Synopsis: This article explains how Tax Deducted at Source (TDS) applies to cryptocurrency trading in India. It covers why TDS was introduced, when it is deducted, related tax rules, compliance requirements, and penalties for non-payment.
What Is TDS?
Tax Deducted at Source (TDS) is a system in which tax is collected by the government at the time a payment is made. The person making the payment is legally responsible for deducting tax before transferring funds.
Under Section 194S of the Income Tax Act, a 1% TDS is applicable on the transfer of Virtual Digital Assets (VDAs), including cryptocurrencies.
TDS is deducted when the transaction value exceeds:
- Rs 10,000 in a financial year for most taxpayers
- Rs 50,000 in a financial year for specified individuals and HUFs (such as those with lower income)
The 1% TDS is deducted on the transaction value, not on profits.
Other Tax Obligations: Section 115BBH
In addition to TDS, crypto traders are also subject to taxation under Section 115BBH.
Under this section:
- Income from crypto transfers is taxed at a flat 30% rate
- No deductions are allowed except the cost of acquisition
- Losses cannot be set off against other income or carried forward
This means crypto investors effectively face:
- 30% income tax on profits, and
- 1% TDS on each eligible transaction
TDS is adjustable against your final tax liability when filing returns.
Why Was TDS Introduced on Crypto Transactions?
The government introduced TDS on crypto trading to:
- Monitor crypto transactions more effectively
- Reduce tax evasion through anonymous trading
- Bring digital assets under the formal tax system
- Improve transparency in the crypto ecosystem
By tracking transactions through TDS, authorities can create an audit trail.
TDS Under Section 194S
Section 194S governs TDS on Virtual Digital Assets.
If you are involved in:
- Selling crypto for profit
- Swapping one crypto for another
- Receiving crypto as consideration
- Transferring crypto as gifts (above limits)
you may be liable for TDS.
The deducted amount is linked to your PAN and reflects in Form 26AS, which you can claim while filing your Income Tax Return.
This provision has been applicable since 1 July 2022, under the Finance Act, 2022.
When Is TDS Deducted on Crypto Transactions?
1. Trading on Indian Exchanges
When you trade on Indian crypto exchanges:
- The exchange deducts 1% TDS automatically
- It deposits the amount with the Central Government
- Users do not need to handle separate compliance
This makes compliance easier for retail investors.
2. Trading on Foreign Exchanges
For transactions on foreign platforms:
- No automatic TDS deduction takes place
- The buyer is responsible for deducting and depositing TDS
- The buyer must ensure proper reporting and compliance
Failure to do so can attract penalties.
3. P2P and Crypto-to-Crypto Transactions
In peer-to-peer (P2P) or crypto-for-crypto transactions:
- The buyer must deduct 1% TDS
- TDS is calculated on the fair market value of the crypto in INR
- The value is determined on the transaction date
If both parties fail to deduct, responsibility may fall on the seller.
4. Buying or Selling Crypto Using Another Crypto
When crypto is exchanged for another crypto:
- It is treated as a taxable “transfer”
- 1% TDS applies on the INR value of the asset
- The buyer must deduct and deposit the tax
This rule applies even if no cash is involved.
5. Selling Crypto for INR
When crypto is sold for Indian Rupees:
- The buyer deducts 1% TDS
- It applies regardless of profit or loss
- The amount is deposited with the government
Loss-making transactions are also subject to TDS.
Also Read: Are Crypto Losses Due to Scams Tax Deductible in India?
Do You Need to File a Form When Paying TDS?
Yes. If you deduct TDS under Section 194S, you must file Form 26QE.
Key points:
- Must be filed within 30 days from the end of the month of deduction
- Delay attracts interest and penalties
- After filing, a TDS certificate (Form 16E) should be issued to the seller
This ensures proper credit in the seller’s tax records.
Penalties for Non-Payment or Non-Deduction of TDS
Failure to comply with TDS provisions can lead to serious consequences.
1. Interest on Late Payment
- 1% per month for late deduction
- 1.5% per month for late deposit after deduction
Interest is calculated until payment is made.
2. Prosecution Under Section 276B
If TDS is deducted but not deposited:
- Imprisonment from 3 months to 7 years
- Along with a fine
This applies in serious and repeated default cases.
3. Penalty Under Section 271C
- A penalty equal to the amount of TDS not deducted or paid
- Imposed in addition to interest and prosecution
This can significantly increase financial liability.
TDS on crypto trading plays a crucial role in bringing transparency to India’s digital asset market. Traders must understand that:
- 1% TDS applies to most crypto transfers
- 30% tax applies on profits
- Compliance is mandatory
- Non-payment attracts heavy penalties
Staying informed and maintaining proper records can help crypto investors avoid legal and financial trouble.
Written by Parvati Anilkumar
