TDS on Virtual Digital Assets (VDAs): Taxation, Compliance & TDS Framework Under the Income Tax Act 1961

What Are Virtual Digital Assets (VDAs)?

The rise of blockchain technology has brought crypto-assets, Non-Fungible Tokens (NFTs), and other digital instruments into the mainstream financial ecosystem. To address the taxation of such instruments, the Indian legislature introduced a comprehensive framework under the Income Tax Act 1961. Understanding the scope of what qualifies as a Virtual Digital Asset is the first step toward proper compliance.

Statutory Definition of VDA

Section 2(47A) of the Income Tax Act 1961 defines Virtual Digital Assets to include the following categories:

• Section 2(47A)(a) — Any information, code, number, or token generated through cryptographic means
• Section 2(47A)(b) — Any notified Non-Fungible Token (NFT)
• Section 2(47A)(c) — Any other digital asset specifically notified by the Central Government
• Section 2(47A)(d) — Any crypto-asset that constitutes a digital representation of value and relies on a cryptographically secured distributed ledger or a comparable technology for transaction validation and security

What Is Excluded from the Definition of VDA?

Certain instruments and currencies are explicitly kept outside the ambit of VDAs. The following are not treated as Virtual Digital Assets:

• Indian Currency
• Central Bank Digital Currency (CBDC)
• Foreign Currency
• Physical NFTs — [Notification No. 75, dated 30-06-2022]
• Gift Cards or Vouchers — [Notification No. 74, dated 30-06-2022]
• Reward Points or Loyalty Cards — [Notification No. 74, dated 30-06-2022]
• Subscriptions to Websites or Applications — [Notification No. 74, dated 30-06-2022]
• Any other digitally notified assets excluded by the Government

Taxation of Income from Transfer of VDAs — Section 115BBH

How Is the Income Computed?

The income arising from the transfer of a Virtual Digital Asset is computed using a straightforward formula:

Important: No deductions other than the cost of acquisition are permissible. No expenditure, allowance, or set-off of losses from other transactions can be claimed against VDA income.

Rate of Tax

Income from VDA transfers is taxable at a flat rate of 30% (plus applicable surcharge and cess), regardless of the nature of income — whether treated as capital gains or business income.

Reporting Obligations for Crypto-Asset Transactions — Section 285BAA

Entities designated as specified reporting entities are obligated to report transactions involving crypto-assets — as defined under Section 2(47A)(d) — in the prescribed form and within the prescribed timeline. This reporting mechanism ensures that the tax administration maintains visibility over digital asset transactions occurring across platforms.

TDS on Transfer of Virtual Digital Assets — Section 194S

Section 194S of the Income Tax Act 1961 mandates that any person responsible for making a payment to a resident person as consideration for the transfer of a VDA must deduct tax at source at the rate of 1% of such consideration.

Where the recipient of consideration is a non-resident, the applicable provision is Section 195.

Who Is Responsible for Deducting TDS? — Identifying the Deductor

The identity of the deductor varies depending on the structure of the VDA transaction. The following scenarios clarify the deduction responsibility:

(a) Over-the-Counter (OTC) Transactions

Where the buyer and seller are known to each other and transact directly (OTC deal), the buyer bears the responsibility to deduct tax at source under Section 194S.

(b) Exchange of VDAs for VDAs

In cases where one VDA is exchanged for another, both the payer and the payee may be liable for TDS, since a transfer of VDA occurs from both sides.

(c) Transfer Through an Exchange — Direct Payment to Seller

Where VDAs are transferred via an Exchange and the Exchange directly pays the seller, the Exchange is liable to deduct TDS.

(d) Transfer Through an Exchange — Payment Via Broker

Where the sale proceeds flow from the Exchange to the seller through an intermediary broker, both the Exchange and the broker carry the TDS obligation. However, if there exists a written agreement between the Exchange and the broker specifying that the broker alone shall deduct TDS, the responsibility shifts exclusively to the broker.

(e) VDA Owned by the Exchange Itself

When the Exchange is the actual owner of the VDA being transferred, primary TDS liability falls on the buyer or the buyer's broker. As an alternative arrangement, the Exchange may execute a written agreement with the buyer or broker, committing to pay the tax directly to the government on or before the due date for that quarter.