How 1% TDS Under Section 194S Applies to Crypto and VDA

Section 194S sits at the intersection of two systems that most individual crypto traders never expected to deal with simultaneously: the TDS compliance framework built for businesses, and the 30% VDA tax regime introduced for individuals. The result is that every time you transfer a crypto asset above certain thresholds, you are either the deductor (if you are buying), the deductee (if you are selling), or both at different points in the same financial year.

Misunderstanding how the deduction works, specifically who deducts, at what point, and how the credit is tracked, is one of the most common crypto compliance errors in India today. This guide covers every part of Section 194S in the practical order you will encounter it.

What Section 194S Covers

Section 194S was inserted into the Income Tax Act 1961 by the Finance Act 2022. It applies to every transfer of a Virtual Digital Asset where consideration is paid or credited.

The term "Virtual Digital Asset" is defined in Section 2(47A) and includes:

• All cryptocurrencies: Bitcoin, Ethereum, Solana, USDT, USDC, BNB, XRP, and all other tokens
• Non-Fungible Tokens (NFTs) as notified by CBDT Notification 75/2022

Not covered by Section 194S:

• Transfer of VDA received as gift (no consideration paid by the transferee)
• Transfer where the VDA is received as mining rewards or airdrops and no cash consideration changes hands

The 1% Rate and Its Mechanics

The rate under Section 194S is a flat 1% of the consideration. Where the consideration is wholly or partly in kind (for example, another VDA), the person paying must ensure that tax equal to 1% of the value is paid before releasing the consideration. If the seller has not furnished a PAN, the rate is 20% under Section 206AA.

There is no surcharge, no cess, and no differential rate based on the seller's income level. Whether the seller is an individual paying zero tax overall or a company, the buyer deducts 1% (subject to the PAN rule).

The deduction happens at the time of credit or payment, whichever is earlier. For exchange-based trades, this means at the point of settlement, not at withdrawal. The exchange credits your account with net proceeds after TDS has already been deducted at the transaction level.

Two Threshold Levels: Rs 50,000 vs Rs 10,000

Section 194S creates two categories of buyers with different thresholds:

The threshold applies to aggregate consideration paid or credited during the financial year, not per transaction. If a specified person buys Bitcoin peer to peer for Rs 40,000 in June and another Rs 20,000 in August, the August purchase takes the year's total to Rs 60,000, above Rs 50,000. Once the limit is crossed, the whole aggregate for the year is liable, so TDS of 1% x Rs 60,000 = Rs 600 should be deducted from the August payment.

Why the threshold matters for individuals: Most retail crypto buyers are "specified persons" because their trading does not constitute a business above Rs 1 crore turnover. For them, the Rs 50,000 threshold means that low-frequency, small-value transactions may not trigger TDS at all. But anyone buying crypto regularly with annual purchase volume above Rs 50,000 will encounter TDS on every purchase above the threshold.

How Crypto Exchanges Handle TDS

CBDT Circular 13/2022 provides detailed mechanics for exchange-facilitated transactions. The key rule is:

The exchange acts as the designated person for TDS deduction and deposit when it is the one facilitating the transaction between buyer and seller.

Practically, this means:

1. When you sell crypto on CoinDCX, WazirX, CoinSwitch, or any other registered exchange, the exchange calculates 1% of your sale consideration.
2. The exchange deducts that 1% from your proceeds before crediting the balance to your exchange wallet or bank account.
3. The exchange deposits the TDS with the government against your PAN.
4. The TDS deducted appears in your Form 26AS and Annual Information Statement (AIS) after the exchange files its quarterly TDS statement.

You as the seller do not need to do anything separately for exchange-based transactions. Your only task is to reconcile the TDS credit shown in Form 26AS against your actual transactions when filing your ITR.

Exchange TDS on crypto-to-crypto swaps: Under Circular 13/2022, when you swap one VDA for another on an exchange (for example, selling ETH and buying SOL), the exchange deducts TDS on the INR value of the ETH you transferred, not on the SOL received. The notional INR value at market price at the time of the swap is used as the consideration base.

Peer-to-Peer Transfers: Form 26QE and Form 26QF

Not every VDA transfer goes through a registered exchange. Transactions happen on P2P platforms, over messaging apps, or directly between wallets. In these cases:

The buyer (the person paying for the VDA) is responsible for TDS deduction and deposit.

The government introduced two forms specifically for this:

Form 26QE: For Specified Persons (No TAN Required)

Form 26QE is a challan-cum-statement, meaning the TDS payment and the statement are filed together, for each transaction. There is no separate quarterly return. It was designed for individuals and HUFs who are "specified persons" and who typically do not hold a Tax Deduction Account Number (TAN) because their TDS obligations arise only from VDA purchases.

Key details:

• No TAN required: The buyer's PAN is sufficient.
• Filed through e-Pay Tax on the income tax e-filing portal (incometax.gov.in).
• Due date: 30 days from the end of the month in which TDS was deducted. So TDS deducted in May must be deposited by 30 June.
• Information required: Buyer PAN, seller PAN, date of transaction, VDA description, consideration amount, TDS amount.

After paying through Form 26QE, the buyer downloads Form 16E from TRACES and gives it to the seller within 15 days from the due date of Form 26QE. For deductions from 1 April 2026 (tax year 2026-27), the Income-tax Rules, 2026 replace Form 26QE with the challan-cum-statement in Form 141 (Rule 219(5), same 30-day deadline) and Form 16E with the certificate in Form 132 (Rule 215).

Non-Specified Persons and Companies: TAN and Form 26Q

Companies, firms, LLPs, and high-turnover individuals who are not specified persons must:

• Hold a TAN.
• Deposit TDS by the 7th of the following month (30 April for March deductions).
• Report it in the regular quarterly non-salary TDS return, Form 26Q (Form 140 for deductions from tax year 2026-27), and issue Form 16A.

Form 26QF is a separate quarterly statement filed by exchanges for VDA transactions they facilitate, as set out in CBDT Circular 13/2022. Individual buyers do not file it. From tax year 2026-27, the exchange statement is Form 142 under Rule 219(2) of the Income-tax Rules, 2026.

The critical distinction: If you are an individual retail investor (specified person) buying crypto P2P above Rs 50,000 in a year, you use Form 26QE. If you are a company or large-turnover individual buying above Rs 10,000, you deduct with a TAN and report in Form 26Q.

How Sellers Claim TDS Credit in Their ITR

The TDS deducted under Section 194S is advance tax paid on the seller's behalf. It reduces the seller's actual 30% tax liability under Section 115BBH.

Step 1: Verify Form 26AS and AIS After each quarter, check Form 26AS (Part A for exchange and TAN-based deductions, Part F where a buyer paid through Form 26QE) and the relevant section of AIS to confirm TDS has been credited against your PAN.

Step 2: Compute your VDA gains Under Section 115BBH, your taxable gain = consideration received minus cost of acquisition. No other deductions are allowed.

Step 3: Apply TDS credit in ITR In ITR 2 (or ITR 3 if VDA is business income), claim the TDS credit under "Taxes Paid" against the 30% VDA tax computed. The TDS from Form 26AS pre-fills in the TDS credit schedule of the ITR utility.

Example:

• You sell Bitcoin worth Rs 5,00,000. Cost of acquisition was Rs 3,00,000.
• Gain = Rs 2,00,000. Tax at 30% = Rs 60,000.
• Exchange deducted Rs 5,000 as 1% TDS on Rs 5,00,000 sale value.
• Add 4% cess on Rs 60,000 = Rs 2,400, so total tax = Rs 62,400 (before any surcharge).
• Net tax payable = Rs 62,400 minus Rs 5,000 = Rs 57,400.

What happens if TDS exceeds tax? If your overall VDA transactions during the year resulted in net losses or minimal gains, but TDS was still deducted on gross sale value, the excess TDS is refunded. You claim it as advance tax in your ITR and the refund process handles the excess.

What Section 194S Does NOT Allow

Several misconceptions persist about what TDS under Section 194S means:

• TDS deduction does not fulfil your filing obligation. If TDS is deducted, you still have to file an ITR and declare your VDA income in Schedule VDA. Non-disclosure is a separate offence from non-payment.

• TDS cannot be reduced for losses. If you sold Bitcoin at a loss, the buyer still deducts 1% on the consideration received. There is no mechanism for the seller to inform the buyer of a loss and get TDS reduced. The only route to recover overpaid TDS is through the ITR refund process.

• Section 194S does not apply to gifted VDAs. If someone gifts you crypto with no consideration, there is no "payment" triggering Section 194S. However, Section 56(2)(x) may tax the gift in your hands if its value exceeds Rs 50,000.

• The 1% TDS is not the 30% tax. This is the most critical point. TDS is a collection-at-source mechanism. Your 30% liability under Section 115BBH is calculated on net gains. TDS is simply pre-deposited against that liability.

Consequences of Non-Deduction

If a buyer fails to deduct or deposit TDS under Section 194S:

Exchange-reported TDS appears in Form 26AS and AIS against the seller's PAN, so a mismatch between those entries and the gains declared in Schedule VDA can lead to a notice.

Let Tax Garden Handle Your Section 194S Compliance

For sellers: Tax Garden pulls your CoinDCX, WazirX, CoinSwitch, and other exchange statements, handles TDS entries in Form 26AS and AIS, files your Section 115BBH liability, and claims every rupee of TDS credit correctly in Schedule VDA. See our tax compliance plans or talk to our team.

Frequently Asked Questions

Do I need to deduct TDS under Section 194S if I buy crypto on an Indian exchange?

Usually no. When a registered Indian exchange facilitates the trade, the exchange deducts the 1% TDS from the seller's proceeds and deposits it against the seller's PAN. As a buyer on the exchange you do not file anything separately. Your own obligation arises mainly when you buy crypto peer to peer, outside an exchange, and your purchases cross the yearly threshold.

Is the 1% TDS on crypto the final tax on my gains?

No. The 1% TDS is only a pre-payment. Gains on VDA transfers are taxed at a flat 30% under Section 115BBH, plus surcharge if applicable and 4% cess, on sale value minus cost of acquisition. The TDS shown in your Form 26AS and AIS is claimed as a credit against that 30% tax when you file ITR-2 or ITR-3.

Can I get a refund of Section 194S TDS if I sold crypto at a loss?

Yes, through your income tax return. The buyer or exchange must deduct 1% on the sale consideration even if you made a loss, and there is no way to get it reduced at source. Report the transactions in Schedule VDA, claim the TDS as taxes paid, and any TDS above your actual VDA tax liability is refunded after processing.

What is the TDS threshold for a salaried person buying crypto peer to peer?

A salaried individual with no business income is a specified person, so TDS applies only once total VDA purchases paid or credited in the financial year exceed Rs 50,000. For other buyers, such as companies, firms and individuals whose business turnover exceeds Rs 1 crore, the threshold is Rs 10,000 in the year. The limit is aggregate for the year, not per transaction.

Does a specified person need a TAN to deposit Section 194S TDS?

No. An individual or HUF who is a specified person deposits the TDS using Form 26QE, a challan-cum-statement that works with the buyer's PAN alone. It must be paid within 30 days from the end of the month in which the TDS was deducted. Buyers who are not specified persons need a TAN and follow the regular monthly deposit and quarterly TDS return process.