Guidelines On TDS Under Section 194S Of ITA Simplified

The Finance Act 2022 introduced Section 194S in the Income-tax Act, 1961 (ITA), which became effective on July 1, 2022. 

If you trade in virtual digital assets (VDAs), which include cryptocurrencies and non-fungible tokens (NFTs), a provision has been introduced for a deduction of 1% TDS on payments made on the transfer of VDAs. This is applicable in case the value of the transaction is more than Rs 10,000 or Rs 50,000 in the case of specified persons, in a particular year. The tax deducted is required to be reported to the government in Form 26Q in case of other persons and Form 26QE in case of specified persons.

If you buy cryptocurrency worth Rs 1,00,000, you must deduct TDS at 1% of Rs 1,00,000 from your payment and pay the balance of Rs 99,000 to the seller. You will need to deposit Rs 1,000 with the government.

Budget 2025 update

The Union Budget 2025 proposed the rationalisation of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) to ease compliance challenges for taxpayers especially for middle-income earners. The government has raised the threshold limits across various TDS sections, aiming to simplify the tax process. The proposed changes are as follows

Section	Present	Proposed
193 - Interest on securities	NIL	10,000
194A - Interest other than Interest on securities	(i) 50,000/- for senior citizen; (ii) 40,000/- in case of others when payer is bank, cooperative society and post office (iii) 5,000/- in other cases	(i) 1,00,000/- for senior citizen (ii) 50,000/- in case of others when payer is bank, cooperative society and post office (iii) 10,000/- in other cases
194 – Dividend, for an individual shareholder	5,000	10,000
194K - Income in respect of units of a mutual fund	5,000	10,000
194B - Winnings from lottery, crossword puzzle Etc. & 194BB - Winnings from horse race	Aggregate of amounts exceeding 10,000/- during the financial year	10,000/- in respect of a single transaction
194D - Insurance commission	15,000	20,000
194G - Income by way of commission, prize etc. on lottery tickets	15,000	20,000
194H - Commission or brokerage	15,000	20,000
194-I - Rent	2,40,000 (in a financial year)	6,00,000 (in a financial year)
194J - Fee for professional or technical services	30,000	50,000
194LA - Income by way of enhanced compensation	2,50,000	5,00,000
206C(1G) – Remittance under LRS and overseas tour program package	7,00,000	10,00,000

Note: 

• The Tax Collected at Source (TCS) will be removed on remittances made for educational purposes when these remittances are financed through loans from specified financial institutions (Section 80E).
• The Tax Collected at Source (TCS) on the purchase of goods will be removed, effective from April 1, 2025.
• The higher TDS rate will only apply in cases where taxpayers do not provide PAN.

Who Is Specified Person?

TDS liability under Section 194S is applicable when the payment for the transfer of VDA exceeds Rs 50,000 during the financial year in the case of a specified person and Rs 10,000 in other cases.

Here, a Specified Person means:

• Individuals or HUFs who do not have income under ‘profits and gains of business and profession’
• Individuals or HUFs having business income up to Rs 1 crore
• Individuals or HUFs having professional receipts up to Rs 50 lakh

Further, the Central Board of Direct Taxes (CBDT) has recently issued clarificatory guidelines for TDS deduction on VDAs.

Key Aspects Of Section 194S Guidelines

• Transfer of a VDA (in cash) through an Exchange (who does not own the VDA) 
• If the transfer of VDA takes place on or through an Exchange (who does not own the VDA), then the transaction chain may look something like this:

Buyer⇒ Broker ⇒ Exchange ⇒ Broker ⇒ Seller (owner)

Here, a buyer would credit the payment to the exchange (directly or through a broker). The exchange will then be required to credit the payment to the owner of the VDA (directly or through a broker).

In this case, many parties are involved, but the exchange making the payment to the seller shall deduct TDS. However, if the payment between the seller and the exchange is made through a broker, then both parties are responsible for deducting tax.
Alternatively, the exchange and broker may agree that the broker will deduct TDS on all such transactions. The exchange is required to furnish a quarterly report in Form No. 26QF on or before the due date.

Transfer Of VDA (In Cash) Through An Exchange (Who Does Not Own VDA)

If the transfer of VDA takes place on or through an exchange (who does not own the VDA), then the exchange shall make the TDS at 1% and remit the balance amount of consideration to the seller. Where many parties are involved, and the buyer or his broker is required to deduct TDS.

Alternatively, the exchange may enter into an agreement with the buyer or their broker stating that the exchange shall pay the due tax on or before the due date of that quarter. In this case, the exchange would be required to furnish a quarterly report in Form No. 26QF on or before the due date. 

Exchange Of VDA(in kind) Via Broker, Barter For Another One

Unlike the above cases, the payments could be in kind, partly in kind, or in barter for another one. In such cases, the exchange may deduct tax on both legs of the transactions based on its agreement. If the transaction is not done through an Exchange, the person making the payment must deduct and deposit the TDS.  

If TDS Deducted By Exchange In Kind

a. The exchange shall maintain records for every VDA-to-VDA trade.

b. The exchange shall convert this tax withheld in kind to one of the primary VDAs [Bitcoin (BT), Ethereum (ETH), USD Tether (USDT), and USD Coin (USDC), etc.], which can be easily converted into Indian Rupees (INR).

c. The tax withheld, which is now converted into primary VDA, must be accumulated for the day from 00:00 to 23:59.

d. The accumulated balance of primary VDAs with Exchange at 00:00 hours is to be converted into INR at the market rate by placing a sell order. 

e. The Exchange needs to email the customer a contract note that includes the TDS on VDA withheld in kind and its  INR value upon conversion. 

f. The Exchange is required to deposit the INR value in the government account within the due dates

For the assessment year (AY) 2022-23, Form No. 26Q has included provisions for reporting such transactions. Similarly, Form No. 26QE has been introduced in the case of specified persons.

TDS Interaction Section 194S And 194O

If the tax is deducted under Section 194S of the ITA, TDS under Section 194O (applicable to payments by e-commerce operators to e-commerce participants) would not be required.

The tax will be deducted from the net consideration after excluding Goods and Services Tax (GST) or other charges.  

Payment Gateways And TDS Under Section 194S

If the payment for the transfer of a VDA is made through a payment gateway, then the payment gateways are exempted from deducting TDS.  

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