Section 194S: Understanding the 1% TDS on Crypto and VDA Transfers

Short answer: Section 194S of the Income-tax Act, 1961, mandates a 1% Tax Deducted at Source (TDS) on payments for transferring a Virtual Digital Asset (VDA), like cryptocurrency or an NFT. This applies when the total payment to a single person in a financial year exceeds ₹50,000 (for specified persons) or ₹10,000 (for others). The buyer is responsible for deducting this tax and remitting it to the government.

What is Section 194S of the Income-tax Act?

It is a tax provision, effective from 1 July 2022, that requires the deduction of tax at source on the transfer of Virtual Digital Assets (VDAs). The primary purpose of this section is to create a trail for all VDA transactions and bring them into the tax net. It ensures that the government can track high-value crypto transactions and verify that the income generated from them is being correctly reported. The TDS amount is adjustable against your final tax liability, which is calculated at a flat 30% on VDA gains under Section 115BBH.

Who is responsible for deducting TDS under Section 194S?

The person responsible for paying the consideration for the VDA transfer, i.e., the buyer, is liable to deduct the TDS. The responsibility varies slightly depending on the transaction type:

Peer-to-Peer (P2P): The buyer directly pays the seller. The buyer must deduct 1% TDS before making the payment.
Through an Exchange: If the transaction is mediated by a crypto exchange in India, the exchange is typically responsible for deducting the TDS. This is often the more straightforward route for traders as the exchange handles the compliance.
Barter/Swap: In a crypto-for-crypto transaction, both parties are considered buyers and sellers. They must mutually ensure that the 1% tax on both sides of the transaction is paid before the transfer is completed.

What are the monetary thresholds for Section 194S?

TDS is not applicable on every transaction; it is triggered only when the total value of consideration paid to a single person in a financial year exceeds a certain limit. The thresholds are:

₹50,000 per financial year: This limit applies if the buyer is a "Specified Person."
₹10,000 per financial year: This limit applies to all other buyers.

A "Specified Person" is defined as:

An individual or a Hindu Undivided Family (HUF) whose total sales, gross receipts or turnover from business do not exceed ₹1 crore, or from profession do not exceed ₹50 lakh, during the financial year immediately preceding the year of the VDA transfer.
An individual or HUF who does not have any income under the head "Profits and gains of business or profession."

Essentially, most salaried individuals and small-scale professionals/business owners fall under the ₹50,000 threshold category.

How is TDS under Section 194S handled?

The process depends on who the deductor (buyer) is. The 1% TDS is calculated on the gross consideration, not on the net profit. This value includes any associated charges, commissions, or GST.

Deductor Type	Form for TDS Payment & Statement	Due Date for Payment & Filing
Persons required to get accounts audited (e.g., companies, LLPs, certain individuals)	Form 26Q (Quarterly Statement)	For payment: By the 7th of the next month (30th April for March). For filing: By the last day of the month following the quarter-end.
Persons not required to get accounts audited (e.g., salaried individuals)	Form 26QE (Challan-cum-statement)	Within 30 days from the end of the month in which the deduction is made.

If the seller does not provide their PAN (Permanent Account Number), the TDS rate increases to 20% under Section 206AA.

What happens in non-monetary or barter transactions?

In transactions where consideration is partly in kind or wholly in kind (e.g., swapping Bitcoin for Ethereum), Section 194S applies. Since no cash is exchanged from which TDS can be deducted, the law places a specific obligation on the parties. Before making the payment in kind, the person responsible for paying the consideration (the buyer) must ensure that the tax has been paid in respect of such consideration. In a crypto-for-crypto swap, both parties are buyers and must ensure the other party has paid their respective 1% tax before releasing their VDA.

Worked example

Ms. Ananya is a salaried IT professional in Bengaluru. She has no business income. For FY 2025-26, she is considered a "Specified Person," so her TDS threshold under Section 194S is ₹50,000 per seller.

She decides to buy some Virtual Digital Assets from her friend, Mr. Varun, in a peer-to-peer transaction.

Transaction 1 (15 October 2025): Ananya buys Ethereum worth ₹40,000 from Varun. Since the total consideration is below ₹50,000, no TDS is required.
Transaction 2 (20 December 2025): Ananya buys more Ethereum from Varun, this time for ₹25,000.

Step 1: Check the aggregate threshold Total consideration paid to Varun in FY 2025-26 = ₹40,000 + ₹25,000 = ₹65,000. This exceeds the ₹50,000 threshold.

Step 2: Calculate TDS TDS is applicable on the transaction that crosses the threshold and all subsequent transactions. Per CBDT guidelines, TDS liability arises on the entire amount of the transaction that makes the aggregate value cross the limit.

TDS to be deducted = 1% of ₹25,000 = ₹250.

Step 3: Make the payment and deposit TDS

Ananya pays Varun: ₹25,000 - ₹250 = ₹24,750.
She must deposit the ₹250 TDS to the government using Form 26QE.

Step 4: File Form 26QE

The deduction was made in December 2025. Ananya must file Form 26QE and pay the tax by 30th January 2026 (within 30 days from the end of the month of deduction).

Varun will see this ₹250 TDS credit in his Form 26AS and can claim it against his final tax liability when he files his ITR. His gains from this ₹65,000 sale will be taxed separately at 30% under Section 115BBH.

Common mistakes

Ignoring the threshold: Many assume TDS is not required for small P2P trades, forgetting that the ₹10,000 or ₹50,000 limit is cumulative for the entire financial year per seller.
Forgetting crypto-to-crypto swaps: Believing that no cash means no tax. The law explicitly covers barter transactions, and failure to ensure tax payment can lead to penalties.
Confusing TDS with final tax: The 1% TDS is merely an advance tax. The actual tax on VDA gains is a flat 30% (plus cess) under Section 115BBH, with no deductions or set-off of losses allowed. See our guide on /blog/tax-on-crypto-in-india.
Not obtaining the seller's PAN: Failing to get the seller's PAN makes the buyer liable to deduct TDS at a much higher rate of 20%.
Using the wrong form: Businesses and professionals subject to tax audit must use the quarterly Form 26Q, while others like salaried individuals must use the monthly Form 26QE.
Incorrect value for deduction: TDS is calculated on the gross sale price, including fees or GST, not the net amount received by the seller.

How SP & SC helps

Navigating the complexities of VDA taxation can be daunting. At SP & SC, our team of Chartered Accountants and tax lawyers provides end-to-end assistance with TDS compliance. We help you determine your liability, calculate the correct TDS amount, file the necessary forms like Form 26Q and 26QE, and ensure you remain compliant with all provisions under Section 194S. We can also assist in preparing and filing your income tax return reflecting VDA transactions and responding to any departmental queries. You can explore our TDS return filing services for comprehensive support.

Frequently asked questions

Is TDS applicable on losses from crypto trading?

Yes. Section 194S mandates TDS on the gross consideration (the sale value), irrespective of whether the seller made a profit or loss on that specific trade. The TDS is a mechanism for reporting the transaction, not a tax on profit.

What if I buy crypto from a foreign exchange or person?

As an Indian resident buyer, the legal obligation to deduct TDS under Section 194S remains with you, even if the seller or exchange is outside India. While enforcement can be practically challenging, non-compliance poses a legal risk. You would be required to deposit the tax using Form 26QE.

Does Section 194S apply to NFTs?

Yes. The definition of a Virtual Digital Asset in the Income-tax Act is broad. It includes cryptocurrencies, non-fungible tokens (NFTs), and any other token of a similar nature, by whatever name called. Therefore, the 1% TDS rule applies to the sale of NFTs as well.

What are the penalties for not complying with Section 194S?

Non-compliance can lead to several penalties:

Interest: For late deposit of TDS, interest is levied under Section 201(1A).
Penalty: A penalty equal to the amount of TDS not deducted or not paid can be imposed under Section 271C.
Late Filing Fee: A fee under Section 234E is applicable for late filing of TDS statements (Form 26Q/26QE).
Prosecution: In cases of wilful default, prosecution under Section 276B can be initiated.

Can I claim a refund of the 1% TDS?

You cannot get an immediate refund of the TDS deducted. This amount is credited against your PAN and will appear in your Form 26AS and AIS. When you file your annual income tax return, you can adjust this TDS against your total tax liability. If the total TDS deducted exceeds your final tax liability for the year, you will be eligible for a tax refund.

Get a fixed-fee quote

Unsure about your TDS obligations on crypto transactions? Worried about filing Form 26QE correctly? Share your documents with us for a confidential review, and we will provide a written fixed-fee quote for handling your VDA tax compliance end-to-end. Contact SP & SC today via our website or on WhatsApp at +91 90356 74566.

Section 194S: 1% TDS on Crypto Transfers