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Updated On : July 19, 2025

Section 194S – TDS on Virtual Digital Assets: Demystifying Crypto Taxation

The burgeoning world of Virtual Digital Assets (VDAs), encompassing cryptocurrencies, Non-Fungible Tokens (NFTs), and other digital tokens, has significantly expanded the financial landscape. To bring these new-age assets under the tax net and ensure compliance, the Indian government introduced Section 194S to the Income Tax Act, 1961, through the Finance Act, 2022. This section mandates the deduction of Tax Deducted at Source (TDS) on payments made for the transfer of VDAs.

Why was Section 194S Introduced?

The introduction of Section 194S reflects the government's intent to:

Legitimize and Regulate VDA Transactions: While VDAs operate in a largely unregulated space globally, this provision is a step towards formalizing and tracking VDA transactions within India's tax framework.
Ensure Tax Compliance: By mandating TDS, the government aims to ensure that income generated from VDA transfers is appropriately reported and taxed, addressing concerns about potential tax evasion in the rapidly growing digital asset market.
Create a Transparent Ecosystem: The TDS mechanism provides a trail for VDA transactions, enabling the Income Tax Department to monitor significant transfers and bring greater transparency to the digital asset ecosystem.

Understanding Virtual Digital Assets (VDAs)

Before diving into the specifics of Section 194S, it's crucial to understand what constitutes a Virtual Digital Asset (VDA). As per Section 2(47A) of the Income Tax Act, a VDA is broadly defined as:

Any information, code, number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, whether by whatever name called.
It provides a digital representation of value exchanged with or without consideration, with the promise or expectation of deriving income or profit from the appreciation in value.
It can be transferred, stored, or traded electronically.
This includes cryptocurrencies, NFTs, and other similar digital assets. Certain NFTs whose transfer results in the transfer of ownership of the underlying tangible asset, and the transfer of ownership of such underlying asset is legally enforceable, are excluded from the definition of VDA.

Applicability of Section 194S

Section 194S became effective from July 1, 2022. It applies to any person who is responsible for paying any sum to a resident as consideration for the transfer of a VDA. The responsibility for deducting TDS primarily falls on the buyer of the VDA.

TDS Rate and Threshold Limits

The TDS rate under Section 194S is 1% of the consideration paid for the transfer of a VDA. However, the applicability of this deduction is subject to specific threshold limits:

Scenario 1: For a "Specified Person"

A "specified person" refers to:

An individual or Hindu Undivided Family (HUF) who does not have any income under the head "Profits and Gains of Business or Profession."
An individual or HUF having income under the head "Profits and Gains of Business or Profession," whose total sales/gross receipts/turnover from business does not exceed ₹1 Crore or from profession does not exceed ₹50 Lakh in the financial year immediately preceding the financial year in which the VDA is transferred.

For a specified person, TDS is required only if the aggregate value of consideration for VDA transfers during a financial year exceeds ₹50,000.

Example: If a salaried individual (a specified person) buys VDAs worth ₹60,000 in a financial year, a TDS of 1% (₹600) will be deducted on the entire ₹60,000. If the total purchases are ₹45,000, no TDS is applicable.

Scenario 2: For Persons Other Than a "Specified Person"

This category includes companies, firms, LLPs, and individuals/HUFs whose turnover/receipts exceed the limits for a "specified person."

For persons other than a specified person, TDS is required if the aggregate value of consideration for VDA transfers during a financial year exceeds ₹10,000.

Example: A company (not a specified person) buys VDAs worth ₹15,000 in a financial year. A TDS of 1% (₹150) will be deducted on the entire ₹15,000. If the total purchases are ₹8,000, no TDS is applicable.

When to Deduct TDS?

TDS under Section 194S must be deducted at the earlier of:

The time of credit of such sum to the account of the resident (seller of VDA).
The time of payment of such sum by any mode (cash, bank transfer, another VDA, etc.) to the resident.

Transactions Involving "In Kind" Payments or Exchanges

Section 194S also covers situations where the consideration for VDA transfer is wholly or partly in kind, or in exchange for another VDA. In such cases, the person responsible for paying the consideration (the buyer) must ensure that the tax has been paid before the transfer takes place. If both parties are transferring VDAs (e.g., VDA-to-VDA exchange), both are considered buyers and sellers, and both are responsible for deducting and depositing TDS on their respective legs of the transaction based on the fair market value.

Crucial Point for "In Kind" Transactions: If the payment is entirely in kind or partly in kind and the cash component is insufficient to cover the TDS liability, the buyer must ensure that the tax is paid (e.g., by depositing cash for the TDS amount) before the VDA transfer is completed. The seller would then receive the net consideration after TDS.

Role of Crypto Exchanges

In transactions facilitated through a crypto exchange, the responsibility for TDS deduction often falls on the exchange itself, especially if they are making the payment to the seller. Exchanges may enter into written agreements with buyers/brokers to streamline the TDS compliance process. They are required to furnish quarterly statements in Form 26QF for such transactions.

Important Considerations

PAN Requirement: If the seller (deductee) does not provide a valid Permanent Account Number (PAN), the TDS rate will be a higher rate of 20%, as per Section 206AB, instead of 1%.
No Lower Deduction Certificate: Provisions for applying for a lower deduction certificate (e.g., using Form 15G/15H or Section 197) are generally not applicable under Section 194S.
Deduction on Gross Consideration: TDS is to be deducted on the gross consideration for the transfer of VDA, excluding any GST or service charges levied by the deductor.
No Set-off of Losses: A key aspect of VDA taxation (under Section 115BBH) is that no deduction for any expenditure or allowance (other than the cost of acquisition) is permitted, and losses from VDA transfers cannot be set off against any other income nor can they be carried forward to subsequent assessment years.
Tax Credit: The seller of the VDA can claim credit for the TDS deducted by the buyer when filing their Income Tax Return (ITR). This amount will be adjusted against their total tax liability.
Compliance for "Specified Persons": "Specified persons" are not required to obtain a Tax Deduction and Collection Account Number (TAN). They can file their TDS return using Form 26QE on the income tax portal. Other deductors (non-specified persons) with a TAN will file Form 26Q and deposit TDS using Challan ITNS 281.
International Exchanges/Non-Residents: Section 194S is primarily applicable to payments made to a resident for the transfer of VDA. Transactions with non-residents or through international exchanges might fall under different tax provisions (Section 195, for example), or their applicability could be debated based on the specific circumstances and location of the transaction.

Impact on the VDA Market

The introduction of Section 194S (along with the flat 30% tax on VDA gains under Section 115BBH) has had a significant impact on the Indian VDA market. While it brings clarity and aims to curb illicit activities, it also imposes a compliance burden on participants. Investors and traders in VDAs must maintain meticulous records of all their transactions to ensure accurate calculation of tax liability and proper TDS compliance.

Navigating VDA Taxation? Let DisyTax Simplify It!

The taxation of Virtual Digital Assets is a complex and evolving area. Section 194S adds another layer of compliance for individuals and businesses dealing in crypto and NFTs. DisyTax offers expert guidance to help you navigate these regulations with ease.

Our specialized services for VDA taxation include:

Understanding Applicability: Clarifying if and how Section 194S applies to your VDA transactions.
TDS Calculation & Compliance: Assisting with accurate TDS calculations and ensuring timely deduction and deposit.
Record Keeping Advice: Guiding you on maintaining proper documentation for all your VDA trades.
ITR Filing for VDA Income: Expert assistance in reporting VDA income and claiming TDS credit in your Income Tax Return.
Strategic Tax Planning: Helping you understand the tax implications of your VDA portfolio and plan accordingly.

Don't let the complexities of VDA taxation deter you. Partner with DisyTax for comprehensive and reliable tax solutions.

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Section 194S – TDS on Virtual Digital Assets: FAQs

What is Section 194S of the Income Tax Act?

Section 194S of the Income Tax Act mandates Tax Deducted at Source (TDS) on payments made for the transfer of Virtual Digital Assets (VDAs), including cryptocurrencies and NFTs. It was introduced to bring transactions involving VDAs into the tax net and ensure traceability.

When did Section 194S come into effect?

Section 194S became effective from July 1, 2022.

What is the TDS rate under Section 194S?

The TDS rate under Section 194S is 1% of the consideration paid for the transfer of a Virtual Digital Asset.

What qualifies as a Virtual Digital Asset (VDA) for this section?

As per the Income Tax Act, a Virtual Digital Asset means:

Any information or code or number or token 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 expectation of a utility in the future or a store of value, including its use in any financial transaction or investment, but not limited to, a cryptocurrency or Non-Fungible Token (NFT).
Any other digital asset as the Central Government may, by notification in the Official Gazette, specify.

Who is liable to deduct TDS under Section 194S?

Any person responsible for paying to any resident any sum by way of consideration for transfer of a VDA is liable to deduct TDS. This includes individuals, HUFs, firms, companies, and also specified persons (e.g., exchanges, brokers) facilitating the transfer.

What are the thresholds for TDS deduction under Section 194S?

The thresholds are as follows:

₹50,000 in a financial year for specified persons (individuals/HUFs whose total sales, gross receipts or turnover from business or profession does not exceed ₹1 crore in case of business or ₹50 lakh in case of profession during the financial year immediately preceding the financial year in which such asset is transferred).
₹10,000 in a financial year for other persons.

How does TDS apply to transactions on VDA exchanges?

When the transfer of a VDA takes place on an exchange and payment is made by the buyer to the seller through the exchange, the exchange is considered the "person responsible for paying" and is liable to deduct TDS. They typically facilitate this by adjusting the amount during the transaction.

What if the consideration for VDA transfer is in kind or through exchange?

If the consideration is wholly in kind, or partly in cash and partly in kind, or wholly through exchange of another VDA, the person responsible for paying (the buyer) must ensure that tax has been paid in respect of such transaction. This can be done by making arrangements with the exchange or, if directly, by paying the tax before the transfer.

Is TDS applicable on gifts of VDAs?

Section 194S applies to "transfer" of VDA for "consideration." A gift is typically a transfer without consideration. However, the taxation of VDA gifts falls under Section 56(2)(x) if the value exceeds ₹50,000, where the recipient would be liable to pay tax, not TDS by the giver.

Can I get a refund of TDS deducted under Section 194S?

Yes, like other TDS provisions, the TDS deducted under Section 194S can be claimed as a credit when you file your income tax return. If your total tax liability is less than the TDS deducted, you may be eligible for a refund.

What are the consequences of non-compliance with Section 194S?

Failure to deduct or deposit TDS under Section 194S can lead to penalties, interest charges, and disallowance of expenditure (if applicable) under the Income Tax Act.

Does Section 194S apply to P2P (Peer-to-Peer) VDA transactions?

Yes, Section 194S applies to all transfers of VDAs for consideration, including P2P transactions. In such cases, the buyer of the VDA is responsible for deducting and depositing the TDS. This can be challenging for direct P2P trades without an intermediary.

Are stablecoins and NFTs covered under Section 194S?

Yes, the definition of Virtual Digital Asset is broad and specifically includes "cryptocurrency or Non-Fungible Token (NFT)." This implies that stablecoins and NFTs fall within the purview of Section 194S if they meet the general criteria of a VDA.

How does Section 194S interact with the 30% tax on VDA income?

Section 194S is a TDS provision, meaning it's an advance tax collection mechanism on the *consideration* for the transfer. The 30% tax (plus surcharge and cess) under Section 115BBH is on the *income* derived from the transfer of VDAs (i.e., profits). The TDS deducted under 194S will be adjusted against your final tax liability calculated under Section 115BBH.

What if the VDA is transferred outside an exchange?

If a VDA is transferred directly between two persons (e.g., P2P) without an exchange facilitating, the buyer (person making the payment) is responsible for deducting TDS and depositing it with the government. This requires the buyer to have a TAN (Tax Deduction and Collection Account Number) and file TDS returns.

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