VDA Taxation in India: The 30% Flat Rate, 1% TDS, and the Income-tax Act 2025 Transition

VDA taxation in India continues to rest on the framework the Finance Act, 2022 installed — a 30 per cent flat rate on gains from the transfer of virtual digital assets, a 1 per cent tax deducted at source on the consideration paid, and a dedicated Schedule VDA in the income tax return. What has changed, and what every taxpayer dealing in crypto-assets during FY 2025-26 must now absorb, is the re-codification of the Indian direct-tax statute. The Income-tax Act, 2025, effective 1 April 2026, carries forward the substantive regime with section numbers re-sequenced, the definition of VDA expanded to explicitly include “crypto-asset”, and a new reporting and penalty architecture layered on top. This first article in a three-part series walks through the tax framework as it stands in April 2026; Part Two covers the reporting obligation under Section 509 and the path to OECD CARF in April 2027; Part Three addresses the enforcement wave now under way.

Key Takeaways

• Income from the transfer of any VDA is taxed at a flat 30 per cent under Section 115BBH of the Income-tax Act, with a 4 per cent health-and-education cess and applicable surcharge added; no deduction beyond the cost of acquisition is permitted.
• Losses from VDA transfers cannot be set off against any other income, including against gains from a different VDA, and cannot be carried forward to subsequent years.
• 1 per cent TDS applies under Section 194S (re-codified as Section 393(1) read with Section 393(4) in the Income-tax Act, 2025), with thresholds of INR 50,000 for specified persons and INR 10,000 for all other payers.
• The definition of VDA under Section 2(47A) was expanded from 1 April 2026 by the Finance Act, 2025 to explicitly include “crypto-asset” as sub-clause (d), closing any residual interpretive gap around tokens using distributed-ledger technology.
• VDA income is reported in Schedule VDA of ITR-2 (capital gains) or ITR-3 (business income); the form requires transaction-wise disclosure of sale consideration, cost of acquisition, and resultant profit or loss.
• The Union Budget 2026 retained the 30 per cent tax and 1 per cent TDS unchanged despite extensive industry lobbying, and layered on a new reporting obligation with penalties for default.

The 2022 Genesis: Section 115BBH and the 30 Per Cent Flat Rate

The statutory regime governing VDA taxation began with the Finance Act, 2022, which inserted Section 115BBH into the Income-tax Act, 1961 effective from assessment year 2023-24. The provision creates a special charging regime for income from the transfer of any virtual digital asset, taxable at 30 per cent regardless of whether the holder is a casual retail investor, a high-frequency trader, or a corporate entity. Surcharge applies on a slab basis, ranging from 10 per cent to 37 per cent depending on total income, and a 4 per cent health-and-education cess is added on the aggregate of tax and surcharge. The effective marginal rate for a high-income taxpayer can therefore exceed 42 per cent.

Two features distinguish Section 115BBH from the ordinary capital-gains regime. First, the rate is uniform across holding periods — no long-term or short-term distinction, no indexation, and no concessional rate even where the asset has been held for years. Second, the computation mechanic is deliberately narrow: the only deduction allowed is the cost of acquisition. Transaction fees, exchange charges, blockchain gas fees, advisory fees, internet and hardware costs associated with mining, and any other expenditure ordinarily available as a deduction under Chapter IV of the Act are all disallowed. Indian tax portals and vendor guidance have consistently read this restriction strictly, and the CBDT has not indicated any intent to liberalise it.

Section 194 (Formerly 194S) and the 1 Per Cent TDS Mechanic

Section 194S of the Income-tax Act, 1961 — re-codified under the Income-tax Act, 2025 as Section 393(1) read with the Table entry at serial number 8(iv) and Section 393(4) at entry 12 — requires any person paying consideration to a resident for the transfer of a VDA to deduct tax at source at 1 per cent. The deduction happens at the earlier of credit of the sum to the seller’s account or actual payment, and it applies regardless of whether the consideration is in fiat, in kind, or as a VDA-to-VDA swap. Where the consideration is wholly or partly in kind, the payer must ensure that the tax required to be deducted has in fact been paid before the consideration is released.

The threshold regime remains unchanged under the new Act. TDS does not apply where the aggregate consideration in a financial year does not exceed INR 50,000 for a “specified person” — an individual or HUF whose business turnover in the preceding year does not exceed INR 1 crore or whose professional receipts do not exceed INR 50 lakh, or who does not have profits and gains of business or profession. For all other payers, the threshold is INR 10,000. Where PAN is not furnished, the TDS rate is enhanced to 20 per cent. The CBDT’s Circular No. 13 of 2022 sets out the mechanics for exchange-mediated and broker-mediated transactions: the primary obligation to deduct rests on the exchange crediting payment to the seller, with specific rules for scenarios involving brokers and VDA-to-VDA swaps. Reporting is now through Form 140 (formerly Form 26Q) for quarterly returns and Form 141 (formerly Form 26QE) for challan-cum-return filings by specified persons.

Section 2(47A) and the 2026 Expansion to “Crypto-Asset”

The definition of VDA in Section 2(47A) has always been broad. It covers any information, code, number or token (other than Indian or foreign currency) generated through cryptographic means or otherwise, which provides a digital representation of value and which can be transferred, stored or traded electronically. Non-fungible tokens are expressly included, and the Central Government is empowered to notify further inclusions or exclusions. The CBDT has used this notification power twice — first to exclude gift cards, reward points, loyalty card records, website subscriptions and NFTs representing ownership of tangible assets, and second to define the species of NFT that is squarely within the VDA net.

The Finance Act, 2025 added a new sub-clause (d) to the definition with effect from 1 April 2026, bringing “crypto-asset” explicitly within the VDA perimeter. The text covers any crypto-asset being a digital representation of value that relies on a cryptographically secured distributed ledger or similar technology to validate and secure transactions. The effect is to close any residual interpretive gap around novel tokens and to align the Indian definition more closely with the OECD CARF definition of a crypto-asset. In substance, every Bitcoin, Ethereum, Solana, stablecoin, meme coin, exchange token and NFT traded in India falls within the VDA regime — and the 2026 amendment ensures that future digital-ledger innovations do as well.

No Deduction Beyond Cost, No Set-Off, No Carry-Forward

The loss-treatment rule under Section 115BBH is the single most consequential design choice in India’s VDA regime and the one that most frequently trips taxpayers up. Losses arising from the transfer of a VDA cannot be set off against any other income — not against salary, not against business income, not against capital gains from equity or real estate, and crucially not against gains from a different VDA. Losses from one VDA transaction also cannot be carried forward to subsequent years. This treatment is more restrictive than anywhere else in the Income-tax Act. A trader whose spot portfolio shows INR 5 lakh in gains on one token and INR 3 lakh in losses on another still pays tax on the full INR 5 lakh; the INR 3 lakh loss is extinguished.

Industry participants have lobbied successive governments to soften this treatment, with Shardul Amarchand Mangaldas partner Rohit Garg publicly calling in January 2026 for at least intra-VDA set-off and CoinDCX chief executive Sumit Gupta arguing for TDS reduction to 0.01 per cent and slab-rate taxation. Neither call has been accepted. The Union Budget 2026 retained the full restriction on loss set-off and the 30 per cent flat rate, and the Finance Minister’s speech flagged enforcement as the priority rather than rate calibration. For taxpayers planning portfolios, the practical implication is that VDA losses have no tax value — the loss remains real but yields no reduction in liability, immediate or deferred.

Schedule VDA in ITR-2 and ITR-3

From assessment year 2023-24, the income tax return forms have included a dedicated Schedule VDA for disclosure of virtual digital asset transactions. Taxpayers treating VDA income as capital gains — the typical position for investors — file ITR-2. Traders running a business activity file ITR-3 with the same schedule. Neither ITR-1 (Sahaj) nor ITR-4 (Sugam) accommodates VDA income, a design choice that effectively forces VDA holders into the more detailed returns with their additional disclosures and schedules.

Schedule VDA requires transaction-wise reporting — not an aggregated summary. For each transfer during the year, the return seeks the date of transfer, the date of acquisition, the sale consideration, the cost of acquisition, and the resultant profit or loss. TDS deducted under Section 194S is separately claimed against the final tax liability via the TDS schedule. Reconciliation with Form 26AS and the Annual Information Statement is now closely scrutinised — discrepancies between exchange-reported TDS and ITR entries trigger automated notices under the CBDT’s Insight portal and Non-Filer Monitoring System. Indian exchanges provide transaction reports that can be imported into ITR utility software; offshore exchanges typically do not, leaving the reconciliation burden on the taxpayer.

Section 56(2)(x): Gifts, Airdrops, Mining, and Staking Rewards

Not every VDA receipt is governed by Section 115BBH. Where a VDA is received without consideration (a gift) or for inadequate consideration, Section 56(2)(x) of the Income-tax Act treats the fair market value of the asset as “income from other sources” taxable at the recipient’s applicable slab rate, provided the aggregate value of such gifts from non-relatives in the financial year exceeds INR 50,000. Gifts from specified relatives, gifts on the occasion of marriage, and gifts by inheritance remain exempt. Subsequent transfer of the gifted VDA is then taxed under Section 115BBH at 30 per cent, with the cost of acquisition being the fair market value already subjected to Section 56 tax.

Airdrops, mining rewards, and staking rewards occupy a similar tax posture. The CBDT position, reflected in Budget 2022 memoranda and subsequent clarifications, is that these accruals are taxed as income at the fair market value on the date of receipt (under the head “income from other sources” at slab rates), with any subsequent gain on transfer taxed separately under Section 115BBH at 30 per cent. Fair-market-value determination follows Rule 11UA principles — broadly, the price quoted on a recognised exchange on the date of receipt, or an auditor-certified valuation where no quoted price is available. The practical consequence is a double layer: tax at slab rates on receipt, tax at 30 per cent on subsequent sale, with cost of acquisition defined by the fair market value taken at the first layer.

The Income-tax Act 2025 Transition: What Changed in Section Numbering

The Income-tax Act, 2025, effective from 1 April 2026, re-codifies the Indian direct-tax statute with substantial structural re-organisation. For VDA taxpayers, the substantive regime is preserved, but section numbers have moved. Section 194S has become Section 393(1) read with the Table at serial number 8(iv) and Section 393(4) at entry 12. Section 195, governing TDS on non-resident payments, is now Section 393(2) at serial number 17. Form 26Q has become Form 140, and Form 26QE has become Form 141. Section 285BAA, the new reporting obligation for VDA transactions, is re-codified as Section 509(1). A new penalty framework under Section 446 attaches: INR 200 per day for non-furnishing of a Section 509 statement, and INR 50,000 for furnishing inaccurate information or failing to correct it.

The re-numbering is cosmetic in the sense that it preserves the 30 per cent rate, the 1 per cent TDS, the Section 2(47A) definition and the Schedule VDA filing mechanic. It is substantive in the sense that compliance documentation, software mappings, circular references, litigation citations, and internal tax process handbooks all need to be updated. For most practitioners the sensible approach through FY 2025-26 will be to cite both the 1961 section number and the 2025 section number in parallel — “Section 194S (now Section 393)” — to avoid the confusion that always attends a re-codification. CBDT Circular No. 4 of 2026 sets out implementation guidance on the Document Identification Number mechanism under the new Act, and Notification G.S.R. 198(E) dated 20 March 2026 (with corrigendum G.S.R. 286(E) dated 16 April 2026) issues the Income-tax Rules, 2026.

What Budget 2026 Changed (and What It Didn’t)

The Union Budget 2026, presented on 1 February 2026, disappointed industry expectations on rate calibration. The 30 per cent tax under Section 115BBH remained. The 1 per cent TDS under Section 194S / Section 393 remained. The restriction on loss set-off remained. The CoinDCX and Bharat Web3 Association submissions calling for TDS reduction to 0.01 per cent and slab-rate treatment were not accepted. What the Budget did do was layer on enforcement: the Section 509 reporting obligation and the Section 446 penalty framework became operative from 1 April 2026, and the criminal liability cap for TDS defaults under Section 276B was reduced from seven years to two years as a modest quid pro quo.

The signalling is explicit. The government’s position is that India’s VDA regime is settled at the rate level and that the policy priority for the next phase is compliance enforcement, cross-border information exchange, and inter-agency coordination. For taxpayers, this means the analytical framework for the next three years is planning-forward rather than waiting-for-reform: assume the 30 per cent rate holds, assume the 1 per cent TDS holds, assume the loss-restriction holds, and structure compliance around those constraints. For industry lobbyists, the pre-Budget 2027 advocacy cycle is the next window — but the Finance Minister’s framing in the 2026 speech suggests that window will be narrower, not wider.

Looking Ahead

Two things will shape the VDA tax landscape through FY 2026-27 and FY 2027-28. First, the Section 509 reporting obligation under the new Act has activated from 1 April 2026. Indian crypto exchanges and designated reporting entities are now filing user-level transaction statements with the Income Tax Department. Offshore platforms that service Indian users will be drawn into the same reporting regime as India implements the OECD Crypto-Asset Reporting Framework from April 2027. The informational asymmetry that historically protected offshore trading is closing quickly. Part Two of this series addresses this reporting architecture in detail.

Second, enforcement intensity is rising. Section 148A reopening notices are being issued to traders for assessment year 2022-23, often with AIS-driven triggers that misinterpret gross turnover as net income and produce demand figures out of proportion to actual profit. Block-assessment provisions at 60 per cent under Chapter XIV-B threaten taxpayers whose disclosures do not reconcile with exchange-filed data. Part Three examines this enforcement reality. For taxpayers with positions spanning domestic and offshore platforms, the window to clean up prior-year disclosures — using Section 139(8A) updated returns where open, and through proactive disclosure where the limitation period has passed — is shorter in April 2026 than it was a year ago, and will be shorter still by April 2027.

Frequently Asked Questions

What is the tax rate on cryptocurrency and VDA gains in India?
Income from the transfer of any virtual digital asset is taxed at a flat 30 per cent under Section 115BBH of the Income-tax Act, 1961 (continued under the Income-tax Act, 2025). A 4 per cent health-and-education cess is added, and surcharge between 10 per cent and 37 per cent applies based on the taxpayer’s total income slab. The effective marginal rate for a high-income taxpayer can therefore exceed 42 per cent. The rate applies uniformly regardless of holding period, with no concessional treatment for long-term holdings.

Can crypto losses be set off against crypto gains in India?
No. Under Section 115BBH(2), losses from the transfer of any VDA cannot be set off against any other income, including against gains from a different VDA. Losses also cannot be carried forward to subsequent years. A taxpayer with INR 5 lakh of gains on one token and INR 3 lakh of losses on another pays tax on the full INR 5 lakh. This is stricter than the treatment of any other asset class under the Income-tax Act.

What is the 1 per cent TDS on crypto under Section 194S?
Section 194S (re-codified as Section 393(1) in the Income-tax Act, 2025) requires a 1 per cent TDS on any payment made to a resident for the transfer of a VDA. The threshold is INR 50,000 per financial year for specified persons (individuals or HUFs below specified turnover thresholds) and INR 10,000 for all other payers. TDS is deducted by the payer — typically the exchange or the buyer in peer-to-peer transactions — and credited against the seller’s final tax liability. Where PAN is not furnished, the TDS rate is enhanced to 20 per cent.

Which ITR form should I use for reporting crypto income?
ITR-2 is used where VDA gains are reported as capital gains — the default for investors — and ITR-3 where VDA income is reported as business income, typical for high-volume traders. Both forms include a dedicated Schedule VDA requiring transaction-wise disclosure of sale consideration, cost of acquisition, and resultant profit or loss. Neither ITR-1 (Sahaj) nor ITR-4 (Sugam) supports VDA income disclosure, so taxpayers with VDA transactions must file the detailed return forms.

Has the Income-tax Act 2025 changed the crypto tax rate?
No. The Income-tax Act, 2025, effective from 1 April 2026, carries forward the substantive VDA regime unchanged — 30 per cent flat tax on transfers, 1 per cent TDS, no deduction beyond cost of acquisition, and no loss set-off or carry-forward. What has changed is the section numbering: Section 194S is now Section 393, Section 285BAA is now Section 509, Form 26Q is Form 140, and Form 26QE is Form 141. A new penalty framework under Section 446 has been added for reporting-entity defaults. Budget 2026 did not accept industry requests to reduce the rate or allow loss set-off.

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This analysis was prepared by the Candour Legal Team. Candour Legal is a full-service Indian law firm with offices in Ahmedabad, Delhi, and Mumbai, publishing commentary on digital assets, financial regulation, and cross-border compliance at candourlegal.com.

Further reading in this series

• Part 2 — Section 509 Reporting from April 2026 and India’s Path to the OECD CARF
• Part 3 — Section 148A Notices, Block Assessment, and the Crypto Tax Enforcement Reality
• FIU-IND Registration for Crypto Businesses — on the parallel AML/CFT regime under the PMLA, which runs alongside the income-tax framework discussed in this series.