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What is the meaning of TDS? Everything you need to know about TDS for your Crypto Transactions

Since the government has mandated Tax Deduction at Source (TDS) on crypto transactions from 1st July 2022, here’s an explainer of how TDS is going to affect your crypto trading and investing

Key Highlights 

  • Tax Deduction at Source was introduced with the idea of collecting tax at the very origin of the transaction.
  • From 1st July 2022, TDS will be applicable on all transactions across all platforms and exchanges in the Indian crypto ecosystem. 
  • Tax deducted at source for an Investor/trader will be applicable only for Sell transactions. They will not be applicable for Buy transactions. 
  • In the case of crypto <> crypto transactions, the government has levied a 1% TDS rate on all crypto transfers. 
  • No set-off relief is provided by the government for loss-making trades. Even if the trade is squared off in a loss, TDS will still be deducted. 
  • There will be NO TDS deducted when a user deposits INR on an exchange. 

Before we delve into the nitty-gritty of TDS and how it’s going to affect users, it’s important to know, that if you’re transacting on an exchange, most likely, the TDS deduction will be done by the exchange on behalf of the user. Whether you’re a buyer or a seller, TDS deduction will be handled by the exchange. 

Also, TDS will be applicable on transactions from 1st July 2022. Any transactions and trades that occurred before that would not be subject to TDS. 

What is Tax Deducted at Source? 

Tax Deducted at Source, TDS is a form of income for the government, wherein the tax is collected from the very source of the income and not at the time of filing taxes at the end of the year. TDS is a mechanism that is used globally to collect taxes in advance by the taxing authority. Any payment that is made under the TDS provision is paid only after deducting the tax on it. 

The main idea of TDS is the prevention of tax evasion & manipulation of books of account. Since TDS is a form of Advance Tax that is already paid, it provides for the creation of transparent books of accounts. 

TDS was thus introduced in cryptocurrencies to trace every transaction and ensure the users are able to account for the same.

What are the TDS Rates?

The TDS tax rates are prescribed by the government and could be different for various transactions. TDS on transactions could be as low as 1% or even as high as 30%.

TDS Rates for Crypto Transactions 

Currently, for all crypto transactions under section 194S of the Income Tax Act, the TDS levied is 1%.

TDS example for a traditional transaction

We’re going to discuss a transaction between a freelance graphic designer, Aditi, and a company availing the services, Stellar Co.

Aditi provides deliverables worth INR 60,000 to Stellar Co. The invoice is drawn up and sent to the company. 

Stellar Co. will then deduct 10% TDS (INR 6000) as per the relevant TDS section and credit INR 54,000 to her bank account. 

(All numerical and examples mentioned henceforth, is for representation purpose only. The examples are all hypothetical, and Binocs is not responsible for any actions taken by users) 

Moving onto TDS for Cryptocurrency Transactions 

1. Buying crypto with INR on an exchange 

If you’re buying crypto on an exchange with INR as the medium of exchange, you as a buyer DO NOT need to deduct TDS. Only sellers of the cryptocurrency are required to bear the TDS on transactions. 

For example: If you wish to buy 2 ADA against INR 100 from the seller.
The seller will receive INR 99 (1% of TDS deducted from transaction value)
The buyer will receive the full 2 ADA’s since no TDS is deducted on crypto bought against INR. 

2. Buying crypto against another crypto 

For crypto/crypto, 1% TDS will be deducted from both parties of the transaction, that is the buyer and the seller.

For example:

If you exchange USDT for ETH, then 1% of the total value of USDT will be deducted from the sale of USDT. Consecutively, the exchange would also deduct 1% of the total value of ETH from the person selling the ETH on the exchange.

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 manual changes. 

It will then convert the coin value to INR. In this case, convert 1% of ETH and 1% of USDT of the transaction value to INR and deposit the same to the central government on behalf of the buyer and seller, both. 

3. P2P Transactions

For P2P transactions, the regulations are different from the Buyer’s perspective. 

The buyer needs to deduct 1% TDS  from the transaction (sale) value and deposit the same with the government.

4. TDS while depositing money on an exchange and other scenarios

When a user deposits money on the exchange, no TDS is deducted during the process. 

Also, TDS will be calculated on the ‘net’ transaction value. That is, TDS will be calculated after excluding GST, Brokerage Charges, and other charges. 

5. Loss-Making Trades

 In case a seller is squaring off a position that is a loss-making transaction, TDS will still be deducted. Irrespective of the net position of the trade, whether profit or loss, TDS will be applicable. 

What does a trade example look like along with all charges and TDS deduction? 

In case of a BUY order for BTC worth INR 1,00,000

Transaction and Exchange Fees = INR 200 ( ~0.2% of INR 1,00,000)
TDS Charges = NIL (No TDS for buy orders against INR)
Total BTC Value in Hand = 99,800  (1,00,000 – 200) 

In case of  a SELL order for BTC worth INR 1,00,000

Transaction and Exchange Fees = INR 200 ( ~0.2% of INR 1,00,000)
TDS Charges = INR 998 (1% of INR 99,800 that is after excluding GST, brokerage charges and other charges)
Total Saleable Value in Hand = 98,802  (1,00,000 – 200 – 998) 

This is what a generic transaction would look like on an exchange. 

To sum it up

Currently, this is everything you need to know about TDS and how it’s going to affect your crypto trading and investing. In case you wish to know how your overall tax will be computed, check out our software to help you calculate your taxes and track your entire portfolio from one software. 

Frequently Asked Questions about TDS 

1. Is TDS applicable on all transactions? 

TDS is applicable on all SELL transactions. In case you BUY crypto against INR, TDS is NOT applicable. In case you buy one crypto against another crypto,  TDS is applicable for both parties (buyer and seller) in the transaction.

2. Is TDS applicable on all transactions? 

No. Thankfully, most exchanges have integrated TDS calculation in their transaction software itself. The software will deduct the TDS on behalf of your transaction without you making any manual changes. 

However, in the case of P2P transactions, the TDS deduction needs to be done manually by the buyer. 

3. Will 1% TDS be applicable if the investor is paying 30% tax? 

Yes. TDS is an advanced tax that needs to be paid during the occurrence of the transaction being executed. 

All individuals who receive a gain from their Virtual Digital Assets are required to pay 30% Income Tax on these gains, with the applicable surcharge and cess. 

The two taxes are separate, however the investor can claim credit of TDS so deducted by the exchange at the time of filing of annual tax returns and reduce the total income tax liability.

4. Will I get a report of my TDS history and invoice? 

Most exchanges are incorporating this feature into their software. You will be able to access your TDS invoices a few hours post the transaction. You will also receive a Tax Deduction Certificate from the exchange every few months or quarters to know the summary of your transactions.

In case your exchange does not provide that feature, you can check out Binocs, where you can integrate your entire transaction history on the exchange in just a few clicks and receive an entire summary of your transaction logs, TDS paid, and your total tax liability. 

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