The Finance Act, 2022 is widely regarded as the Act which introduced taxation on Cryptocurrencies into the Indian Income Tax System.

The Act had introduced various Sections and had also introduced a new exhaustive definition
to ensure that all forms of digital transactions were covered under the ambit of the Income Tax Act, 1961.

In recent times, India has recorded tremendous increase in the trend of investing in Virtual Digital Assets (VDAs).  It is important for everyone of us  to update ourselves on the recently introduced taxation laws regarding VDAs which is universally predicted to play a major role as a method of payment for trades in the future.

Before going through an overview of VDA Taxation in India, it is important to know about the definition of VDAs to find out the transactions that are covered under the ambit of the Income Tax Act, 1961.

As per Section 2(47A) which was Introduced through Finance Act, 2022, the term Virtual Digital Assets is defined as: –

·   any type of digital item like data, code, numbers, or tokens (excluding Indian or foreign currency) that is created using cryptography or other methods. It represents value that can be exchanged with or without payment. This digital value can be used in financial
transactions or investments, stored, traded, or transferred electronically.

·   includes non-fungible tokens (NFTs) or any other token, regardless of its name.

·   any other digital asset that the Central Government may declare as a VDA through
official notification.

Moreover, the explanation to Section 2(47A) elaborates on the following:

·   A non-fungible token (NFT) refers to a digital asset specified by the government.

·   The terms currency, foreign currency, and Indian currency retain their definitions
as outlined in the Foreign Exchange Management Act, 1999

The following is a brief overview on how Virtual Digital Assets are taxed in India

(i)   Section 115BBH (Introduced Vide Finance Act, 2022)

Effective Date: April 01, 2022

Taxability: Income from the transfer (Sale) of VDAs is subject to a tax rate of 30% plus applicable surcharge and cess irrespective of the taxpayer’s individual tax slab.

Deductions: Unlike regular investments, in case of sale of VDAs, only the Cost of Acquisition can be deducted (Transaction Fees, Brokerage, Internet Charges cannot be deducted to reduce profit)

This shall mean that profits received from transfer of VDA’s are taxed at a flat rate of 30% irrespective of whether a taxpayer’s Gross Total Income is below or above the basic exemption limit.

(ii) Inclusion in the definition of “Property” under Section 56(2)(x): –

Effective Date: 01/04/2023

Taxability: Under the head Income from Other Sources (IFOS)

Impact: VDA transferred as “gift” will be treated on par with transfer of property and be taxed under the head IFOS unless such transfer is exempted based on provisions of the said section (Receipt from relatives)

(iii) Deduction of Tax Deducted at Source while buying VDA’s under Section 194(S): –

Effective Date: July 01. 2022

TDS Deduction Rate: 1% on the consideration paid for transfer of VDAs.

Who is responsible to deduct: The buyer is responsible to deduct and deposit TDS at the time of acquiring the VDAs.

Transaction Limit:

TDS is applicable even if the transfer of VDA is in kind or partly in kind and partly in cash

(iv)  Schedule VDA – Reporting in the Income Tax Return: 

With effect from Assessment Year 2023-24, the Central Board of Direct Taxes (CBDT)had mandated reporting of any profit or loss from the transfer of VDA’s in “Schedule VDA” which was newly introduced.

 It is imperative to note that CBDT also mandates reporting of loss from transfer of VDA’s as loss from transfer of VDAs cannot be set off/ carried forward.

(v)    Exceptional Events also considered as taxable: –

·   Selling Crypto for Cash (Fiat Money i.e. Indian Rupees) – taxable under Section 115BBH.

·   Crypto to Crypto trade/ Swap – considered as “transfer” of VDA.

·    Using Crypto to purchase goods or acquiring services – taxable event.

Note: However, transfer of Crypto currencies between own wallets is exempt from taxation

Conclusion

The introduction of taxation on Virtual Digital Assets through the Finance Act, 2022 marks a pivotal moment in India’s evolving digital economy. By bringing cryptocurrencies and other digital tokens under the ambit of the Income Tax Act, 1961, the government has ensured greater transparency, accountability, and regulatory oversight in this rapidly growing sector.

Investors and traders must stay vigilant, maintain proper records, and comply with all reporting requirements. While the current framework may appear stringent, it also signals the government’s intent to establish a stable and legitimate environment for future innovations in digital finance. Responsible compliance today will help pave the way for a more structured, secure, and recognized crypto ecosystem in India.