In recent years, Non-Fungible Tokens (NFTs) have emerged as a groundbreaking form of asset in the digital realm. However, the rise in NFT trading has also left many questioning how these assets are treated under income tax laws. This article aims to demystify the treatment of NFTs under the Indian Income Tax Act of 1961, focusing on Sections 115BBH and 2(47A) as well as Central Board of Direct Taxes notifications and TDS implications.
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Section 115BBH – Tax on Virtual Digital Assets
According to Section 115BBH of the Income Tax Act, 1961, NFTs fall under the definition of Virtual Digital Assets (VDAs) and are taxable at a rate of 30%. Moreover, no deductions are allowed against this income except for the cost of acquisition, if any. This implies that trading NFTs would incur substantial tax liabilities, and you won’t be able to claim any deductions other than the original purchase price of the NFT.
Section 2(47A) – Definition of Virtual Digital Asset
The Act’s Section 2(47A) defines what constitutes a Virtual Digital Asset. It’s a comprehensive definition that encompasses not just NFTs, but also other kinds of digital tokens and assets that are electronically transferable. It is this section that places NFTs firmly within the tax net by equating them with other forms of virtual assets.
Central Board of Direct Taxes Notification
In a recent Notification No. 75/2022-Income Tax [S.O. 2959(E).] dated 30th June 2022, the Central Government clarified what counts as a non-fungible token. It stated that NFTs that result in the transfer of ownership of an underlying tangible asset are not included in this definition for taxation purposes. This clarification might provide some relief to NFT traders who deal in tokens backed by physical assets.
TDS Implications Under Section 194S
Tax Deducted at Source (TDS) for NFTs also has specific rules. According to Section 194S, 1% of the amount must be deducted as income tax at the time of crediting the sum to the account of the resident or making the payment, whichever is earlier. However, no tax is deducted if:
- The amount doesn’t exceed fifty thousand rupees in a financial year and is payable by a specified person.
- The amount doesn’t exceed ten thousand rupees in a financial year and is payable by any person other than a specified person.
Here, a “specified person” is generally an individual or a Hindu undivided family meeting certain conditions like income or turnover thresholds.
Conclusion
The treatment of NFTs under Indian tax law is still a relatively new and complex issue. However, existing provisions make it clear that NFT trading is not tax-free. It’s crucial for NFT traders to understand Sections 115BBH, 2(47A), and 194S to ensure they are in compliance with the law. With the Central Government taking steps to clarify the regulations, it’s crucial to stay updated to avoid any legal complications.
Understanding the tax implications is not just about compliance but also about making informed decisions when entering the NFT market. So, if you are thinking about dabbling in NFTs, make sure you’re well-versed in these tax laws.
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