Introduction
In the wake of increasing adoption and trading of digital virtual assets (DVAs), particularly cryptocurrencies and NFTs, the Indian government introduced a legal tax framework to bring such transactions under regulatory oversight. This move culminated in the insertion of Section 194S and Section 115BBH into the Income Tax Act, 1961 via the Finance Act, 2022, effective from 1st July 2022 and 1st April 2022, respectively.
These provisions aim to ensure tax compliance and traceability in digital asset transactions.
Section 2(47A) – “Virtual Digital Asset” (VDAs) means—
1. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
2. a non-fungible token or any other token of similar nature, by whatever name called;
3. any other digital asset, as the Central Government may, by notification in the Official Gazette specify:
Following sub-clause (d) shall be inserted after sub-clause (c) of clause (47A) of section 2 by the Finance Act, 2025, w.e.f. 1-4-2026:
- any crypto-asset being a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions, whether or not such asset is included in sub-clause (a) or sub-clause (b) or sub-clause (c):
Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.
Explanation.—For the purposes of this clause,—
1. “non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
2. the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);
Legal Definition of Virtual Digital Asset (VDA)
Introduced via Section 2(47A) of the Income Tax Act:
“Virtual Digital Asset” means any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, providing a digital representation of value.
Includes:
- Cryptocurrencies like Bitcoin, Ethereum, etc.
- Non-fungible Tokens (NFTs).
Excludes:
- Official digital currency (CBDC) issued by RBI.
SECTION 194S – TDS on Payment for Transfer of Virtual Digital Assets (VDAs)
1. Legal Framework
- Inserted by: Finance Act, 2022
- Effective from: 1st July 2022
- Applicable Law: Income Tax Act, 1961
2. Scope and Applicability
Section 194S mandates deduction of Tax Deducted at Source (TDS) at the rate of 1% on any payment made for the transfer of a virtual digital asset (VDA) to a resident.
Applicable when:
- Payment is made in cash or kind.
- Payment is made in exchange of another VDA.
- Buyer is a resident.
3. Threshold Limits
- ₹10,000 per financial year for general taxpayers.
- ₹50,000 per financial year for specified persons (individuals/HUFs) who:
- Do not have income under the head “Profits and Gains from Business or Profession,” or
- Have income under the said head, but gross receipts are less than ₹1 crore (for business) or ₹50 lakh (for profession) in the previous financial year.
4. Specified Person Definition
As per Rule 12AB:
- An individual or HUF not required to audit their accounts under section 44AB in the previous year.
5. Responsibility to Deduct
- The buyer of VDA must deduct TDS before making the payment.
- If consideration is wholly/partly in kind or in exchange of another VDA, buyer must ensure TDS is paid before transferring the asset.
6. Rate of TDS
- 1% on consideration amount.
- 20% if PAN is not furnished (Section 206AA).
7. Related Forms and Procedures
- Form 26QF: Quarterly TDS return for tax deduction by exchange under section 194S
- Form 26QE : Quarterly TDS return for tax deduction by specified person under section 194S
- Form 16A: TDS certificate.
- Form 26QE: Challan-cum-statement for non-audit individual/HUF.
- Due date for payment of TDS:
- On or before 7 days from the end of the month in which tax deducted
- Where income or amount is paid or credited in the month of March :- Tax should be deposited by April 30.
- Within 30 days from the end of the month in which deduction is made (for Form 26QE).
SECTION 115BBH – Tax on Income from Virtual Digital Assets
1. Legal Framework
- Inserted by: Finance Act, 2022
- Effective from: 1st April 2022
- Applicable Law: Income Tax Act, 1961
2. Scope and Applicability
Section 115BBH provides for taxation of income from transfer of VDAs at a flat rate of 30% (plus surcharge and cess), without allowing any deductions other than COA or loss set-off.
3. Key Provisions
- Flat tax rate: 30% on income from transfer of VDA. Tax rate is the same whether it is business income or short-term capital gain or long-term capital gain.
- No deduction: Except cost of acquisition.
- No set-off of losses: Loss from VDA cannot be set off against income from any other source.
- No carry-forward of losses: VDA losses cannot be carried forward.
Compliance Requirements
For Deductors:
- Obtain PAN from payee.
- File quarterly TDS returns.
- Issue TDS certificate.
For Assessees:
- Report income under Section 115BBH in ITR.
- Pay tax at 30% rate.
- No benefit of slab rate or deductions.
FEMA Considerations
1. Applicability
Foreign Exchange Management Act (FEMA), 1999 governs cross-border transactions and foreign investments.
2. Current Status
- RBI stance: VDAs are not recognised as legal tender.
- FEMA restriction: Under current FEMA regulations, cross-border crypto transactions are under scrutiny and generally not permitted unless specifically allowed.
- LRS (Liberalized Remittance Scheme): RBI has not expressly permitted remittances for purchase of crypto assets under LRS.
3. Compliance Advisory
- Residents should avoid remitting funds overseas for VDA investment without RBI’s express approval.
- FEMA penalties may apply for contravention.
Historical Background
1. Pre-2022 Era
- No clear legal provision for taxing or regulating VDAs.
- Gains taxed under general provisions as capital gains or business income.
- No TDS on VDA transfers.
2. Post-2022 Developments
- Introduction of Section 115BBH and 194S in 2022 provided legislative clarity.
- Budget 2022 laid down intent to bring VDAs into the tax net.
- Ongoing consultations by RBI and SEBI on future regulations.
Key Judicial and Regulatory Insights
- RBI Circular (April 2018): Prohibited banks from dealing with entities trading in cryptocurrencies – later quashed by the Supreme Court in March 2020 (Internet and Mobile Association of India v. RBI).
- Finance Ministry Clarifications (2022): Taxing VDAs does not imply their legalization.
- CBDT Circular No. 13/2022 (22 June 2022): Clarified TDS mechanism for VDA transfers.
Conclusion
Sections 194S and 115BBH mark India’s first structured move towards regulating digital assets from a taxation standpoint. While they impose strict taxation and compliance burdens, they also indicate the government’s recognition of VDAs as significant economic instruments.
However, regulatory clarity under FEMA and GST is still evolving, and investors must tread cautiously, ensuring full tax compliance and legal due diligence in cross-border transactions.
Disclaimer for Section 194S , 115BBH and FEMA
The information provided herein on Section 194S and section 115BBH of the Income-tax Act, 1961 and FEMA are intended solely for general educational and awareness purposes. It does not constitute legal, tax, or investment advice and should not be relied upon as a substitute for professional consultation with a qualified chartered accountant, tax practitioner, or legal counsel.
Section 194S, section 115BBH together with any related CBDT circulars, notifications, and judicial pronouncements, and FEMA regulations is subject to amendment and administrative interpretation. The authors and publisher have taken reasonable care to ensure factual accuracy as of May 28 2025, but make no warranties—express or implied—regarding completeness, timeliness, or future applicability.
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