The Income-tax Act, 2025, as amended by the Finance Act, 2026, contains specific provisions for tax deducted at source (TDS) on payments made for the transfer of Virtual Digital Assets (VDAs). Under Section 393(1) [Table S. No. 8(vi)], TDS is required at 1% of the consideration when a resident receives payment for transferring a VDA.
The Income Tax Department has also clarified how the TDS responsibility works in different situations, including direct transactions, exchange-based trades, broker-assisted transactions and VDA-for-VDA exchanges.
Who is Required to Deduct TDS on VDA Transfers?
The responsibility generally falls on the person making the payment to a resident for the transfer of a VDA. However, the deductor can differ depending on how the transaction is carried out.
For an over-the-counter (OTC) transaction where the buyer and seller know each other, the buyer is responsible for deducting TDS.
Where VDAs are traded through an exchange, the exchange may be responsible for deduction, particularly where it makes the payment directly to the seller. If a broker is involved, both the exchange and broker may have TDS responsibilities, although a written agreement can allow the broker alone to deduct the tax.
TDS Rate on Virtual Digital Assets
The applicable TDS rate is 1% of the consideration for the transfer of a VDA. The rate is not increased by surcharge or Health & Education Cess.
However, if the deductee does not furnish PAN, TDS is required to be deducted at 20% under Section 397(2).
What is the TDS Threshold for VDA Transactions?
TDS is not required where the aggregate consideration payable during the tax year does not exceed the applicable threshold.
A ₹50,000 threshold applies to certain individuals and HUFs, including those meeting the specified turnover conditions or individuals/HUFs without income under the head "Profits and gains of business or profession."
For other persons, the applicable threshold is ₹10,000.
Individuals and HUFs covered by the ₹50,000 threshold are not required to obtain a TAN for this purpose. Instead, their PAN is required to be quoted in the challan and TDS statement.
When is TDS Deducted?
TDS must be deducted at the earlier of:
- The time of payment by any mode; or
- The time when the amount is credited to the resident's account.
For intra-day cryptocurrency trading, tax is deducted each time the transaction is squared off.
What Happens When VDA Consideration is Paid in Kind?
Special rules apply when the consideration is wholly in kind or partly in cash and the cash component is insufficient to cover the TDS liability.
In such cases, the payer must ensure that the required tax has been paid before releasing the consideration. Where the seller pays the tax through advance tax, the deductor can rely on the seller's declaration and advance tax payment challan, subject to the reporting requirements.
TDS Rules for VDA Exchange Transactions
Transactions conducted through cryptocurrency exchanges can involve multiple parties, making TDS compliance more complex.
Where a broker is not involved, the exchange may deduct TDS when it credits or pays the seller. If a broker is involved and is not the seller, both the exchange and broker may have deduction responsibilities unless a written agreement provides for the broker alone to deduct the tax.
Where the exchange itself owns the VDA being transferred, the primary responsibility generally rests with the buyer or the buyer's broker. An alternative arrangement may allow the exchange to pay the tax under a written agreement, subject to specified reporting and compliance conditions.
What if One VDA is Exchanged for Another?
Where one VDA is exchanged for another through an exchange, the primary TDS responsibility lies with the buyer and seller. Alternatively, the exchange can deduct TDS for both sides under a written contractual arrangement.
The Income Tax Department has also prescribed a mechanism for handling cases where TDS is withheld in the form of VDAs. Such VDAs have to be converted into INR and the resulting amount deposited with the Government within the applicable deadline.
TDS Compliance: Deposit, Returns and Certificates
The compliance requirements depend on the applicable threshold.
For persons covered by the ₹50,000 threshold, TDS is required to be deposited through Form 141 within 30 days from the end of the month in which the tax was deducted. The challan-cum-statement is also filed electronically in Form 141.
For other deductors, TDS is deposited through Challan ITNS 281(N) within 7 days from the end of the month in which the tax was deducted, subject to the specific March provision mentioned by the Income Tax Department. TDS statements are filed quarterly in Form 140.
The corresponding TDS certificates are issued in Form 132 for persons covered by the ₹50,000 threshold and Form 131 for other persons.
Consequences of Non-Compliance
Failure to deduct or deposit TDS can result in the deductor being treated as an assessee-in-default. Interest may apply at 1% per month or part of a month for failure to deduct tax and 1.5% per month or part thereof where tax has been deducted but not deposited.
Additional penalties and prosecution provisions may also apply for specified defaults. Failure to furnish TDS statements can attract fees and penalties, while failure to issue TDS certificates can result in a penalty of ₹500 for every day during which the default continues.
Key Takeaway
The VDA TDS framework places a clear compliance responsibility on parties involved in cryptocurrency and other VDA transactions. While the standard TDS rate is 1%, the applicable threshold, deductor and reporting requirements can vary depending on the nature of the transaction and the parties involved.
With different rules for OTC deals, exchanges, brokers and VDA-for-VDA transactions, taxpayers and intermediaries should identify the applicable TDS responsibility before completing the transaction and ensure timely payment and reporting.
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