Buying Bitcoin or Ethereum in India just got more expensive. Since July 2022, the government has enforced a 1% Tax Deducted at Source (TDS) on cryptocurrency transactions. This rule isn't just about collecting money; it's about tracking every move you make in the volatile world of Virtual Digital Assets (VDAs). If you trade crypto, hold altcoins, or even swap one token for another, this 1% deduction hits your wallet before you see any profit.
Many traders confuse TDS with income tax. They are not the same. TDS is an advance payment against your future tax liability. You pay it upfront when you sell or transfer crypto. Later, when you file your annual returns, this amount can be adjusted against your total tax bill. However, if your actual tax liability is lower than the TDS paid, you get a refund. The catch? Getting that refund takes time and paperwork. Understanding how this works is crucial for keeping your capital intact.
How Section 194S Works in Practice
The legal backbone of this rule is Section 194S of the Income Tax Act, 1961. Introduced during the Union Budget 2022 by Finance Minister Nirmala Sitharaman, this section mandates that anyone paying for a VDA must deduct 1% TDS. But here is where it gets tricky: who counts as a "payer"?
In most cases, if you use a registered exchange like WazirX or CoinDCX, the platform acts as the payer. They automatically deduct the 1% from your transaction value. You don't need to do anything manually. However, if you engage in peer-to-peer (P2P) trades or use decentralized exchanges (DEXs), the rules shift. In P2P scenarios, the buyer becomes responsible for deducting the TDS. This means you need to collect the seller's PAN, calculate the 1%, deposit it with the government, and issue a certificate. For casual traders, this administrative burden is often too much to handle.
The definition of a "transaction" under Section 194S is broad. It includes selling crypto for fiat currency (like INR), trading crypto for other crypto, and even spending crypto for goods or services. Transferring crypto from one wallet to your own another wallet does not trigger TDS because there is no change in ownership. But swapping Bitcoin for Solana? That’s a taxable event. Both the buyer and the seller incur TDS liabilities in such swaps, effectively doubling the cost impact on the trade.
Understanding the Threshold Limits
Not every small trade triggers TDS immediately. The law sets specific thresholds based on your taxpayer status. These limits apply to the aggregate value of all crypto transactions in a financial year, not per individual trade.
| Taxpayer Type | Annual Transaction Threshold | TDS Rate |
|---|---|---|
| Specified Persons (Individuals/HUF without tax audit) | ₹50,000 | 1% |
| All Others (Companies, Audited Individuals) | ₹10,000 | 1% |
| Defaulters (Non-filers with high TDS history) | No threshold (applies to all) | 5% |
If you are a regular salaried employee whose income doesn't require a tax audit, you fall into the "Specified Person" category. You can transact up to ₹50,000 worth of crypto in a year without facing TDS deductions. Once you cross this limit, even by one rupee, the 1% deduction kicks in for all subsequent transactions in that financial year. For businesses or individuals subject to tax audits, the bar is much lower at ₹10,000. This dual-threshold system often confuses new investors, leading to unexpected deductions.
A critical penalty exists under Section 206AB. If you have failed to file income tax returns for the last two years and had TDS exceeding ₹50,000 deducted annually, you face a punitive 5% TDS rate on crypto transactions. There is no threshold exemption for these defaulters. Every single transaction attracts 5% TDS, making crypto trading prohibitively expensive until you rectify your filing status.
The Double Taxation Burden
TDS is only half the story. India applies a flat 30% tax on profits from Virtual Digital Assets under Section 115BBH, plus a 4% health and education cess. This brings the effective tax rate on gains to 31.2%. Crucially, you cannot set off losses from crypto against gains from other sources like salary or stocks. You can only offset crypto losses against crypto gains.
So, imagine you buy Bitcoin for ₹1,00,000 and sell it for ₹1,20,000. Here is what happens:
- You pay 1% TDS on the sale: ₹1,200.
- Your profit is ₹20,000.
- You pay 31.2% tax on the profit: ₹6,240.
- Total tax outflow: ₹7,440 (3.72% of the transaction value).
Compliance Challenges for Traders
For users on major Indian exchanges, compliance is mostly automated. Platforms like ZebPay and CoinDCX deduct TDS at the source and report it to the government. You can track your cumulative TDS in Form 26AS, usually within 7-10 business days. However, technical glitches do happen. Users have reported delays in TDS credit updates, sometimes taking 30-90 days to reflect in their tax records. This delay can cause issues if you need proof of payment for loans or other financial activities.
If you trade on international platforms or via P2P, the responsibility falls entirely on you. You must:
- Deduct 1% TDS from the payment.
- Deposit the TDS with the government using Challan 281.
- File Form 26QE within 30 days of the month-end.
- Issue a TDS certificate (Form 16A) to the seller within 15 days.
Future Outlook and Regulatory Shifts
The regulatory landscape is evolving rapidly. In July 2025, clarifications were issued regarding GST on exchange services, adding another layer of taxation. Additionally, the proposed Digital Asset Bill 2025 aims to replace the current TDS framework with a centralized transaction registry. This could simplify reporting but might also increase surveillance.
There are whispers of threshold revisions. Industry pressure has led to stakeholder consultations suggesting a potential raise of the individual threshold to ₹1,00,000. Until then, traders must operate within the existing ₹10,000/₹50,000 limits. As the National Payments Corporation of India (NPCI) integrates crypto data into the Account Aggregation Framework, expect tighter monitoring in 2026. Staying compliant now builds a clean record for whatever changes come next.
Is TDS on crypto mandatory for all Indians?
Yes, if you exceed the annual transaction thresholds. For individuals not liable for tax audit, the limit is ₹50,000. For others, it is ₹10,000. Anyone failing to file returns for two consecutive years faces a mandatory 5% TDS with no threshold.
Can I claim back the TDS paid on crypto?
Yes. TDS is an advance tax payment. When you file your annual income tax return, you can adjust the TDS amount against your total tax liability. If the TDS exceeds your tax owed, you are eligible for a refund, though processing times vary.
Does transferring crypto between my own wallets attract TDS?
No. TDS applies only to "transfers," defined as a change in ownership. Moving funds from your personal Wallet A to your personal Wallet B is not a transfer under Section 194S and does not trigger TDS.
What happens if I trade crypto for other crypto?
Crypto-to-crypto swaps are taxable events. Both the buyer and the seller are required to deduct 1% TDS each. This means the effective deduction on the transaction value is 2%, impacting both parties' capital.
Are losses from crypto deductible from other income?
No. Under Section 115BBH, losses from Virtual Digital Assets can only be set off against gains from other VDAs. You cannot offset crypto losses against salary, stock market gains, or house property income.
