Ethereum (ETH) in India: Income Tax, TDS and Compliance Rules Under the Income-tax Act, 2025

Ethereum has evolved into one of the most widely used programmable blockchains globally. Its native crypto-asset, Ether (ETH), powers a diverse ecosystem of decentralised applications (dApps), smart contracts, decentralised finance (DeFi) and token issuance. For an Indian assessee, however, ETH is squarely within the purview of Indian tax and regulatory laws despite being operated on a decentralised network.

From tax year 2026-27 onwards, the Income-tax Act, 2025 consolidates and updates India’s regime for virtual digital assets (VDAs). This framework governs:

  • Tax on income from transfer of ETH at a special 30% rate
  • 1% TDS on qualifying consideration for transfer of ETH
  • Restrictions on deduction, set-off and carry-forward of VDA losses
  • Crypto-asset reporting obligations and penalties
  • Linkages with PMLA, FIU-IND, GST, FEMA and accounting standards

This article provides a structured walkthrough of how ETH-related transactions are treated for Indian income-tax and allied compliance purposes under the Income-tax Act, 2025, with a focus on practical issues that individual and business users commonly face.

1. Understanding Ethereum and ETH in Functional Terms

1.1 Ethereum as a Smart-Contract Platform

Ethereum is not only a network for transferring value. It is a decentralised blockchain programmed to execute smart contracts—self-executing code that can:

  • Facilitate token launches and transfers
  • Power DeFi lending, borrowing and trading protocols
  • Enable issuance and trading of non-fungible tokens (NFTs)
  • Support a range of on-chain commercial and governance arrangements

These features mean that ETH usage extends far beyond simple “buy and sell” flows.

1.2 ETH as the Native Crypto-Asset

ETH (Ether) is Ethereum’s native crypto-asset. Within the network it is primarily used for:

  • Paying “gas” for transactions and computation
  • Being locked, or “staked”, by validators in Ethereum’s proof-of-stake (PoS) consensus mechanism
  • Serving as collateral, settlement asset or reward token in various smart-contract based systems

Ethereum’s migration from proof-of-work to proof-of-stake through “The Merge” on 15 September 2022 fundamentally changed how blocks are validated. Validators now stake ETH and are subject to protocol-level penalties, including “slashing” in certain circumstances, to discourage dishonest behaviour.

2. Why ETH Transactions Are Legally Complex

2.1 More Than a Simple Payment Token

A single ETH-linked transaction can involve multiple legal and tax elements. For instance, an assessee might:

  • Swap ETH for another VDA through a decentralised exchange
  • Provide ETH as liquidity to an automated market maker
  • Stake ETH directly or via a pooled or liquid-staking arrangement
  • Bridge ETH between different networks or Layer 2 solutions
  • Receive tokens via airdrops or protocol incentives
  • Use ETH solely as “gas” while interacting with dApps

Each of these can have distinct tax and regulatory consequences. Analysing everything under one uniform label—“Ethereum transaction”—is risky and often incorrect.

Under Indian law, the nature of taxation and compliance typically depends on:

  • The type of transaction (sale, exchange, staking, lending, reward, gift, etc.)
  • The capacity in which the assessee acts (investor, trader, business, platform operator, validator, etc.)
  • The instrument involved (ETH vs other VDAs, tokens, NFTs)
  • The counterparty profile (resident vs non-resident; regulated vs unregulated platform)

Consequently, a sale of ETH for INR, an ETH-for-token swap, and a staking reward are not automatically treated identically for tax purposes.

3. ETH as a Virtual Digital Asset Under Indian Income Tax Law

3.1 Migration From the 1961 Act to the 2025 Act

India’s earlier VDA provisions under the Income-tax Act, 1961 have effectively been carried forward and restructured under the Income-tax Act, 2025, which applies from 1 April 2026.

For tax year 2026-27 and later years, assessments on ETH transactions should be grounded in the 2025 Act, rather than mechanically citing repealed sections from the 1961 Act, except where dealing with historical periods.

3.2 ETH Within the VDA Definition

Cryptocurrencies such as ETH fall under the statutory definition of “virtual digital asset” for Indian tax purposes. Accordingly:

  • Income from transfer of ETH is subject to the special VDA taxation regime
  • TDS obligations arise on qualifying consideration paid on transfer of ETH
  • Losses from ETH transfer are governed by the specific restrictions applicable to VDAs

This VDA regime operates as a special code distinct from ordinary capital-gains treatment applicable to securities or immovable property.

4. 30% Tax on Income From Transfer of ETH: Section 194

4.1 Core Charging Provision

For tax year 2026-27, section 194, Table Sl. No. 4 of the Income-tax Act, 2025 provides a 30% tax rate on income from transfer of a virtual digital asset. Surcharge and health and education cess apply in addition to this base rate.

This provision:

  • Applies to income from transfer of ETH as a VDA
  • Operates as a self-contained, special regime
  • Overrides more favourable capital gains features available for certain other assets

4.2 Restrictions on Deductions and Loss Treatment

The VDA transfer regime is intentionally tight. Broadly:

  • Only cost of acquisition, if any, is generally allowed as deduction for computing VDA income
  • Other expenditure, allowances or deductions are not typically admissible under this special provision
  • A loss from transfer of a VDA cannot be set off against income governed by other provisions
  • VDA losses cannot be carried forward to subsequent tax years under this special regime

This means ETH is not treated like listed equity shares that benefit from long-term capital-gains concessions or indexation.

4.3 No Long-Term vs Short-Term Distinction

Simply holding ETH for an extended period does not create any concessional “long-term” rate under this VDA-specific mechanism. The 30% rate continues to apply irrespective of the holding period, subject to the statutory text.

5. Numerical Illustration: Sale of ETH

Consider a resident assessee who acquires ETH at a cost of ₹4,00,000 and later transfers it for ₹6,50,000. Ignoring other elements:

  • Sale consideration: ₹6,50,000
  • Cost of acquisition: ₹4,00,000
  • Income from VDA transfer: ₹2,50,000

At 30%, basic income-tax on this VDA income = ₹75,000.
Health and education cess at 4% = ₹3,000.
Total before surcharge = ₹78,000.