07 Feb 2023
4 min read
Whether you are a trader or an investor, this guide is trying to simplify the complicated Tax Deductions at Source (TDS) for the crypto world.
While the government has implemented a 30% tax rate on income earned from the “transfer” of all crypto assets, a 1% TDS has also been implemented on the transfer of Virtual Digital Assets, VDA from consideration of every trade from July 1, 2022.
The idea behind introducing the TDS mechanism is to trace every crypto transaction and ensure the users can account for the same at the time of filing taxes.
In this guide, we are going to break down the TDS implications for all traders and investors. But before we delve further into the TDS implications on crypto transactions, we will cover the basics of TDS in short.
Tax Deductions at Source (TDS) was introduced with the idea of collecting tax at the very origin of the transaction. If a payment exceeds a certain threshold limit, TDS is required to be deducted. What is Tax Deduction at Source, TDS?
There are two parties involved in a TDS transaction:
- We will be discussing a transaction between a freelance graphic designer, A, and a company availing the services, S Co.
- A provides deliverables worth INR 60,000 to S Co. The invoice is drawn up and sent to the company.
- S Co. will then deduct 10% TDS (INR 6000) as per the TDS provisions and credit INR 54,000 to A’s bank account.
- In the case of crypto transactions, the government has levied a flat 1% TDS rate on all crypto transfers.
- (For ease of simplicity, we’re going to consider TDS at 1% for this entire guide)
An individual is said to be a resident of India if they have spent more than 182 days residing in the country
The taxpayer has been in India for at least 365 days in the four years immediately preceding a particular financial year and is in India for 60 days or more in that year.
‘According to Section 194S introduced in Finance Act, 2022 TDS on Transfer of Virtual Digital Assets, any person transacting with a resident is required to deduct taxes while paying the consideration for transfer of the digital asset.’
Let’s break this down.
According to the government circular issued on June 28, 2022, from July 1, 2022, every buyer of VDA who transacts with a resident is required to deduct TDS from the seller in the transaction.
The deduction needs to be done at the time of the transaction from the buyer's end and is required to deposit the tax so deducted with the government.
In a peer-to-peer transaction (P2P) the buyer needs to deduct 1% TDS from the total sale consideration and deposit the same in the government's account.
Here is an example:
S is a resident of India buying a crypto asset, ADA worth INR 50,000 or 1000 ADA coins via a P2P transaction (where an exchange/platform is nowhere involved in carrying out the transaction) with T, another resident of India. In this scenario:
- S - Buyer of cryptocurrency, also known as Deductor
- T - Seller of cryptocurrency, also known as Deductee
According to the section, S is required to deduct 1% of the transaction value as TDS before transferring the sale consideration of INR 50,000 to T.
1% of INR 50,000 is INR 500.
The final transaction would look like this:
- S will receive = 1000 ADA Coins
- T will receive = INR 49,500 (post-TDS deduction)
TDS deducted by S = INR 500 (on behalf of T, paid to the central government)
The above is an example of an INR transaction.
A cash transaction is when the buyer pays for the assets via fiat currency (e.g. INR, USD, or Euros), similar to buying an equity stock.
In the example mentioned above, S is buying a crypto asset and is paying for it via cash (INR 50,000).
Note: INR transactions don’t just mean transactions that occurred via the exchange of hard cash. Transactions via Bank transfers, UPI payments, and NEFTs are all considered INR transactions.
For the above transaction to go through, it is important for the seller, that is T, to provide their PAN card details to S, for deduction and payment of taxes.
S buys 10 ETH from T and pays for it via 1 BTC via P2P.
(The numbers are mentioned for representation purposes only.)
This is known as a transaction in kind. Here, the buyer pays for the assets through a barter system similar to the olden-day transactions. Such a transaction could be buying one crypto asset and paying for it via another crypto asset.
A transaction in kind carried out is typically known as a crypto Swap in the crypto ecosystem.
In a swap transaction, where two Virtual Digital Assets (VDAs) are exchanged, both parties would be liable to withhold TDS as both are buying a VDA, hence both would be required to deduct and deposit the same amount as TDS with the government.
As per the current law, parties transacting in kind need to ensure that TDS is deducted before making the payment to the seller.
Based on this, in the above transaction
This TDS portion of ETH and BTC needs to be converted to INR with exchange rates as on the date of transaction and deposit to the govt.
Any individual providing services to another individual who is being paid in crypto also needs to pay TDS on the transaction along with the 10% TDS on freelance transactions u/s 194J.
Hold on, we’ll break it down for you.
A is providing freelance services to B worth INR 60,000. In a generic scenario where the services are provided in return for INR, B will deduct 10% TDS on behalf of A based on the TDS regulations and credit INR 54,000 to A’s account.
Moving on, A provides freelance services to B and in return requires remuneration in crypto coins. In such a situation, 1% TDS will also be chargeable along with the 10% TDS since crypto assets are being transferred between individuals.
The transaction would look something like this:
A provides freelance services in return for crypto coins with INR 60,000.
B receives the services and deducts 10% TDS worth INR 6000 and 1% TDS worth INR 600.
A finally receives a total sum of INR 53,400 post the generic TDS deduction and the crypto TDS deduction.
10% TDS = INR 6000, this is deducted on behalf of A as per the regulations
1% TDS = INR 600, this is deducted on behalf of B as per the regulations, since the seller has the liability to deduct TDS in case of crypto transactions.
At the time of the crypto coin transfer, the seller needs to convert the coin value to INR till the extent of the TDS amount and deposit the same amount to the government and transfer the remaining crypto coins to A.
There are two situations wherein the TDS is not required to be paid for P2P transactions:
A buyer is not required to deduct TDS if the total transaction amount does not exceed INR 10,000 for the entire financial year and the person they are transacting with is a non-specified person.
In case a buyer is transacting with a specified person and the total transaction amount is less than INR 50,000 for the entire financial year, the buyer is not required to deduct TDS.
A specified person is an individual or HUF whose total sales, gross receipts, or turnover does not exceed Rs 1 crore in case of business and Rs 50 lakh in case of the profession during the financial year immediately preceding the financial year or a person being an individual or HUF not having any income under the head profits and gains of business and profession.
As per Section 194S of the Income Tax Act, the threshold limit beyond which TDS is to be deducted is INR 10,000. However, for a specified person, the limit would be INR 50,000 during the financial year.
If you’re buying crypto on an exchange with INR as the medium, you as a buyer DO NOT need to deduct TDS. Only sellers of the cryptocurrency are required to bear the TDS on transactions. In the instant case, the exchange would deduct the tax from the seller.
If you wish to buy 2 ADA against INR 100 from the seller.
- Seller will receive INR 99 [1% of TDS deducted from transaction value by the exchange]
- Buyer will receive 2 ADAs [Buyers do not have to bear TDS on an Indian Exchange]
While the seller is required to bear TDS, most Indian exchanges have automated the deduction of TDS and its calculator at the time of the trades taking place.
Hence, making it is important that you pick an exchange that has enabled the TDS function to meet the Indian Tax requirements.
This means that no human intervention is additionally required for TDS compliance while trading on an Indian exchange.
For transactions wherein crypto/crypto trades are taking place, TDS is required to be deducted by both parties involved in the trade. However, since the exchange is acting as an intermediary in the transaction, the exchange does the TDS compliance formalities on behalf of both parties.
This is because both the parties involved are buyers of particular crypto in a crypto swap transaction, and hence are liable to bear TDS.
Now while this may sound complicated and a tedious effort to take, the effort required is minimal. Once these transactions are taking place on an exchange, the exchange itself will deduct 1% of the coin value from your transaction without you making any manual changes.
A Non-Resident is an individual who spends less than 182 days in the country of India. However, the individual has a business or other interests in the region.
However, for determining the residential status of an NRI returning to India for permanent settlement, for the year of return, besides the stay not exceeding 181 days an additional condition is applicable that of stay not totaling 60 days or more in the relevant previous year if their stay in earlier 4 years total to 365 days or more.
Section 195 of the Income Tax Act overlooks the transactions that are conducted with a Non-Resident. For Section 195 to be applicable the income of a Non-Resident should be chargeable to tax in India.
The Crypto TDS provisions introduced under Section 194S of the Income-tax Act are silent on the transactions carried out with non-residents.
While TDS and related income tax provisions on crypto have been mentioned in Budget 2022, and later passed via the Finance Act 2022, there is still a lot of ambiguity around transactions, for individuals and exchanges. The overall crypto community is working towards gaining clarity from the government, majorly in a few big segments:
In layman's terms, for everything you transact in crypto, you will lose 1% of your capital for that particular transaction. This can however be claimed as tax paid at the end of the year while filing taxes.
While TDS returns can be declared and any amount above the taxes due paid will be refunded, for everyday traders and short-term investors, the TDS amount will most likely add up, causing hindrance in their trading activities.
Think about it, you start with a capital of INR 1,00,000. With your first transaction, you’re getting VDAs worth INR 99,000. In the second transaction, VDA’s worth INR 98,100. With every sell transaction, your capital is reduced to the extent of 1% TDS deducted.
The overall crypto community is lobbying to get the TDS rate reduced, so as to not discourage traders and short-term investors. With a lower TDS, higher volumes of VDAs can be transacted, encouraging individuals to take more positions.
India is a large market for crypto. There are approximately 20 million Indian crypto investors, which is already the second largest base in the world (after the US). It is expected to become the largest in a few years to come. As crypto compliances evolve for Indians, they need a piece of software to help track their crypto portfolio and compute their taxes and compliances.
Binocs is building cutting-edge accounting, tax, and portfolio-tracking software for crypto transactions. Our software makes it effortless for Indian crypto investors to comply with the recent new regulations announced by the Government.
Tax, both at the individual level and institutional level is at the center of this issue. We’ve launched Binocs to help crypto investors connect their investment accounts (exchanges and wallets etc.) to our app, which will enable us to read their raw transactions and prepare an accounting and tax ledger for them.
Co-founded Mettl, a SaaS company in India that was acquired by Mercer in 2018.
Engg manager at Google, VP Engineering at SigTuple (10 US Patents)
Binocs Labs Pvt. Ltd. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide tax, legal or accounting advice. As tax laws in India with regards to virtual digital assets are in the developmental stages there is ambiguity in the interpretation of law including judicial and administrative interpretation. Tax law is subject to continual change, at times on a retroactive basis and may result in incremental taxes, interest or penalties. Binocs Labs Pvt. Ltd. and its affiliates are not responsible for any liability arising from the use of this informational guide.
Associate Product Manager, Crypto Tax
After running a support team for years, Rushina joined the Product team at Binocs, where we help crypto traders and institutions mange their crypto investments easier and pay them with calculating taxes. Connect with her on Twitter and LinkedIn.
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