Section 194S of the Income Tax Act: Essential Guide for Cryptocurrency Enthusiasts
Updated: Oct 3
With the rapid rise of cryptocurrencies and other virtual digital assets (VDAs), it’s crucial for traders, investors, and enthusiasts to stay informed about the latest tax regulations. Section 194S of the Income Tax Act is one such provision that directly impacts anyone dealing with VDAs like Bitcoin, Ethereum, and NFTs. Introduced to bring clarity and ensure proper tax compliance, Section 194S mandates the deduction of Tax Deducted at Source (TDS) on transactions involving the transfer of cryptocurrencies and other VDAs.
In this blog, we will explore everything cryptocurrency enthusiasts need to know about Section 194S, including when TDS applies, the rates, thresholds, and implications for peer-to-peer transactions. Whether you’re buying, selling, or gifting cryptocurrencies, understanding this section is crucial to avoiding penalties and ensuring smooth compliance with the tax laws.
Table of Contents
Understanding the Concept of Virtual Digital Assets
According to section 194S of the Income Tax Act, a virtual digital asset, or VDA, includes the following:
Cryptocurrency is any data, tokens, numbers, or code that is produced, either via cryptography or another method.
NFT is a non-fungible token, or any token with a corresponding structure.
Any additional digital asset that the national government publishes notice of in the official gazette.
What is Section 194S of the Income Tax Act?
A new Section 194S regarding tax deducted at source (TDS) on the transfer of virtual currency assets (VDAs) was established by the Finance Act of 2022. This means that a TDS equal to 1% of the VDAs' value must be paid by the individual making the payment when buying cryptocurrencies or NFTs. Nevertheless, a 20% tax deduction will be made if the deductee fails to provide the deductor with their permanent account number (PAN). This clause will go into force on July 1, 2022.
When the money is credited to the resident's account or when it is paid using any method, the tax will be withheld, whichever occurs first. The onus, with the implementation of Section 194S, is now on the buyer of such VDAs. If the transactions' value is more than the designated level, the tax is deducted. TDS must be subtracted from the total consideration paid to the resident to transfer VDAs. Additionally, the person receiving the VDA is responsible for paying TDS if the payment is made entirely in kind or in exchange for another VDA and does not include any cash.
Applicability of Section 194S
Section 194S is relevant exclusively when purchasing VDA from an Indian tax resident. Therefore, Section 194S is applicable in the following ways:
Trading on Indian Crypto Exchanges: Any trade on Indian crypto exchanges, including P2P, is subject to a TDS deduction, according to a notification from the income tax department. The exchange must also submit Form 26QF to the IT department to report such transactions.
Trading Cryptocurrency to Crypto on International Exchanges: Only when cryptocurrency is purchased from an Indian tax resident is Section 194S applicable. Given that they are external exchanges, one may argue that these entities are outside of India and that no money is made there. As a result, neither Section 195 nor Section 194S apply to TDS.
Trading on International Exchanges (P2P): You can be sure that the person you are purchasing cryptocurrency from is an Indian resident with an Indian bank account when you use INR to acquire it at a P2P exchange. TDS deductions might not be made automatically by these exchanges, nevertheless. In these situations, the buyer must manually obtain the PAN from each vendor and submit a TDS return in relation to that PAN.
TDS Exemption under Section 194S
When the sum made for the transfer of VDA exceeds Rs. 50,000 for certain individuals and Rs. 10,000 in other situations, TDS under section 194S is applied. A particular individual is:
A person or HUF without a source of income from a business or occupation
Individuals or HUFs earning up to Rs. 1 crore from their businesses
Individuals or HUFs with up to Rs. 50 lakhs in professional receipts.
Conversely, the regulation does not apply to everyone. If the total value of consideration given to a resident is less than Rs 50,000 in a given fiscal year, a designated person is obliged to deduct TDS. In all other circumstances, the financial year's threshold limit is set at Rs 10,000. Additionally, the person in question may be an individual or Hindu undivided family (HUF) whose income from a business did not exceed Rs. 1 crore, or whose income from a profession did not exceed Rs. 50 lakh, in the year prior. An individual or HUF with no revenue from their business may also be included.
TDS Deduction Process under Section 194S
Specified person: For TDS deduction under Section 194S, no TAN is needed. Such an individual must sign into their income tax portal by selecting E-Pay Tax. To file their TDS return, choose Form 26QE.
Other than a specified person: A TAN-holding entity may record transactions on which TDS is withheld under section 194S.
Crypto exchanges by using Form 26Q: These entities will be required to submit transactions on a quarterly basis in Form 26QF.
Furthermore, non-filers of income returns are not subject to the Section 206AB provision that allows TDS to be deducted at a higher rate.
The following table shows the CBDT clarification regarding tax deduction under Section 194S:
TDS Certificate for Deduction under Section 194S
For the TDS that is deducted during the transfer of VDA, the deductor issues a TDS certificate to the deductee in Form 16A. When completing their ITR, the deductee might request a credit for the same amount. The government's commitment to establishing a more regulated financial ecosystem is demonstrated by the establishment of this provision, which provides clear criteria for TDS (Tax Deducted at Source) on these transactions.
Conclusion
Following these rules is crucial for everyone involved in the transaction—buyers, sellers, exchanges, and brokers—to ensure that TDS returns are filed on time and that you are aware of any recent changes to the tax code. If you have any inquiries about TDS u/s 194S, you might want to see an expert.
FAQ
Q1. When should the tax be deducted under Section 194S?
If the consideration is entirely in kind or partially in cash, and the portion in cash is insufficient to meet the TDS liability, the person responsible for paying such consideration should make sure that adequate tax had been paid prior to the transfer of a virtual digital asset. Tax should be deducted at the time of credit of consideration to the seller's account or at the time of payment, whichever is earlier.
Q2. What is the limit up to which no tax needs to be deducted under Section 194S?
If the consideration payable by a designated person is less than Rs. 50,000 in the fiscal year, no tax is required to be deducted. If the consideration payable during the financial year by any person other than a specified person does not exceed Rs. 10,000, no tax needs to be deducted.
Q3. Does a company come under the category of a specified person?
No, a designated person category only applies to a single person. If a corporation receives consideration for the transfer of VDAs that exceeds Rs 10,000, it will be classified as "other" and be required to deduct TDS.
Q4. Is Goods and Services Tax (GST) levied on VDAs?
The applicability of GST to the trade of NFTs and cryptocurrencies is currently unclear. The Tax Research Unit under the CBIC has been tasked by the GST Council with determining whether VDAs constitute a financial instrument, good, or service. But as of right now, trading NFTs and cryptocurrencies on exchanges is regarded as a financial instrument, and as such, GST (CGST and SGST) will only be due at an 18% rate on the commission that the exchange charges.
Q5. What is the TDS limit for crypto?
If the value of the transferred cryptocurrency assets exceeds Rs 50,000, Section 194S charges 1% TDS.
Q6. What is the due date to deposit TDS under section 194S?
The deadlines for paying TDS, if the payment is made in March, are as follows: for government deductors, the deadline is April 7th, at the latest; for other deductors, it is April 30th. The deadline will be seven days after the end of the month in which the deduction was made if the amount is taken out in a month other than March. For instance, the deadline for depositing the TDS is May 7th if it was deducted on April 25th. In a similar vein, if the TDS is withheld on April 5th, the deadline for depositing the TDS is May 7th.
Q7. What are the due dates for filing a TDS return under section 194S?
The due dates for filing a TDS return are listed as follows –
April to June - 31st July
July to September - 31st October
October to December - 31st January
January to March - 31st May
Q8. Who is responsible for deducting TDS under Section 194S?
The person responsible for paying consideration for the transfer of Virtual Digital Assets (VDAs) is required to deduct TDS under Section 194S. This could be an individual, firm, or other entity facilitating the transaction.
Q9. Is TDS applicable under Section 194S for peer-to-peer (P2P) transactions of virtual digital assets?
Yes, TDS under Section 194S is applicable to peer-to-peer transactions. If the transaction involves VDAs, the buyer is responsible for deducting TDS, even in a direct transaction without an intermediary like an exchange.
Q10. What happens if TDS under Section 194S is not deducted or deposited on time?
Failure to deduct or deposit TDS under Section 194S will result in interest charges. The deductor will have to pay interest at 1% per month for failure to deduct and 1.5% per month for failure to deposit the TDS. Additionally, penalties may be imposed under the Income Tax Act.
Q11. Can the seller of virtual digital assets claim credit for TDS deducted under Section 194S?
Yes, the seller of VDAs can claim credit for the TDS deducted by the buyer when filing their income tax return. The deducted amount will be adjusted against their total tax liability for the financial year.
Q12. What is the procedure for depositing TDS deducted under Section 194S?
TDS deducted under Section 194S must be deposited with the government by filing the relevant challan (Challan ITNS 281) through the Income Tax portal. The TDS must be deposited by the 7th day of the month following the month in which the tax was deducted.
Q13. How does Section 194S apply to crypto exchanges?
Crypto exchanges, if they facilitate the transfer of virtual digital assets, must ensure that the buyer or seller (whichever is responsible for paying consideration) deducts TDS under Section 194S. They also need to ensure compliance with tax regulations and may deduct TDS on behalf of their users if applicable.
Q14. Are there any exemptions for non-residents under Section 194S?
No, Section 194S does not provide any specific exemptions for non-residents. TDS under this section applies to all individuals or entities facilitating transactions involving VDAs, regardless of their residency status. However, non-residents may fall under other tax provisions, such as Section 195.
Q15. Is TDS under Section 194S applicable on gift transactions involving virtual digital assets?
Yes, TDS under Section 194S will apply to any transfer of virtual digital assets, including gifts. The person responsible for the transfer is required to deduct TDS, even if no cash is involved in the transaction.
Q16. How can I claim a refund if excess TDS is deducted under Section 194S?
If excess TDS is deducted under Section 194S, the seller can claim a refund by filing an income tax return and reporting the correct income. Any excess TDS will be refunded by the Income Tax Department after processing the return.
Q17. How is TDS under Section 194S calculated if the consideration is partly in cash and partly in kind?
If the consideration involves both cash and kind, TDS must be deducted on the entire value of the consideration. The person responsible for paying the consideration must ensure that adequate tax is deducted and deposited before the transfer of the virtual digital asset.
Q18. How does Section 194S impact decentralized finance (DeFi) transactions?
Section 194S applies to transactions involving virtual digital assets, including those occurring through decentralized finance (DeFi) platforms. Buyers or intermediaries involved in DeFi transactions must deduct TDS in compliance with the provisions.
Q19. Can individuals avoid TDS under Section 194S by conducting transactions below the threshold limit?
Yes, if the total value of VDAs purchased or sold by a specified person during the financial year is below Rs 50,000 (or Rs 10,000 for others), TDS under Section 194S is not applicable. However, if the transactions exceed these limits, TDS must be deducted.
Q20. Is TDS applicable if the VDA is held for a long-term period and then sold?
Yes, TDS under Section 194S applies regardless of the holding period of the virtual digital asset. Whether the asset is sold after a short-term or long-term holding, TDS is deducted at the time of transfer if the consideration exceeds the threshold limit.
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