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Guidelines On TDS Under Section 194S Of ITA Simplified

Updated on: Apr 30th, 2024

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8 min read

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.

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

government recognized cryptocurrency

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

TDS in case of vda exchanged for vda

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.  

Related Articles

  1. Bitcoin And Its Taxability In India
  2. Cryptocurrency Taxation
  3. Calculation Of Tax On Income From Cryptocurrency

Frequently Asked Questions

What is the rate at which tax is to be deducted under Section 194S?

Tax is to be deducted at the rate of 1% of the consideration. If the payee does not furnish his/her PAN, tax has to be deducted at 20%

What is a Virtual Digital Asset?

Virtual Digital Asset for the purpose of deduction of tax under this section means

  • Any information, code, number or token which is generated through cryptographic means, also known as crypto currency. Eg. Bitcoin, ethereum etc.
  • Non-Fungible Token (NFT) or any other token of similar nature as notified by Govt.
  • Any other digital asset, as notified by the Central Govt.
What is the maximum amount upto which no tax needs to be deducted under this section?

No tax needs to be deducted if the consideration payable by a specified person does not exceed Rs. 50,000 during the financial year. No tax needs to be deducted if the consideration payable by any person other than a specified person does not exceed Rs. 10,000 during the financial year.

Is the possession of a valid Tax deduction and collection account number (TAN) mandatory for deducting tax under this section?

No, TAN is not mandatory for deducting tax under Section 194S.

Who is a specified person for Section 194S?

a) Individual /HUF whose sales , gross receipts or turnover from business or profession doesn’t exceed 1cr in case of business or 50L in case of profession during financial year immediately preceding financial year in which the asset is formed ,

b) Individual /HUF not having any Profits and gains of business or profession (PGBP) income.

What Is Time limit for filing Form-26QE?

Tax deducted must be reported on Form-26QE within 30 days from the end of the month in which tax has been deducted. For example: Mr X has purchased VDA from Mr Y of Rs 60,000 on 10th May 2023. Mr X is required to deduct TDS @ 1% on 10th May 2023 and file form 26QE within 30 days from the end of May 2023 i.e., June 30 2023. Click here to know more.

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Quick Summary

Section 194S of the Finance Act introduces TDS on payments exceeding Rs 10,000 for VDAs, including cryptocurrency and NFTs. Specified persons include individuals or HUFs with specific income thresholds. Guidelines clarify TDS deductions for VDA transfers, where parties such as brokers and exchanges play a role. Forms 26Q and 26QE are crucial for reporting. Section 194O and payment gateways exemptions are discussed.

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