The government introduced 1% Tax Deducted at Source (TDS) on crypto transactions under Section 194S of the Income-tax Act. The objective is not to tax profits immediately, but to track crypto transactions and ensure transparency in digital asset trading.
This TDS applies to the transfer of Virtual Digital Assets (VDAs), which includes cryptocurrencies and NFTs, irrespective of whether the transaction results in profit or loss.
What are Threshold Limits
TDS applies only after crossing a minimum transaction value in a financial year:
- ₹50,000 for individuals and HUFs not subject to tax audit
- ₹10,000 for other taxpayers
Once this threshold is crossed, 1% TDS is deducted on every subsequent transaction, not just on the excess amount.
When Is TDS Deducted?
TDS is deducted at the time of transfer, which includes:
- Selling crypto for INR
- Crypto-to-crypto trades
- Using crypto to buy goods or services
On most exchanges, TDS is deducted automatically. However, in peer-to-peer (P2P) transactions, the responsibility to deduct and deposit TDS lies with the buyer, which is often overlooked. Here is the example:
If you buy crypto worth ₹1,00,000, a 1% TDS of ₹1,000 is deducted. The seller receives ₹99,000, while the ₹1,000 is deposited with the government. This amount later reflects in Form 26AS, allowing you to claim credit while filing your return.
What Compliance Requirements
To stay compliant, taxpayers must ensure that TDS is:
- Deducted correctly
- Deposited within the prescribed timelines
- Reported accurately so it reflects in Form 26AS/AIS
Failure to comply can attract interest, late fees, and penalties, even if the transaction amount is small or infrequent.
Key Clarification
Many investors assume tax applies only when profits are earned or money is withdrawn. However, 1% TDS applies on every eligible crypto transaction, even if you are trading at a loss or have not withdrawn funds from the exchange. The deduction is linked to the act of transferring crypto, not to profitability or cash withdrawal. This 1% TDS is also separate from the 30% tax on crypto profits, which is calculated later at the time of filing your income tax return.
Proper TDS reconciliation is essential before filing your ITR.
Ensuring that all deducted TDS reflects correctly in Form 26AS helps you claim accurate credit and avoid notices from the Income Tax Department. Understanding these rules early makes crypto taxation far more manageable and stress-free.