Key Takeaways
- Section 194S, inserted by the Finance Act 2022 effective 01 July 2022, requires the buyer of a Virtual Digital Asset (VDA) to deduct 1% TDS before making payment to the seller.
- The annual threshold is Rs 50,000 for "specified persons" (individuals and HUFs with no business/professional income, or whose turnover/receipts are below the Section 194Q limit) and Rs 10,000 for everyone else.
- When you trade on a registered Indian crypto exchange (CoinDCX, WazirX, CoinSwitch), the exchange deducts and deposits TDS on your behalf under CBDT Circular 13/2022. You do not deduct it yourself.
- For peer-to-peer (P2P) transfers not routed through an exchange, the buyer must deduct TDS and file Form 26QE (if the buyer is a specified person with no TAN) or Form 26QF (if the buyer is a company or non-specified person).
- The TDS deducted is not your tax. It appears as advance tax credit in your Form 26AS and AIS. You claim it while filing your ITR to reduce the final 30% tax payable under Section 115BBH.
- VDA losses cannot be set off against TDS excess or any other income. The 30% flat rate under Section 115BBH applies to gains; TDS is simply an advance deposit against that liability.
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.
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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
- Exchange of one VDA for another VDA at a notified exchange (CBDT clarification under Circular 13/2022 means the exchange handles TDS on the net cash proceeds, not on every swap separately)
The 1% Rate and Its Mechanics
The rate under Section 194S is a flat 1% of the consideration (or of the fair market value, if higher than agreed consideration).
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%.
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:
| Category | Threshold Per FY | Who Qualifies |
|---|---|---|
| Specified person | Rs 50,000 aggregate | Individual or HUF with no income under "Profits and Gains of Business or Profession", OR individual/HUF whose business turnover in the previous FY was at or below Rs 1 crore, or professional receipts at or below Rs 50 lakh |
| Non-specified person | Rs 10,000 aggregate | All companies, firms, LLPs, and individuals/HUFs who run larger businesses above the above thresholds |
The threshold applies to aggregate consideration paid or credited during the financial year, not per transaction. If you buy Bitcoin worth Rs 40,000 in June and another Rs 20,000 worth in August, the second purchase crosses Rs 50,000 for the year and TDS applies on the full Rs 20,000 second purchase (not retrospectively on Rs 10,000 above the threshold — the deduction applies at the triggering transaction onwards for the amount of that transaction).
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:
- When you sell crypto on CoinDCX, WazirX, CoinSwitch, or any other registered exchange, the exchange calculates 1% of your sale consideration.
- The exchange deducts that 1% from your proceeds before crediting the balance to your exchange wallet or bank account.
- The exchange deposits the TDS with the government against your PAN.
- The TDS deducted appears in your Form 26AS (Part F) and Annual Information Statement (AIS) within a few weeks of the quarter end.
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 it serves both as the TDS deposit mechanism and the quarterly reporting form in one. 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 on the TIN-NSDL portal (tin.tin.nsdl.com), under the TDS section.
- 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.
Form 26QF — For Non-Specified Persons and Companies
Companies, firms, LLPs, and high-turnover individuals who are "non-specified persons" under Section 194S must:
- Hold a TAN.
- File Form 26QF as a quarterly TDS return (like Form 26Q for other TDS sections).
- Deposit TDS by the 7th of the following month (or 30 April for March quarter).
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 use Form 26QF with a TAN.
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 Part F of Form 26AS and the relevant section of AIS to confirm TDS has been credited against your PAN. Exchanges typically update this within 30-45 days of the quarter end.
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.
- Net tax payable = Rs 60,000 minus Rs 5,000 = Rs 55,000 (plus surcharge and 4% cess as applicable).
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:
1. TDS deduction does not fulfill 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.
2. 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.
3. 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.
4. 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:
| Consequence | Details |
|---|---|
| Interest under Section 201(1A) | 1% per month from the date TDS was deductible; 1.5% per month from the date TDS was actually deducted but not deposited |
| Penalty under Section 271C | Equal to the amount of TDS not deducted — 100% of the TDS amount |
| Disallowance under Section 40(a)(ia) | If the buyer is computing business income, the VDA purchase cost may be disallowed to the extent TDS was not deducted |
| Prosecution under Section 276B | In serious cases of non-payment, criminal prosecution with up to 7 years imprisonment |
For exchanges and large platforms, CBDT has increased scrutiny significantly from FY 2024-25 onwards. Exchange P&L data flows directly into AIS, so unexplained discrepancies between AIS TDS entries and declared Schedule VDA gains are flagged automatically.
Let Tax Garden Handle Your Section 194S Compliance
For sellers: Tax Garden pulls your CoinDCX, WazirX, CoinSwitch, and other exchange statements, reconciles TDS entries in Form 26AS and AIS, computes 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.
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