TDS on Crypto in India

Nirmala Sitharaman, India's Finance Minister, suggested taxing digital assets, which has stoked more discussion about whether cryptocurrency transactions should be allowed in India. While many have welcomed the government's move to tax virtual currencies as the first step towards recognising them, no formal statement has been made by the government about the legality of such currencies in India. 

One can conclude that cryptocurrencies are unlawful, but there isn't a firm ban on them in India based on several important statements by the Governor of the Reserve Bank of India and other government spokespersons, including the nation's Finance Minister. Although unregulated, the Indian government recently executed a 30% tax on cryptocurrency earnings and a 1% tax deducted at source as part of the Union Budget 2022.

 What is 1% TDS on Crypto in India?

The type of tax deducted at the transaction's source is called TDS. A 1% TDS is charged when a crypto asset is transferred. A transfer refers to a change in ownership, not a transfer from one wallet to another. The main objective of the 1% TDS is to record transaction information and keep track of purchases of crypto assets.

There are a few crucial considerations about crypto TDS: 

• From July 1, 2022, onwards, crypto transactions are subject to a 1% TDS.
• TDS on crypto assets is deducted and deposited to the Central Government. 
• The buyer must withhold TDS when transacting using P2P platforms or overseas exchanges.
• When trading one cryptocurrency for another, a TDS of 1% will be charged to both the buyer and the seller.

However, if the total value of cryptocurrency trading activities does not reach Rs 50,000 in a financial year, the individual won’t be required to pay any TDS.

How is TDS in Crypto Transaction Calculated in India?

As per Section 2(47A) of the Income Tax Act, Virtual Digital Assets (VDAs) effectively includes all crypto assets, such as NFTs, cryptocurrencies, tokens, etc.

While announcing the 2022 Union Budget, Finance Minister Nirmala Sitharaman introduced Section 115BBH, as per which there is a 30% tax applicable on gains obtained from trading cryptocurrencies on or after April 1, 2022. 

Private investors, professional traders, and anyone involved with digital asset transactions during a particular, fiscal year are subject to the tax rate.

Moreover, cryptocurrency transactions are subject to other taxes besides the 30% levy. To guarantee that all cryptocurrency transactions are recorded, there is a 1% TDS on crypto transactions amounting to Rs 50,000 in a fiscal year. This is applicable as per clause 194S on transactions carried out on or after July 1, 2022. 

What is the Date from Which TDS is Applicable on Crypto?

The Central Board of Direct Taxes (CBDT) published a circular on June 22, 2022, defining the procedure for tax deductions for transfers of virtual digital assets (VDAs) and cryptocurrency. TDS provisions are applicable from 1 July 2022. 

These provisions will not affect any trades executed before the mentioned date. As per these provisions, TDS would be deducted on each trade where a crypto asset is exchanged for INR or another crypto asset. However, if you have placed orders before 1 July 2022 but the trades get executed post the date, the new TDS provisions will be applied to your transaction.

What Is the Crypto TDS Rule?

There can be four scenarios that may arise while transacting in cryptocurrencies. These are:

1. You Are Buying Cryptocurrency with Indian Rupee

When you are buying a cryptocurrency with INR, no TDS is required.

2. You Are Selling Cryptocurrency and Getting Indian Rupee

In this case, there will be a TDS deduction of 1% on the total value of the transaction. 

3. You Are Buying Cryptocurrency but Paying with Another Crypto

In this situation, a 1% TDS would be applicable on the sale point transaction of the crypto transaction. For example, if you were using 2000 Ethereum to buy Rs 2000 worth of Bitcoin, you will be required to pay 1% of 2000 Ethereum, or about 20 Ethereum as the TDS.

4. You Are Selling Cryptocurrency for Another Crypto

In this case, if you were to sell your Dogecoin for Ethereum, you would be required to pay 1% of the Dogecoin's INR value as Tax Deducted at Source.

What is the Crypto TDS Form?

Form 26QE must be submitted to deposit the tax deducted on any VDAs. This form requires the tax deducted under Section 194S to be paid to the Central Government within 30 days from the end of the month when the deduction is made. 

What is the Crypto TDS Refund Policy?

As per the new taxation rules, it is mandatory to pay TDS on the transfer of virtual digital assets. Indian investors who have already paid a 30% tax on their gains from crypto transactions are liable to pay TDS. 

These two tax liabilities need to be settled individually. However, if the tax owed is less than the tax deducted, investors can claim the difference between the two as a refund when filing the tax return. 

What is the Penalty for Not Paying TDS on Crypto?

If you fail to pay the tax on transactions of cryptocurrencies under Chapter XII-D or XVII-B, 276B, you will be imprisoned for a tenure of a minimum of three years which can extend to seven years, along with a hefty fine.

After the TDS legislation was announced during the Union Budget 2022, a new Finance Bill was shared in the Union Budget 2023.

The Finance Bill included a change to section 271C of the Income Tax Act, which stated that failure to pay TDS would result in a fine equivalent to the amount of unpaid TDS; the fine would be imposed by a joint commissioner, or it could be a jail sentence of up to six months. This can translate into a 15% annual interest charge for late payments in the event of any delay.

Final Word

According to the Income Tax laws, if you purchase NFTs or crypto coins in INR, no TDS would be applicable on such transactions. However, you must pay TDS if you wish to sell it back to get INR. By considering the above facts, you can be a responsible owner of VDAs in India.