1% TDS on Crypto: How Does It Impact Crypto Investors In Indian Union Budget 2024 ?

In the Union Budget 2022, the Indian Government announced new tax policies for interacting with virtual digital assets or cryptocurrencies in the country. The Central Board of Direct Taxes (CBDT) issued a circular in June 2022, which included various guidelines outlining the tax rules for digital currencies. The “1% TDS on crypto” is the tax deducted at the time of making a transaction involving cryptocurrencies.

We will discuss everything you need to know about the 1% TDS on crypto in India, in the present article. Furthermore, we will also look at the potential impact it has on Indian crypto investors.

What Exactly is TDS?

When a person is obligated to make a specified payment to another person, they must deduct tax at the source. This is called TDS or “Tax Deducted at Source”. This deducted amount will directly go to the Central Government. On the basis of Form 26AS or a TDS certificate, the deductee from from whose the 1% TDS is deducted is entitled to get a credit for it.

What is 1% TDS on Crypto?

The Central Board of Direct Taxes outlined tax policies and tax deduction process or TDS for virtual digital asset and cryptocurrency transfers.

As we explained, the tax that is deducted at the source, while making a transaction, is called TDS. And, the Indian Government announced in 2022, stating that a 1% TDS is chargeable on all virtual digital asset (VDA) transactions. This is applicable only when digital assets are transferred from one person to another or when a purchase takes place. And, the 1% TDS on crypto is not applicable when virtual digital assets are transferred from one wallet to another of the same person.

In other words, when you buy or sell a cryptocurrency, the exchange that facilitates the transaction must deduct 1% of the transaction value as TDS. This is eventually paid to the central government of India. As per the guidelines, this rule applies to transactions worth more than Rs. 10,000.

What Do You Need To Do For TDS Deduction?

As a buyer or seller on an exchange, you wouldn’t have to take any action regarding TDS. The crypto exchange will deduct the tax amount in accordance with the Central Board of Direct Taxes (CBDT) guidelines under Section 194S. The exchange will send you TDS statements at regular intervals.

In the case of TDS, it makes no difference whether you make a profit or a loss on your trade. TDS will be levied on the total amount sold (the “final sale amount”), regardless of whether you incur profit or loss.

How to calculate TDS on your Crypto?

Let’s understand how to calculate TDS with an example. Assume you sold Rs. 1,000 in ETH on a crypto exchange. In this case, the 1% TDS would be deducted from Rs. 1000 (final sale amount, regardless of whether you are selling ETH for a profit or a loss), which comes to around Rs.10. For the sake of simplicity, this example excludes exchange fees.

How 1% TDS on Crypto Impacts Crypto Investors?

When the Indian Government announced the application of 1% TDS on crypto, it justified the act saying that the tax will be refunded in the future. And, they also mentioned that the major reason behind the TDS is to record all crypto transactions and to avoid tax evasion and illegal transactions. Because, the Indian Government believes that crypto investments are made to avoid taxes in the long term.

Coming to the impact it has on investors in India, the financial burden is not that significant. The actual impact of the 1% TDS on crypto is majorly about compliance. Unlike the situations before the implementation of this act, investors must record every transactional purchase.

However, the implementation of this act combined with 30% tax on crypto earnings further added to the complexity of the crypto world. Investors who are trying to explore the crypto industry with small investments started having second thoughts after the tax policy announcements from the Indian Government.

The upcoming Union Budget in 2024 might bring some changes to the current tax policies around virtual digital assets. However, it is an interim budget before the elections. So, we cannot surely say whether the budget includes cryptocurrencies and brings new changes to the existing policies. Nonetheless, even the slightest modifications to new policies to the crypto market will make a huge impact on the industry in India.