What is Section 194S of the Income Tax Act?

Introduction: Understanding Section 194S

India’s growing digital economy has given rise to new forms of assets, such as cryptocurrencies and other Virtual Digital Assets (VDAs). To regulate and track the taxation of these assets, the government introduced the Section 194S of the Income Tax Act, which has direct implications for buyers, sellers, and exchanges operating in digital assets. This section stipulates the 194S TDS provision, representing a significant development in tax compliance for anyone trading or investing in VDAs.

Who does it apply to?

Section 194S of Income Tax Act mandates that any person (individual, business, or exchange) that is making a payment to a resident for the transfer of a VDA must deduct TDS at the time of credit or payment—whichever is earlier. This includes all transactions above a prescribed threshold and applies to entities large and small.

Key points regarding 194S TDS section applicability:

Individuals, businesses, or exchanges buying VDAs from resident sellers must comply.

The section is relevant for cryptocurrencies, NFTs, and any digital asset notified by the government as a VDA.

If the transaction involves a non-resident, different tax rules may apply.

A special category called “specified persons”—typically individuals or Hindu Undivided Families (HUFs) with limited business/professional income—enjoys some procedural relaxations, but threshold limits still apply.

TDS on Virtual Digital Assets (VDAs) explained

Section 194S of Income Tax Act stipulates that the TDS rate is 1% of the transaction value for transfers of VDAs. This is to ensure tax collection at the source and to promote transparency within the digital asset ecosystem.

When is TDS deducted? TDS must be deducted at the time of payment or credit to the seller’s account—whichever comes first.

Mode and Rate: TDS is generally at 1%. If the payee (seller) fails to provide a valid PAN, tax is withheld at a higher rate of 20%.

Through Exchanges: In transactions conducted via exchanges, the onus to deduct TDS may lie with the exchange, the broker, or the buyer, depending on the transaction structure, as agreed in writing.

Peer-to-Peer and In-Kind Transfers: The responsibility to deduct TDS remains even when VDAs are exchanged for goods or services instead of Indian Rupees.

TDS is to be reported using prescribed government forms such as 26Q or 26QE.

Compliance requirements for taxpayers and exchanges

To comply with Section 194S of Income Tax Act, buyers (or exchanges/brokers, as applicable) must:

Deduct and deposit TDS with the government within the specified time frame.

File appropriate TDS returns (Form 26Q or 26QE for “specified persons”).

Maintain accurate records of VDA transactions, including transaction date, type, value, seller’s PAN, and proof of TDS deposit.

Issue TDS certificates to the payee (seller) as proof of tax deduction.

For exchanges, ensure system-wide compliance for all eligible transactions, and clarify deduction liability with brokers or buyers to avoid double deduction.

Non-compliance, late filing, or erroneous deduction may attract penalties under Section 271H/234E and invite regulatory scrutiny. For specified persons, there are procedural relaxations regarding TAN requirements.

Exceptions and threshold limits under Section 194S

Section 194S provides exemption thresholds to protect small, infrequent, or low-value transactions from undue compliance burden:

No TDS is required if the aggregate value of VDAs transferred does not exceed ₹50,000 in a financial year for specified persons (individuals/HUFs with low turnover/professional receipts). For others (e.g., companies), the threshold is ₹10,000 per year.

The thresholds apply per financial year, per payer.

These conditions ensure that small investors are not unduly affected, focusing the compliance burden on more substantial or business-like activity.

Why Section 194S matters for investors

The introduction of Section 194S of Income Tax Act—mandating 1% TDS on Virtual Digital Assets—marks a significant step toward accountable and transparent taxation of digital assets in India. Investors, traders, and platforms must operate within a clear regulatory framework, which helps ensure all taxable income is reported and tax evasion is minimised.

Understanding the implications, processes, and thresholds under this section allows participants to trade and invest in VDAs with greater confidence and legal clarity.