India’s first formal legal framework for cryptocurrencies emerged through taxation provisions. The Finance Act, 2022, introduced a dedicated definition for Virtual Digital Assets (VDAs) under Section 2(47A) of the Income Tax Act, framed broadly to encompass various digital tokens, including cryptocurrencies and NFTs.
A significant development was the insertion of Section 115BBH, which imposes a flat 30% tax on income arising from the transfer of any VDA, irrespective of the holding period or nature of the transaction. Crucially, the law disallows any deductions for expenses (except the cost of acquisition) and prohibits set-off or carry-forward of losses from VDA transfers — effectively segregating VDAs from all other asset classes and significantly raising the effective tax burden on crypto gains.
Importantly, while VDAs are now subject to specific taxation, this does not imply formal legal recognition of cryptocurrencies. Indian tax law taxes income regardless of its source — whether legal or illegal — which means crypto’s status remains in a regulatory grey zone: not explicitly legal, but not illegal either.
Further compliance requirements were introduced via Section 194S, mandating a 1% TDS deduction on payments made during the transfer of VDAs. The Finance Ministry has since issued Circulars No. 13 and 14 of 2022, offering detailed guidance on TDS obligations in various transactional scenarios — whether involving exchanges, brokers, or peer-to-peer trades, including VDA-to-INR and VDA-to-VDA swaps.
At Web3Legals, we assist Web3 founders, investors, and platforms in navigating this complex tax environment, from transaction structuring to ensuring compliance with reporting and withholding obligations under Indian tax law.