TDS on Crypto in India: Income Tax Regulations For Transactions Using Cryptocurrencies Expounded

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The Income-Tax Act of 1961 was amended by the Finance Bill of 2022 to include a new provision called 194S that imposes a 1 percent TDS on any consideration paid for the transfer of Virtual Digital Assets (VDA). Simply explained, you (or the Exchange facilitating this transaction) will have to deduct and withhold 1 percent of the transaction value as TDS when you acquire any Crypto (Crypto is deemed a VDA). Further payments to the government will be required for this withheld tax.

Before we go into the details, here is a piece of good news for you: The Central Board of Direct Taxes (CBDT) has clarified that when someone is buying Crypto via an Exchange (even in the case of P2P transactions), Tax can be deducted under section 194S by the Exchange.

Making it simple; technically, you as a buyer or seller will not have to do anything. the Exchange will do the needful.

To help you understand these provisions better, here are a few explanations with examples:

• TDS provisions will take effect on July 1, 2022. Trades that were completed before to July 1, 2022, are not impacted by these provisions. These requirements require that TDS be deducted on each transaction where a crypto asset is traded for Indian rupees or another crypto asset.

Please Note: If you have placed orders before the 1st of July 2022, but the trade happens on or after the 1st of July 2022, the TDS provisions will apply.

• While the seller of the cryptocurrency asset would be responsible for paying TDS, no TDS would be taken from the buyer when purchasing cryptocurrency using Indian rupees. The TDS, on the other hand, would be paid by both parties when purchasing a cryptocurrency with another cryptocurrency, or exchanging one cryptocurrency for another.
  

• Where applicable, 1% TDS will be deducted from the amount due in INR or cryptocurrency. However, in accordance with Section 206AB of the Income-Tax Act, 1961, the TDS to be deducted (for Crypto-related transactions) will be at a rate of 5% if the user hasn't filed their income tax return in the previous two years and the amount of TDS was at least INR 50,000 in each of those two prior years. For the sake of simplicity, we'll use 1% as the TDS rate for the purpose of this blog.
  

• The TDS collected must be remitted to the Income Tax Department in INR. Any TDS gathered in the form of Crypto must be translated to INR for this. In Crypto to Crypto transactions, the TDS for both sides would be subtracted from the quotation (or main) Crypto asset to facilitate conversion and minimize price slippage. Let's take an example where we assume there are three  quotation assets in Exchange markets which are INR, USDT, and BTC. For instance, BTC is the quote cryptocurrency asset in the following markets: MATIC-BTC, ETH-BTC, and ADA-BTC; as a result, the TDS of both the buyer and seller dealing in these markets would be deducted in BTC.
  

  • Examples:

    • INR markets: 1 BTC traded for 1000 INR. BTC seller receives 990 INR (after 1% TDS deduction). BTC buyer receives 1 BTC (no TDS deducted).

    • Crypto-Crypto markets: 10 BTC sold for 10 ETH. BTC seller receives 100 ETH by paying 10.10 BTC (after 1% TDS addition). BTC buyer receives 9.90 BTC (after 1% TDS deduction).

• In P2P trades. 1% TDS would be deducted before a USDT sell order is placed. No TDS has to be paid by the P2P USDT buyer.

  • Examples:

    • Seller places an order for selling 1000 USDT. Post 1% TDS deduction, a sell order would be placed for 990 USDT. The buyer would pay for 99 USDT, and the corresponding INR would be transferred to the seller’s bank account by the buyer.

    • If the entire 990 USDT is not successfully sold, 1% TDS would be deducted only in proportion to the amount sold, and the remaining of the 10 USDT locked for TDS would be released back to the seller on order cancellation.

• The TDS will be calculated on the ‘net’ consideration payable after excluding GST/charges levied by the Exchange.
  

• Periodically, any TDS collected in cryptocurrency would be translated into Indian rupees, and the amount received would be updated against the relevant trades.
  

• The TDS deducted would be specified on the order details page right away following trade execution to increase transparency. The comparable INR value of the TDS deducted may be discovered in the trade report after 48 hours in situations when the TDS is deducted in the form of any cryptocurrency asset.
  

• TDS would not be applicable on the trades performed on Exchange by a broker platform if the broker is deducting the TDS itself and it has an appropriate written agreement with Exchange specifying the same.

I hope this article helped you understand the TDS mechanism. I will keep sharing more reading and learning material to make your journey seamless. In case you have any questions, please feel free to drop them in the comments section below.

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Happy Trading.

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