Guidelines on TDS Under Section 194S of the Income Tax Act

Guidelines on TDS Under Section 194S of the Income Tax Act – Simplified

Section 194S of the Income Tax Act mandates a 1% TDS on the transfer of Virtual Digital Assets (VDAs).

What is TDS Under Section 194S?

Section 194S requires a 1% TDS deduction on the sale or transfer of cryptocurrencies and other VDAs. This applies when the total value of such transactions exceeds ₹10,000 in a financial year (₹50,000 for specified persons). The deducted tax must be reported through Form 26Q for regular taxpayers and Form 26QE for specified individuals.

For instance, if you purchase crypto worth ₹1,00,000, you must deduct 1% TDS (₹1,000) and pay the seller ₹99,000. The deducted ₹1,000 must then be deposited with the government.

Who is a Specified Person?

For specified persons, the threshold limit is ₹50,000. A Specified Person includes:

Individuals or HUFs with no income under “Profits and Gains of Business or Profession”
Individuals or HUFs with business income not exceeding ₹1 crore
Individuals or HUFs with professional receipts up to ₹50 lakh

Key Highlights of Section 194S Guidelines

CBDT has issued guidance on TDS deduction for VDA transfers in cases such as:

Transfer of VDA for cash
Transfer of VDA through an exchange that does not own the asset

If a transaction occurs through an exchange that does not hold the VDA, the flow may look like:

Buyer ⇒ Broker ⇒ Exchange ⇒ Broker ⇒ Seller (Owner)

The buyer pays the exchange (either directly or via a broker), and the exchange ultimately pays the seller. In such cases, the exchange is responsible for deducting TDS before making payment to the seller.

Where payments between the exchange and seller move through a broker, both the broker and the exchange share the responsibility of TDS deduction. They may mutually decide that the broker alone will deduct the TDS. In this arrangement, the exchange must file a quarterly statement in Form 26QF within the prescribed timeline.

Transfer of VDA (in Cash) Through an Exchange That Does Not Own the VDA

When a Virtual Digital Asset is transferred through an exchange that does not own the VDA, the exchange is responsible for deducting 1% TDS and releasing the remaining amount to the seller. In cases where multiple intermediaries are involved, the buyer or their broker may also be required to deduct TDS.

The exchange may also enter into an agreement with the buyer or broker agreeing to deposit the applicable TDS within the due date of that quarter. When such an arrangement is made, the exchange must file a quarterly statement in Form 26QF within the prescribed timeline.

Exchange of VDA (in Kind) Through a Broker or via Barter

In situations where VDAs are exchanged in kind, partly in kind, or swapped for another VDA, the exchange may deduct TDS on both sides of the transaction, depending on the terms of the agreement. If the exchange is not involved, the responsibility to deduct and deposit TDS lies with the person making the payment (the buyer).

When TDS Is Deducted by the Exchange in Kind

The exchange must maintain detailed records for every VDA-to-VDA trade.
The VDA amount withheld as TDS must be converted into a primary VDA such as Bitcoin (BTC), Ethereum (ETH), USDT, or USDC—assets that can be easily converted into INR.
All TDS collected in primary VDAs between 00:00 and 23:59 must be accumulated for the day.
The total primary VDA balance held at 00:00 hours should be converted into INR at market value through a sell order.
The exchange must email the customer a contract note showing the VDA withheld as TDS and its INR value after conversion.
The INR amount must be deposited with the government within the applicable due dates.
Form 26Q now includes fields to report such transactions, and Form 26QE applies to specified persons.

TDS Interaction Between Section 194S and Section 194O

When TDS is deducted under Section 194S, no deduction is required under Section 194O (which covers e-commerce transactions). The tax is applied on the net consideration, meaning the amount after removing GST and any other applicable charges.

Payment Gateways and TDS Under Section 194S

When a VDA transfer is routed through a payment gateway, the gateway is not responsible for deducting TDS. The obligation to deduct remains with the party liable under Section 194S.

Section 195 of Income Tax Act – TDS Applicability for NRIs

Frequently Asked Questions on Section 194S (TDS on Virtual Digital Assets)

1. What is a Virtual Digital Asset (VDA)?

A Virtual Digital Asset (VDA) refers to any digital representation of value that is generated, stored, and transferred electronically. For the purpose of TDS under Section 194S, VDA includes:

Cryptocurrencies such as Bitcoin, Ethereum, and other cryptographically generated tokens.
Non-Fungible Tokens (NFTs) or any similar digital collectibles notified by the Government.
Any other digital asset or token category that may be notified by the Central Government in the future.

2. Is a Tax Deduction and Collection Account Number (TAN) mandatory for deducting tax under Section 194S?

No. A TAN is not required for deducting TDS under Section 194S. Individuals and specified persons can deduct TDS without obtaining a TAN.

3. Who is considered a “Specified Person” under Section 194S?

A specified person for the purpose of Section 194S includes:
a) Individual/HUF whose sales, turnover, or gross receipts during the preceding financial year are:

Up to ₹1 crore (in case of business), or
Up to ₹50 lakh (in case of profession).
b) Individual/HUF who does not have income under the head “Profits and Gains of Business or Profession (PGBP).”

4. What is the TDS rate applicable under Section 194S?

TDS is required at:

1% of the consideration paid for the transfer of a VDA.
If the seller does not furnish PAN, TDS must be deducted at a higher rate of 20%.

5. What is the time limit for filing Form 26QE?

Form 26QE must be filed within 30 days from the end of the month in which TDS was deducted.
Example:
If Mr. X buys a VDA worth ₹60,000 from Mr. Y on 10 May 2023, TDS @1% must be deducted on 10 May 2023. Form 26QE must then be filed by 30 June 2023.

6. Who is responsible for deducting TDS when buying or transferring a VDA?

The person paying the consideration for the transfer of VDA (buyer) is required to deduct TDS. In certain cases, exchanges or brokers may also be liable depending on whether the transaction occurs on-platform or off-platform.

7. Does TDS apply even if the VDA transaction results in a loss?

Yes. TDS under Section 194S applies on the transaction value, not on profit. Even if the seller incurs a loss, TDS must be deducted on the full consideration amount.

8. Is TDS applicable when VDAs are exchanged (crypto-to-crypto transactions)?

Yes. In crypto-to-crypto transactions, both parties are considered buyers and may be required to deduct TDS. Exchanges may also facilitate compliance depending on their involvement.

9. Is TDS required when purchasing VDA through an exchange?

If the transaction is carried out through a registered exchange, the exchange may handle the TDS deduction on behalf of the buyer. However, buyers must check the exchange’s TDS policy.

10. What happens if TDS under Section 194S is not deducted or reported?

Failure to deduct or deposit TDS may lead to:

Interest and late fees
Disallowance of expenses
Penalties under the Income Tax Act

11. How is TDS calculated when fees or GST are charged separately?

TDS under Section 194S is deducted on the net consideration, excluding charges such as:

GST
Brokerage
Platform fees
Commission

12. Can the seller claim credit for TDS deducted under Section 194S?

Yes. The seller will see the TDS credit in Form 26AS or AIS after the buyer files Form 26QE. The credit can be used while filing the income tax return.