Budget discussion dominates crypto world! Will there be exemption from 1% TDS and tax?

Before Budget 2026, discussion on crypto tax has started once again. Image Credit source: ChatGPT

Interest in cryptocurrencies has been increasing among Indians in recent years, but due to lack of clarity in regulations and heavy taxation, it has become quite difficult and expensive to invest in cryptocurrencies or Virtual Digital Assets (VDA) in India. With the arrival of Budget 2026, expectations are increasing in the crypto world. Industry participants, tax experts and investors are all expecting a fair approach. The biggest question is, will Budget 2026 prove to be a turning point for crypto taxation in India, or will the status quo remain? Let us try to understand it in detail.

What other improvements are expected from Budget 2026?

Although the government has not yet made any formal proposals, it is widely expected that Budget 2026 will focus on reforms and clarity rather than aggressive taxation, especially at a time when India is moving towards a more mature digital assets ecosystem. CA Mohit Gupta, Partner PNM & Co LLP says in the ET report that a major hope is the reform of 1 percent TDS under Section 194S. Market participants have consistently highlighted that the current rate has adversely impacted liquidity, widened the bid-ask gap and pushed trade volumes towards foreign platforms. Therefore, a reduction in the rate or an increase in the limit is widely expected.

Under the current tax structure, losses from VDA transactions are not allowed to be set off against profits from other VDAs, nor can they be carried forward to subsequent years. CA (Dr.) Suresh Surana says in the media report that this actually leads to tax on gross profits while ignoring actual economic losses, thereby creating an unfair situation for investors. A more balanced and rational approach would be to allow set off of losses under the VDA category and carry forward such losses for a limited number of years, for example 4 years/8 years. Aishwarya Gupta, Global Head of Payments and RWAs at Polygon Lab, talked about some of the key expectations related to Budget 2026 in the ET report.

Major expectations from Budget 2026

He made a comparison between the tax system at the global level and India’s current approach towards crypto taxation.

How is the tax on crypto globally?

• 0% for individuals in UAE
• 0% for individuals in Singapore
• With capital gains tax offset in US
• Capital gains tax in Britain (10-20 percent), with exemption
• Tax free if kept in Germany for more than 1 year
• 30% fixed rate in India, no loss offset, no holding benefit

India’s current tax system is one of the most stringent tax systems globally. The industry expects a balanced approach that minimizes capital flight to foreign platforms while maintaining compliance.

What are the current income tax rules and TDS rates on cryptocurrencies?

1. Any transfer of VDA is taxed at a fixed rate of 30 percent under Section 115BBH of the Income Tax Act, 1961, along with surcharge and cess.
2. Tax rate on VDA gains fixed at 30 percent (regardless of income group)
3. Surcharge and cess will also be applicable, the effective rate of which can reach around 34.5 percent.
4. Loss cannot be offset against other income.
5. Losses cannot be offset against other VDA gains.
6. Loss cannot be carried forward to the next year.
7. Giving VDA worth more than Rs 50 thousand as gift is taxable.

Note: These rules apply regardless of holding period, investor type or trading frequency.

Importantly, while computing the income arising from transfer of VDA, no deduction of any expenditure or allowance other than the acquisition cost is allowed. Surana further explains that the loss arising from such transfers cannot be adjusted against any other income nor can it be carried forward to subsequent years.

They further say that to strengthen tax compliance, 1 percent TDS under Section 194S of the Income Tax Act is applicable on crypto transfers where returns exceed Rs 10,000 in a financial year. In case of specified people this limit is Rs 50,000.

What are VDA as per Income Tax Act?

Under Indian law, cryptocurrencies fall under the category of Virtual Digital Assets (VDAs), and include any information, code, number or token generated by cryptographic means.

Gupta, partner, PNM & Company LLP, says in the media report that the Government of India introduced the concept of VDA by adding Section 2(47A) to the Income Tax Act, 1961 through the Finance Act, 2022.

Under Section 2(47A), VDA is defined as any information, code, number or token – other than Indian or foreign currency – which is generated by cryptographic means or other means, and which provides a digital representation of value and which can be transferred, stored or traded electronically.

Which assets come under VDA?

• Cryptocurrencies (Bitcoin, Ether, etc.): Yes
• Utility Token: Yes
• Governance Token: Yes
• NFT: Yes (with some limited exceptions)
• Stablecoins (USDT, USDC, etc.): Yes
• Indian Digital Rupee (CBDC): No
• Under Indian law, VDAs are considered a distinct asset class distinct from securities, commodities or currencies.

How to file ITR with VDA Income?

Income earned from VDA is required to be reported separately, and detailed details also have to be given while filing ITR. Taxpayers with VDA income will have to file ITR-2 or ITR-3, depending on whether the income is treated as capital gains or business income. The Income Tax Department has introduced a dedicated Schedule VDA, in which transaction-wise reporting is mandatory.

• Nature and type of VDA, • Date of acquisition and transfer date • Acquisition cost, • Selling price • Taxable income under section 115BBH.

Any TDS deducted under Section 194S should be matched with Form 26AS and Annual Information Statement (AIS) and properly claimed in the return. If a VDA is received as a gift and is taxable under section 56(2)(x), the taxable value becomes the acquisition cost for subsequent transfers.