal users’ funds and personal information.
Rug Pulls: Developers abandon projects after collecting investor funds, typically in new token launches.
Pump and Dump Schemes: Coordinated efforts to artificially inflate cryptocurrency prices before selling, leaving other investors with losses.
Legal Provisions Against Crypto Scams: Multiple laws enable authorities to prosecute cryptocurrency fraud:
Indian Penal Code, 1860
Sections 420, 406, 463, 465, 468: Cover cheating, criminal breach of trust, and forgery
Section 120B: Addresses criminal conspiracy
Information Technology Act, 2000
Section 43: Unauthorized access to computer systems
Section 66C: Identity theft
Section 66D: Cheating by personation using computer resources
Section 72: Privacy violations and breach of confidentiality
Prevention of Money Laundering Act, 2002: Applies when cryptocurrency is used for money laundering activities.
Banning of Unregulated Deposit Schemes Act, 2019: Applicable to crypto scams involving unregulated deposit schemes and Ponzi operations.
Legal Challenges in Combating Crypto Scams: Despite the legal framework, several obstacles hinder effective enforcement:
Jurisdictional Issues: Many scams originate from foreign countries, making cross-border investigations complex and time-consuming for Indian law enforcement.
Transaction Anonymity: Cryptocurrencies offer pseudonymity, making it difficult to trace transactions and identify perpetrators.
Limited Technical Expertise: Many law enforcement professionals and legal practitioners lack specialized knowledge of blockchain technology and cryptocurrency operations, leading to delayed detection and slower investigation processes.
Regulatory Ambiguity: The evolving and sometimes unclear nature of crypto-related laws creates delays in regulatory action and enforcement.
Written by Parvati Anilkumar
