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1% TDS on crypto refers to the tax deducted at source obligation under Section 194S of the Income Tax Act, 1961, inserted by Finance Act 2022 (effective 1 July 2022), requiring the payer to deduct 1% TDS on the consideration paid on transfer of any Virtual Digital Asset.
Definition
Section 194S was inserted by Finance Act 2022 (w.e.f. 1 July 2022) and applies to any person responsible for paying any consideration to a resident for the transfer of a VDA. "Transfer" includes sale, exchange, and barter. TDS at 1% must be deducted at the time of credit or payment, whichever is earlier. The deducted amount is remitted to the Central Government and is creditable against the seller's final tax liability (§115BBH) at the time of filing.
The mechanism mirrors existing TDS provisions but is unique in applying to an asset class (VDAs) rather than to a stream of income. Exchanges operating in India deduct TDS automatically at the point of trade settlement and issue a Form 26AS entry. Peer-to-peer (P2P) transfers without an intermediary place the TDS deduction obligation on the buyer.
Regulatory status in India
§194S is a compliance mechanism under the Income Tax Act — not a licensing or prudential requirement. It does not authorise VDA transactions; it merely imposes a withholding obligation on transactions that occur. The Central Board of Direct Taxes (CBDT) issued Circular No. 13/2022 (22 June 2022) providing FAQs and operational guidance on §194S, including valuation methodology and the treatment of barter transactions.
SEBI has not issued any regulation covering §194S compliance for VDAs, as VDAs are outside SEBI's prudential jurisdiction. FIU-IND's PMLA mandate for exchanges operates separately from §194S and covers KYC and suspicious transaction reporting obligations.
Tax treatment
Threshold for TDS deduction:
- ₹50,000 per financial year: applies where the payer is an individual or HUF whose total sales/turnover/gross receipts in the preceding financial year do not exceed ₹1 crore (business) or ₹50 lakh (profession). This covers most retail investors buying from other retail investors (P2P).
- ₹10,000 per financial year: applies in all other cases, including exchange-mediated transfers where the exchange is not an individual/HUF.
Calculation: TDS = 1% × (total consideration paid for VDA transfer in the financial year, above the applicable threshold). Example: exchange sells ₹5,00,000 of BTC on behalf of a user — exchange deducts ₹5,000 TDS (1% of ₹5,00,000) before crediting the seller.
No PAN: If the seller does not furnish PAN, TDS rate escalates to 20% (§206AA). PAN linkage is therefore operationally critical for all exchange account holders.
Credit: TDS deducted under §194S is creditable against the seller's total income-tax liability for the year (including §115BBH liability) and is shown in Form 26AS / AIS.
In-kind / barter: CBDT Circular 13/2022 provides that where VDAs are exchanged for other VDAs (e.g., BTC for ETH), the fair market value of the VDA received is the "consideration" for TDS purposes. The acquiring party bears the TDS deduction obligation.
Operational considerations
Registered Indian exchanges (FIU-IND registered) handle §194S deduction automatically and report via Form 26QE or Form 26Q. Investors using unregistered foreign exchanges must self-assess and deposit TDS via Form 26QE (for individuals). Failure to deduct or deposit TDS attracts interest (§201(1A)), penalty (§271C), and potential prosecution (§276B). CBDT's Compliance Portal (compliance.insight.gov.in) tracks AIS data and may flag VDA transactions.
Worked example
Scenario: Rohit sells ₹8,00,000 worth of cryptocurrency through a registered Indian exchange in FY 2024-25. The exchange deducts 1% TDS.
TDS calculation:
- Sale consideration: ₹8,00,000
- TDS @1%: ₹8,000 (deducted by exchange before crediting net ₹7,92,000 to Rohit's bank)
- Rohit's VDA cost of acquisition: ₹4,50,000
- VDA income (§115BBH): ₹8,00,000 − ₹4,50,000 = ₹3,50,000
- Tax @30% + 4% cess: ₹3,50,000 × 31.2% = ₹1,09,200
- Less: TDS already deducted: ₹8,000
- Net tax payable at filing: ₹1,01,200
The ₹8,000 TDS is not the full tax — it is a 1% advance deduction. The bulk of the tax (₹1,01,200) is paid via advance tax or self-assessment at filing.
Note: This example is illustrative. Consult a qualified tax professional for individual advice.
See also
- Virtual Digital Asset (VDA)
- Crypto Tax India (§115BBH)
- Crypto Exchange India
- Tax on Investments in India — Complete Guide
- TDS on Mutual Funds
Primary source
Finance Act 2022, Section 194S, Income Tax Act, 1961: incometaxindia.gov.in — §194S. CBDT Circular No. 13/2022 (operational guidance on §194S): incometaxindia.gov.in — Circular 13/2022.
MintByte is a SEBI-registered investment adviser (ARN-314872, APMI APRN-01658) offering services in mutual funds and NRI/GIFT City wealth management. MintByte does not advise on, recommend, or facilitate transactions in Virtual Digital Assets (VDAs) including cryptocurrencies. This content is factual and informational only, describing the legal and tax framework under Indian law. It is not investment advice. Past performance is not indicative of future returns. Read all scheme-related documents carefully.