In recent months, there has been a lot of discussion (and a lot of confusion) about crypto taxation in India. In this post, I will briefly explain all the laws that apply to cryptocurrencies in India.
Before we get started, let’s quickly understand what Non-Fungible Tokens (NFTs) are.
NFTs are digital proof of ownership of an underlying asset, such as:
digital art collectibles domain names virtual game items physical assets Cryptos can be broadly categorized into six types:
Currencies not backed by fiat eg Bitcoin (BTC), Monero (XMR) Currencies backed by Fiat eg Tether (USDT) Beneficial coins eg Ether (ETH), Filecoin (FIL) Governance tokens, e.g. Uniswap (UNI) NFTs not backed by tangible assets NFTs backed by tangible assets Virtual digital assets
Categories one through five are Virtual Digital Assets (VDAs) under Section 2 (47A) of the Income Tax Act.
Some of the laws that apply to VDAs are:
VDAs fall under the definition of ‘property’ under Section 56 of the Income Tax Act relating to ‘Income from other sources’.
For many transactions in VDAs, one percent tax is withheld at source (TDS) under Section 194S of the Income Tax Act entitled “Payment on Transfer of Virtual Digital Assets.”
The government has issued guidelines explaining when TDS is applicable and when it is not. These can be downloaded from here.
The government has also commissioned TDS for transactions other than those taking place on or through an Exchange. This can be downloaded here.
The government has also issued a circular outlining some exemptions for the application of Section 206AB to TDS to VDA. Section 206AB is titled “Special provision for withholding tax for non-filers of income tax returns” and the circular can be downloaded here.
Income from VDAs is taxed at 30 percent under Section 115BBH of the Income Tax Act entitled “Taxation on Income from Virtual Digital Assets.”
What does not qualify as VDAs?
The government has issued a notice stating that the following are not considered VDAs:
Gift cards or vouchers Mileage points Rewards points or loyalty card Subscription to websites or platforms or application NFTs Backed by tangible assets
According to the Government of India, an NFT is not considered a VDA if it meets two conditions:
The transfer of the NFT results in the transfer of ownership of an underlying tangible asset.
The transfer of ownership of such underlying tangible assets is legally enforceable. In March, Ritesh Pandey, a parliamentarian from the Bahujan Samaj Party (BSP), had expressed concern in the Lok Sabha. At the time, Pandey said this one percent TDS will promote “red tapism” while destroying this emerging digital asset class.
The idiom “red tapism” refers to those formal rules that are claimed to be exaggerated and rigid.
Pandey’s comments came against the backdrop of an outcry from India’s crypto community asking the government to reconsider the tax regime being forced into the crypto industry.
Cryptocurrency is an unregulated digital currency, not legal tender and subject to market risks. The information contained in the article is not intended as financial advice, trading advice or any other advice or recommendation of any kind offered or endorsed by NDTV. NDTV is not responsible for any loss arising from any investment based on any perceived recommendation, forecast or any other information contained in the article.