With the rising popularity of crypto and digital assets, governments worldwide are implementing regulations to oversee the new asset class. India took a significant step in this direction by introducing Section 115BBH in the Union Budget 2022. The new provision included in the Finance Act, 2022, outlines the taxation framework for Virtual Digital Assets (VDAs), including crypto and NFTs. The changes became effective April 1, 2023.
In this blog, we’ll discuss the key provisions of Section 115BBH, its implications for investors, and how traders and holders can navigate this tax structure effectively.
Understanding Section 115BBH
Section 115BBH was introduced in the Union Budget 2022-23 to give clarity on tax on income from virtual digital assets. The primary objective of this section was to ensure that income from trading, transferring, or investing in VDAs is taxed uniformly.
Key Highlights of Section 115BBH:
- Flat Tax Rate: A 30% tax applies to any income generated from the transfer of virtual digital assets.
- No Deduction Allowed: Unlike other investment instruments, taxpayers cannot claim deductions for expenses incurred (except the cost of acquisition).
- TDS at 1%: A 1% Tax Deducted at Source (TDS) is levied on crypto transactions exceeding Rs. 50,000 (Rs. 10,000 in some cases) in a financial year under Section 194S.
- Loss Set-Off Not Allowed: Losses from VDA transactions cannot be adjusted against any other income.
- Gifting of Crypto Assets: If a person receives crypto or NFTs as a gift, they will be taxed under income from other sources. Some exceptions are allowed, like gifts from close family or under ₹50,000.
Read More: A comprehensive guide to income tax returns (ITR): How to file and track your returns
Impact on investors and traders
The new taxation policy has significantly altered the landscape for crypto users in India. Here’s the impact on different stakeholders at a glance.
1. Retail Investors
- Long-term investors who hold crypto as an asset now face a higher tax burden than holders of other financial instruments.
- No indexation benefits are available, making taxation rigid.
2. Traders & Frequent Buyers
- Day traders and those engaging in frequent transactions are hit hardest since losses cannot be set off.
- Profitability is reduced due to 30% taxation and 1% TDS deduction, impacting liquidity.
3. Crypto Startups & Exchanges
- Indian crypto exchanges have witnessed a decline in trading volumes due to the TDS provision.
- Some crypto investors have migrated to foreign exchanges or decentralized platforms.
Strategies to Manage Crypto Taxation
Given the stringent provisions introduced in Section 115BBH, crypto investors must take proactive steps to reduce their tax liabilities. Here are some tips that could come in handy:
- Record-Keeping: Maintain a detailed log of crypto transactions, including purchase price, dates, and amounts.
- Tax Planning: Explore legal tax-saving avenues such as investing in compliant financial instruments to offset overall tax liabilities.
- Regulatory Compliance: Ensure that transactions comply with TDS requirements to avoid penalties.
- Holding for the Long Term: With a limited scope for tax adjustments, long-term holding may be a better strategy for minimizing frequent taxation events.
Future of Crypto Taxation in India
While Section 115BBH lays a foundation for crypto taxation, more clarity on regulations and possible amendments is expected in the coming years. Industry experts anticipate discussions around:
- Reduction in TDS rates to boost trading activity.
- Adjustments for loss set-offs to make taxation fairer.
- Categorization of NFTs and DeFi transactions under specific tax brackets.
Read More: Income Tax Slabs and Rates: 2025–2026 Taxpayers Best Guide
Conclusion
Section 115BBH has reshaped the taxation of crypto assets in India. While it brings clarity and regulation, it also imposes a significant tax burden on crypto traders and investors. Navigating this framework requires a strategic approach, with a strong emphasis on compliance and tax-efficient planning.
Investors should stay updated with policy changes and seek professional tax advice regarding their crypto holdings while adhering to the legal framework.
FAQs
1. What is Section 115BBH of Income Tax?
Section 115BBH imposes a 30% tax on income from Virtual Digital Assets (VDAs) like crypto, with no deductions allowed except the cost of acquisition.
2. What is the tax on VDA?
Under Section 115BBH, a 30% tax applies to gains from VDAs, not to mention 1% TDS on transactions exceeding specified limits.
3. How to avoid crypto tax in India?
Legally, crypto tax cannot be avoided. However, strategies like holding assets long-term, gifting within family, and using tax-loss harvesting may help reduce liability.
4. Is crypto considered a digital asset for tax purposes?
Yes, crypto is classified as a Virtual Digital Asset (VDA) under Indian tax laws and is taxed accordingly.
