With the rapid growth of cryptocurrency, NFTs, and other virtual digital assets (VDAs), the Indian government introduced Section 194S under the Income Tax Act to ensure tax reporting and collection on such transactions. This section mandates Tax Deducted at Source (TDS) on payments made for the transfer of virtual digital assets.
Understanding who is required to deduct tax, applicable thresholds, forms to be filed, and penalties for non-compliance is extremely important, especially for individuals, traders, exchanges, and investors dealing in crypto assets.
Who Is Required to Deduct Tax Under Section 194S?
Under Section 194S, any person, whether resident or non-resident, who is responsible for paying consideration for the transfer of a virtual digital asset is required to deduct TDS. The deduction must be made at the rate of 1% of the consideration.
The obligation to deduct tax arises at the earlier of the following events:
- When the amount is credited to the account of the seller, or
- When the payment is actually made, whether in cash, bank transfer, or any other mode
This provision applies irrespective of whether the payer is an individual, HUF, company, partnership firm, or any other entity, subject to specified exemptions and thresholds.
What Is a Virtual Digital Asset Under Section 194S?
Virtual digital assets include:
- Cryptocurrencies such as Bitcoin, Ethereum, etc.
- Non-Fungible Tokens (NFTs)
- Any other digital asset notified by the government
Transactions involving exchange of crypto for crypto, crypto for goods, or crypto for services are also covered under this section.
Meaning of “Specified Person” Under Section 194S
The Income Tax Act classifies certain payers as “specified persons”, who are given compliance relaxation under Section 194S.
A specified person means:
An individual or Hindu Undivided Family (HUF) whose total sales, turnover, or gross receipts in the immediately preceding financial year do not exceed ₹1 crore in case of business or ₹50 lakh in case of profession.
OR
An individual or HUF who does not have any income under the head “Profits and Gains of Business or Profession”, such as salaried individuals, retirees, or investors with no business income.
This classification is important because it determines TDS threshold limits and filing requirements.
TDS Threshold Limits Under Section 194S
Section 194S provides different exemption limits depending on whether the payer is a specified person or not.
If the payer is a specified person, TDS is not required if the aggregate value of consideration does not exceed ₹50,000 during the financial year.
If the payer is not a specified person, TDS is not required if the aggregate value does not exceed ₹10,000 during the financial year.
Once these limits are crossed, TDS at 1% becomes applicable on the entire amount.
When Is Form 26QE Required to Be Filed?
Form 26QE is required to be filed when the deductor is a specified person under Section 194S.
In such cases, the deductor must file a challan-cum-statement in Form 26QE electronically within 30 days from the end of the month in which TDS is deducted.
One major relief provided to specified persons is that they are not required to obtain a TAN. They can file Form 26QE using their PAN only.
What If the Deductor Is Not a Specified Person?
If the person deducting tax under Section 194S is not a specified person, then:
- TAN is mandatory
- TDS details must be reported in Form 26Q, which is the regular quarterly TDS return
This generally applies to companies, firms, LLPs, and individuals or HUFs with business turnover exceeding the prescribed limits.
When Is TDS Certificate in Form 16E Required to Be Issued?
After filing Form 26QE, the deductor is required to issue a TDS certificate in Form 16E to the deductee (seller of the virtual digital asset).
Form 16E must be issued within 15 days from the due date of furnishing Form 26QE.
This certificate serves as proof that tax has been deducted and deposited and enables the seller to claim credit for the TDS in their income tax return.
Penalty for Non-Issuance of Form 16E
If the deductor fails to issue Form 16E to the deductee within the prescribed time, he shall be liable for a penalty under Section 272A of the Income Tax Act.
The penalty can be levied for each day of default, subject to prescribed limits. Non-issuance of the TDS certificate may also lead to disputes, notices, and denial of TDS credit to the seller.
TDS in Case of Payment in Kind or Crypto-to-Crypto Transactions
Section 194S specifically addresses situations where the consideration for transfer of a virtual digital asset is:
- Wholly in kind, or
- Partly in cash and partly in kind, where the cash portion is insufficient to meet the TDS liability
In such cases, the payer must ensure that the tax required to be deducted has been paid before releasing the consideration. This means that even if no cash is involved, TDS compliance cannot be avoided.
Applicability Over Section 194-O
In cases where both Section 194S and Section 194-O (e-commerce transactions) appear applicable, the law clearly states that TDS shall be deducted under Section 194S.
This provision avoids double deduction of tax and clarifies priority between sections.
Deemed Credit Provision
If the amount payable for transfer of a virtual digital asset is credited to any account, including a suspense account or any other account name, it will still be treated as credit to the seller’s account.
Accordingly, TDS provisions under Section 194S will apply, and the deductor cannot avoid compliance by accounting treatment.
Why Compliance Under Section 194S Is Crucial
Non-compliance with Section 194S can lead to:
- Interest and penalties
- Disallowance of expenses
- Notices and scrutiny from the Income Tax Department
- Difficulty in claiming TDS credit
Given the increasing monitoring of crypto transactions by tax authorities, proper compliance has become essential.
Final Words
Section 194S marks a significant step by the government to regulate and track transactions involving virtual digital assets. Whether you are an investor, trader, individual buyer, or business dealing in crypto or NFTs, understanding your TDS obligations is critical.
Correct identification of specified person status, timely filing of Form 26QE or Form 26Q, issuance of Form 16E, and proper handling of non-cash transactions ensure smooth compliance and avoid future tax complications.
