Section 194S: Your Complete Guide to TDS on Virtual Digital Assets (VDAs) in India
- Dipali Waghmode
- Jul 25
- 11 min read
The world of Virtual Digital Assets (VDAs) is growing rapidly. As more people in India invest in these assets, it's crucial to understand the taxes involved. The government introduced Section 194S of the Income Tax Act through the Finance Act 2022 to track these transactions. This new rule requires a tax deduction at source (TDS) on VDA transfers.
This guide explains Section 194S in simple terms. You will learn what this section is, who needs to follow it, and the tax rates. We will also cover how to comply with the rules in different situations and answer common questions.
Table of contentÂ
What is Section 194S of the Income Tax Act, 1961?
Section 194S is a rule that requires a tax deduction when you buy a Virtual Digital Asset (VDA) from a resident of India. Introduced by the Finance Act, 2022, this law became effective on July 1, 2022. Its main goal is to bring VDA transactions under the tax system and create a trail for these financial activities.
The core purpose of this section is straightforward. Any person paying for a VDA must deduct a portion of that payment as tax before giving the money to the seller. This process is known as Tax Deducted at Source (TDS).
The key objectives behind Section 194S are:
To track transactions involving VDAs like cryptocurrencies and NFTs.
To ensure that the income from these transfers is reported to the tax authorities.
To create transparency in the growing VDA market.
What is a Virtual Digital Asset (VDA) under Section 194S?
Section 194S applies to the transfer of Virtual Digital Assets. The Income Tax Act defines a VDA broadly to cover newly emerging digital assets.
What is considered a VDA?
Cryptocurrencies:Â These are digital or virtual tokens generated through cryptographic means, like Bitcoin and Ethereum.
Non-Fungible Tokens (NFTs):Â These are unique digital tokens that represent ownership of a specific item or piece of content.
Other Notified Assets:Â Any other digital asset that the Central Government specifies through an official notification.
Indian Currency or Foreign Currency.
Gift cards or vouchers that can be used to get goods or services.
Understanding this distinction is important. It helps you know which of your digital transactions fall under the TDS rules of Section 194S.
Applicability of Section 194S: Who Needs to Comply?
Who is Responsible for Deducting TDS (Deductor)?
The person who pays for the VDA is responsible for deducting the tax. This person is called the deductor. It doesn't matter if the buyer is an individual, a company, or another type of entity; the responsibility lies with the payer.
Payers who must deduct TDS include:
Individuals
Hindu Undivided Families (HUFs)
Companies
Firms
Any other person or entity making the payment.
To Whom Does Section 194S Apply (Deductee)?
Section 194S applies when the payment for a VDA is made to a seller who is a resident of India. The seller, in this case, is the deductee. This rule is specifically for transactions with residents. If the seller is a non-resident, other sections of the Income Tax Act, such as Section 195, might apply.
Monetary Thresholds for TDS Deduction
TDS under Section 194S is not required for every transaction. It only applies if the total payment value in a financial year crosses a certain limit. There are two different thresholds:
Payer Category | Annual Threshold Limit |
Specified Person | ₹50,000 |
Any other person | ₹10,000 |
This means if you are a "Specified Person" and you buy VDAs worth more than ₹50,000 in a year, you must deduct TDS. For everyone else, the limit is ₹10,000.
Who is a Specified Person under Section 194S?
The term "Specified Person" is defined clearly to provide relief to smaller taxpayers. A Specified Person is an individual or a Hindu Undivided Family (HUF) who meets one of the following conditions:
No Business or Professional Income:Â An individual or HUF who does not have any income under the head "Profits and gains of business or profession".
Limited Business Turnover: An individual or HUF whose total sales or turnover from their business is ₹1 crore or less in the previous financial year.
Limited Professional Receipts: An individual or HUF whose gross receipts from their profession are ₹50 lakh or less in the previous financial year.
For example, a salaried individual who does not run a business is a Specified Person. A small shop owner with an annual turnover of ₹80 lakh would also be a Specified Person.
TDS Rate and Calculation under Section 194S
The standard TDS rate under Section 194S is 1% of the gross amount paid for the VDA. This means if you buy a VDA for ₹1,00,000, you must deduct ₹1,000 as TDS. The seller receives the remaining ₹99,000.
Higher TDS Rate for No PAN
It is very important for the seller to provide their Permanent Account Number (PAN). If the seller does not furnish their PAN, the TDS rate jumps to 20%, as per Section 206AA of the Income Tax Act. This much higher rate encourages compliance and proper reporting.
On What Value is TDS Deducted? (Net vs. Gross)
TDS must be calculated on the gross consideration for the VDA transfer. This is the total amount payable to the seller before deducting any other charges like GST, commissions, or brokerage fees. The 1% tax is applied to the full sale value of the asset.
The tax must be deducted at the time of the transaction. The rule specifies that TDS should be deducted at the time of crediting the amount to the seller's account or at the time of payment, whichever happens first. This ensures that the tax is collected promptly at the source of the transaction.
How to Comply with Section 194S
Scenario 1: Direct P2P Transfer (Buyer to Seller, Payment in INR)
In a peer-to-peer (P2P) transaction, the buyer pays the seller directly in Indian Rupees. Here, the buyer holds the full responsibility for TDS compliance.
The buyer must:
Deduct 1% TDS from the payment if the transaction value exceeds the threshold.
Pay the remaining 99% of the amount to the seller.
Deposit the deducted TDS with the government.
File the appropriate TDS return form (Form 26Q for most people, or Form 26QE for specified persons).
Scenario 2: Transfer Through an Exchange (Exchange is NOT the Owner of VDA)
When a VDA is bought and sold through a crypto exchange that only acts as a platform, the exchange usually handles the TDS.
Payment via Exchange:Â If the exchange processes the payment to the seller, it is responsible for deducting the 1% TDS.
Involvement of a Broker:Â If a broker is also involved, the responsibility can become shared between the exchange and the broker. To avoid confusion, the exchange and broker can enter into a written agreement stating that one of them will handle the TDS compliance. If there is no such agreement, both could be held responsible. The exchange may also be required to file a quarterly statement in Form 26QF.
Scenario 3: Transfer Through an Exchange (Exchange IS the Owner of VDA)
If you buy a VDA directly from an exchange that owns the asset, you, the buyer, are primarily responsible for deducting TDS. However, this can be difficult for individual buyers to manage.
To simplify this, the CBDT has provided a solution. The buyer and the exchange can make a written agreement that the exchange will take care of the TDS deduction and payment. In such cases, the exchange will file the necessary forms.
Scenario 4: Payment in Kind (VDA for VDA / Barter)
When one VDA is exchanged for another (a barter transaction), things get a bit more complex. In this situation, both parties are considered a buyer and a seller.
Both individuals must ensure that the tax on the transaction is paid before the exchange happens. Each person must deduct 1% TDS on the fair market value of the VDA they are receiving. They must then show proof of tax payment to the other person before releasing their own VDA. If the barter happens on an exchange, the exchange can agree to manage the TDS for both sides of the trade.
Scenario 5: Payment Partly in Cash and Partly in Kind
If a payment is a mix of cash and a VDA, TDS is calculated on the total value of the consideration. The person making the payment must ensure that the tax on the "in-kind" portion is also covered. If the cash part is not enough to cover the full TDS amount, the payer must ensure the remaining tax is paid before completing the transaction.
Role of Payment Gateways
Payment gateways are generally not required to deduct TDS under Section 194S. This is because the responsibility lies with the person making the payment for the VDA, like the buyer or the exchange. As long as the TDS has been deducted by the responsible party, the payment gateway does not need to do it again.
Depositing TDS and Filing Returns for Section 194S
How to Deposit TDS?
Once you deduct TDS, you must deposit it with the government. This can be done online through the Income Tax portal using Challan ITNS 281. The deposit should typically be made by the 7th day of the month following the month in which the tax was deducted.
Relevant TDS Return Forms
Different forms are used to report TDS based on who the deductor is:
Form Name | Who Should File It | Due Date |
Form 26QE | For a "Specified Person" who does not need a TAN. | Within 30 days from the end of the month of deduction. |
Form 26Q | For deductors (other than specified persons) who have a TAN. | Filed on a quarterly basis. |
Form 26QF | Filed quarterly by an Exchange that has an agreement to handle TDS. |
TDS Certificate (Form 16A/16E)
After depositing the tax and filing the return, the deductor must provide a TDS certificate to the seller (deductee).
Form 16A:Â Issued by deductors who file Form 26Q.
Form 16E:Â Issued by specified persons who file Form 26QE. It can be downloaded from the TRACES portal.
This certificate is the seller's proof that tax has been deducted on their behalf.
Consequences of Non-Compliance with Section 194S
Failing to comply with Section 194S rules can lead to serious consequences.
Interest for Late Deduction/Deposit
If you deduct TDS late or fail to deposit it on time, interest is charged under Section 201(1A).
1% per month for late deduction.
1.5% per month for failing to deposit the tax after deducting it.
Penalty for Non-Deduction/Payment
A penalty equal to the amount of tax you failed to deduct or pay can be imposed under Section 271C.
Late Filing Fees for TDS Returns
If you file your TDS return late, a fee of ₹200 per day is charged under Section 234E until the fee equals the TDS amount.
Prosecution Provisions
In severe cases of default, where the tax is not deposited with the government, prosecution can be initiated under Section 276B.
Interaction of Section 194S with Other TDS/TCS Provisions
Section 194S vs. Section 194OÂ (TDS on E-commerce)
If a transaction is covered by both Section 194S (for VDAs) and Section 194O (for e-commerce operators), Section 194S takes priority. This means tax will be deducted under the VDA rules, not the e-commerce rules.
Section 194S vs. Section 194Q (TDS on Purchase of Goods)
Similarly, if a transaction could fall under Section 194Q (for the purchase of goods), it will not apply if TDS has already been deducted under Section 194S. The rules for VDAs are given precedence.
Key Considerations for Taxpayers
Record Keeping for Section 194S Compliance
It is essential to maintain good records for all VDA transactions. This will help you stay compliant and file your taxes correctly.
Your records should include:
Date of each transaction.
Type of VDA, quantity, and value.
Seller's PAN.
Proof of TDS deduction and deposit.
Copies of TDS returns filed.
TDS certificates issued or received.
Impact on Income Tax Return (ITR) Filing
The TDS deducted under Section 194S is not the final tax. When the seller files their Income Tax Return (ITR), they can claim credit for the TDS amount that was deducted.
Income from the transfer of VDAs is taxed at a flat rate of 30% under Section 115BBH. The TDS paid during the year is adjusted against this final tax liability.
GST Applicability on VDA Transactions
The application of the Goods and Services Tax (GST) to VDA transactions is still an evolving area. Currently, GST may apply to the service fees charged by crypto exchanges, but not directly on the value of the VDA itself. It is advisable to check for the latest GST notifications or consult a tax expert for clarity on this matter.
Common Misconceptions about Section 194S
Myth: TDS under 194SÂ is the final tax on my VDA income.
Fact:Â This is incorrect. The 1% TDS is only an advance tax. The actual income from the VDA transfer is taxed at 30% under Section 115BBH, and the TDS can be claimed as a credit against that final tax.
Myth: Section 194S only applies to large traders.
Fact: The rules apply to everyone once they cross the specified annual threshold of ₹10,000 or ₹50,000, depending on their category.
Myth: The exchange will always handle TDS, so I don't need to worry.
Fact:Â While exchanges often manage TDS, the primary responsibility can fall on the buyer, especially in P2P transactions or when buying from an exchange that owns the VDA. Always be aware of your role in a transaction.
Myth: No TDS is required if I receive a VDA as a gift.
Fact:Â Section 194S applies to the "transfer for consideration." A genuine gift without consideration would not trigger this section. However, the taxation of VDA gifts is a complex topic and may fall under other sections of the Income Tax Act. One source suggests TDS may apply to gifts, highlighting the need for careful evaluation of the transaction's nature.
Official CBDT Guidelines and Circulars on Section 194S
The Central Board of Direct Taxes (CBDT) has issued guidelines to clarify how to implement Section 194S in practice. The most important ones are:
Circular No. 13 of 2022:Â This circular provides detailed guidance on various practical scenarios, such as transactions on exchanges, barter situations, and the role of brokers.
Circular No. 14 of 2022:Â This circular addresses further questions related to the application of Section 194S.
These documents are essential for understanding the official position on complex issues and ensuring proper compliance.
Conclusion: Navigating Section 194S Effectively
Section 194S is a significant step in regulating India's VDA market. The key takeaways are the 1% TDS rate, the thresholds of ₹10,000 and ₹50,000, and the clear responsibility placed on the payer to deduct tax.
Careful compliance is essential to avoid interest and penalties. As the rules for digital assets can change, it is important to stay informed about the latest CBDT circulars and guidelines. Understanding your obligations is the first step toward smooth and compliant VDA trading.
If you need help with your VDA taxation or have questions about your specific situation, it is always a good idea to seek professional guidance. Contact Taxbuddy.
Frequently Asked Questions (FAQs) about Section 194S
1. What is the effective date of Section 194S?Â
Section 194S became effective on July 1, 2022.
2. Is TDS under 194S applicable on the transfer of VDA to a non-resident?Â
No, Section 194S applies only to payments made to a resident of India. Other rules, like Section 195, may apply to non-residents.
3. Do I need a TAN to deduct TDS under Section 194S if I am an individual?Â
If you are a "Specified Person," you do not need a Tax Deduction and Collection Account Number (TAN) and can file using Form 26QE. Other deductors need a TAN and must file Form 26Q.
4. What happens if the VDA transaction results in a loss? Is 194S still applicable?Â
Yes. TDS is deducted on the gross sale value, regardless of whether the transaction resulted in a profit or a loss.
5. How is the value of a VDA determined for TDS in a barter?Â
The Fair Market Value (FMV) of the VDA at the time of the transfer is used to calculate the TDS amount.
6. Can I claim a refund if excess TDS is deducted under 194S?Â
Yes, you can claim a refund for any excess TDS when you file your income tax return.
7. Is Section 194S applicable if I buy VDA from an international exchange?Â
Section 194S applies if you are paying a resident seller. If the seller is a non-resident and the transaction occurs outside India, this section may not apply, but other tax implications could arise.
8. Does 194S apply to crypto mining rewards?Â
Typically, no. Section 194S is for the "transfer for consideration." Mining rewards are generally considered self-generated income and are taxed differently.
9. Is a lower deduction certificate available for Section 194S?Â
The Income Tax Act does not have a provision for obtaining a lower deduction certificate under Section 197 for TDS under Section 194S.
10. What if the PAN of the seller is invalid?Â
It is treated the same as if the PAN was not provided, and TDS must be deducted at the higher rate of 20%.
Related Posts
See AllThe Income Tax Act contains a few clauses that permit deductions  for allocating a specific sum of money to funds designated for...
To make tax compliance easier for Indian domestic businesses, Section 80M was included by the Finance Act of 2020. This provision's main...
Obtaining an insurance firm license from the state's insurance commissioner is a prerequisite for selling insurance products. The entire...
