We all know about the annual tax filing routine, but there is one kind of taxation that is not discussed as often as it ought to be—Tax Deducted at Source or TDS, a type of advance tax.
It is important to be very clear about your tax liabilities before you make any financial commitments. So if you have even the smallest doubt about what TDS is, how it applies to crypto investments (as per the Finance Act, 2022), or how it is calculated, it may be a good idea to read this article.
What is TDS?
Unlike the taxes we file at the end of every year, Tax Deducted at Source or TDS is a tax filed in advance. Any payment made or received under the Income Tax Act, 1961, during a financial year will attract TDS.
TDS may be applied to salaries, rents, commissions, interest earned, dividends, professional fees, and other income-generating sources. The employer/payer is tasked with deducting the amount taxable under TDS and depositing it with the Income Tax (IT) department.
But why do we need TDS when yearly ITR filings exist? Here’s why: TDS isn’t simply a tax form. It is the government’s way of tracing every official payment in order to minimize year-end tax evasions. Simply put, TDS is a way of establishing a money trail.
TDS rates usually vary, depending on the income and age bracket. And as TDS is charged in advance, you can always adjust it with your yearly tax liability. You might get a tax refund if you can show that you have a lesser tax liability than the sum of deducted TDS.
While TDS applies in a wide range of cases, for the purpose of this article, we are limiting our scope to the crypto realm.
What is 1% TDS on crypto assets?
TDS on Crypto in India was implemented on 1 July 2022. It served as a primer on how VDAs are to be taxed, at least initially.
A flat rate of 1% TDS currently applies to crypto assets—Virtual Digital Assets (VDAs), to be precise. This means that every sell-side crypto transaction is to be taxed at 1% of the capital—profit or loss, notwithstanding. That’s that TDS on Crypto means.
Let’s look at an example to understand this better.
If you buy crypto at any exchange, no TDS will be deducted. Say you want to purchase BTC worth ₹12,000. You would get BTC worth the entire ₹12,000, based on the current INR–BTC rate. However, when you sell the BTC, 1% TDS will be deducted before it is credited to your account. It does not matter whether you sell it for ₹13,000 (at a ₹1,000 profit) or ₹8,000 (at a loss).
The point of the rule is to help track every VDA transaction and is a step toward implementing nationwide crypto regulations.
How will the 1% TDS on crypto transactions?
There are some exceptions to keep in mind for the 1% TDS rule. The tax rate may differ in certain circumstances, which are discussed below.
1. Annual trading value under ₹10,000: It is important to note that the crypto TDS isn’t applicable if the total value of the trades does not exceed ₹10,000 in a year. So you need to check the cumulative value of your trades on a yearly basis in order to ensure your taxes are all sorted.
2. Low liquidity: The 1% TDS rule applies only to standard VDAs with adequate liquidity (adequate seller and buyer volumes). For illiquid cryptos (not easily tradable cryptos), exchanges will levy 2% TDS (1% + 1%) on transactions.
3. VDA-VDA swaps: When it’s not just VDA being sold, the tax liabilities will again differ. For instance, if you plan on procuring one VDA (crypto) by purchasing or swapping it with another, the transaction is expected to be taxed in two sprints—which means at 2% TDS. That’s because, in a VDA transfer—as opposed to a VDA sale—the 1% implementation applies separately to each of the two steps.
How does the 1% TDS on crypto calculation work?
The exchange you are dealing with will usually do the math for you, but they are supposed to offer the following documents for your reference in case you want to double-check:
- Transaction invoice highlighting the TDS breakup
- Document with exchange fee breakup
- Quarterly Form 16A certificate for improved tax management
- Invoice generated within 48 hours from when the sell trade is executed
With most reliable exchanges, like CoinSwitch, you may not even need to verify the details but you should nevertheless know how the TDS calculation works.
An example should help simplify things. Imagine you have 20 tokens for a specific asset. You think that the current sell price of each token, ₹500, is good enough, so you decide to sell. So the price you will fetch is ₹10,000 (20 x ₹500).
Now, before you conclude that if 1% TDS applies to that ₹10,000, you will have to simply pay a tax of ₹100, remember you still have to cough up an exchange fee, service charges, and GST for the transaction. Say for a random exchange, these fees amount to X.
So the final sum that reflects in your account is ₹10,000 – X – ₹100.
How is 1% TDS different from the 30% gains tax?
The main similarity between 1% crypto TDS and the 30% tax on VDAs is that both are supposed to tax Indian crypto users. But in the larger scheme of things, the two kinds of taxes are indeed very different from each other. Here is a table highlighting some of the prominent differences between the two:
|Timeline||Advance tax.||Filed periodically by the end of each year.|
|Nature of Taxation||Users are taxed regardless of profit and loss.||Applies only to profits.|
|Offsets||Adjusted against the overall tax liability while filing returns.||No offsets are allowed. If you have profited from crypto sales, you need to pay.|
|Primary Purpose||Helps trail crypto transactions.||Meant for taxing crypto gains.|
That’s pretty much all you need to know about crypto TDS and its implementation for now. However, you should know that the government is constantly looking at the crypto space and could come up with new TDS and capital gains tax strategies as and when necessary. Until then, all you need to do is adhere to the guidelines while sticking to a dependable DYOR strategy.
And yes, you can always HODL. That way, you would not have to pay TDS or capital gains taxes, at least for a while.