Understanding crypto taxation in India: Current framework and challenges

India’s taxation framework for virtual digital assets (VDAs) is clearly defined, covering gains, transfers, and other crypto-related income. Under Section 115BBH of the Income Tax Act, profits from the sale of VDAs are taxed at a flat 30%, with an additional 4% cess and applicable surcharge.

Section 194S mandates a 1% tax deducted at source (TDS) on all VDA transfers, applying to both individual and institutional transactions.

Domestic exchanges in India have introduced features such as automatic 1% TDS deductions and integrated crypto tax calculators to facilitate compliance. Income from mining, staking, airdrops, and salaries paid in crypto is also taxable, as per CoinDCX.

Taxpayers are required to report all crypto-related activity for the previous financial year, FY2024-25. From this year (FY2025-26), the income tax return (ITR) form will include a dedicated Schedule VDA to report gains and other crypto activities, improving transparency for both taxpayers and authorities.

The Finance Bill 2023 strengthened compliance measures under Section 271C, introducing penalties for non-payment of the 1% TDS. Failure to deduct or remit TDS can result in a penalty equal to the unpaid amount, interest of 15% per annum on delayed payments, and in some cases, imprisonment of up to six months.

An industry report highlights that the 1% TDS on crypto transactions has contributed to significant activity on offshore exchanges. According to the report, over 90% of Indian crypto trading currently occurs on offshore platforms, resulting in more than ₹11,000 crore in uncollected TDS. The report estimates that if the current structure continues, India could forgo up to ₹39,971 crore in TDS over the next five years.

ALSO READ | Study reveals how India invests in crypto and who’s making the most gains 

The report suggests potential measures to improve compliance and reduce revenue leakage, including lowering TDS rates, enabling offset of trading losses, bringing offshore exchanges under Indian jurisdiction, and aligning VDA taxation with global norms.

Sumit Gupta, Co-Founder at CoinDCX, stated that these measures could help create a more transparent and accountable environment for crypto taxation, while supporting domestic exchanges and protecting investor interests.

ALSO READ | India needs clear crypto rules to stop capital flight, says policy expert