CA. Ashish Kapoor


Virtual digital assets have gained tremendous popularity in recent times and the volume of trading in such digital assets has increased substantially. The investments in cryptocurrencies have grown despite any regulation from the government or the Reserve Bank of India (RBI). Indian Government has not granted any legal tender status to the cryptocurrency or Virtual Digital Assets. The introduction of taxation on crypto transactions in the form of Crypto Bill was much anticipated and finally in Budget 2022 the taxation on VDAs was introduced.

The Honourable Finance Minister in her Budget Speech said, “There has been a phenomenal increase in transactions in virtual digital assets. The magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime”. In this way the tax regime on Virtual Digital Assets was introduced.

Rationale behind introduction of Tax on VDAs

Due to the huge volume of transactions and increasing interest shown by Indian investors on the crypto exchanges a legislation of some type was the need of the hour. The Finance Act 2022 has made an introduction of the Scheme of Taxation of Virtual Digital Assets by inserting and amending the following provisions:-

  • Section 2(47A)- Definition of VDAs
  • Taxation of income on transfer of VDAs Section 115BBH
  • Tax Deduction on Payment on Transfer of Digital Assets Section 194S
  • Amendment to Section 56(2)(x)- gifting of VDAs

Section 2(47A)-Definition of VDAs (w.e.f. 01/04/2022)

  1. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
  2. a non-fungible token or any other token of similar nature, by whatever name called;
  3. any other digital asset, as the Central Government may, by notification in the Official Gazette specify

    Provided that the Central Government may, by notification in the Official Gazette, exclude any digital asset from the definition of virtual digital asset subject to such conditions as may be specified therein.

    Explanation. For the purposes of this clause,

    1. non-fungible token” means such digital asset as the Central Government may, by notification in the Official Gazette, specify;
    2. the expressions “currency”, “foreign currency” and “Indian currency” shall have the same meanings as respectively assigned to them in clauses (h), (m) and (q) of section 2 of the Foreign Exchange Management Act, 1999.’.


  • Sec 2(47A) covers all kinds of Virtual Digital Assets ie information, code, number or token generated through cryptographic means which can be transferred, stored or traded electronically.
  • Crytocurrency has become generic for anything using blockchain technology. The most popular being Bitcoin, Ethereum, Solana, Cardano which are traded through various trading platforms on crypto exchanges.
  • VDAs also include NFT (Non-Fungible Tokens).Notification on the various Digital Assets is awaited.

TAXATION of Income from Virtual Digital Asset-Section 115BBH (w.e.f. 01/04/2023)

According to Section 115BBH, income tax payable shall be aggregate of:

  1. Tax will be calculated@30% on the income from transfer of the VOA. and
  2. The amount of income – tax which the assessee would be paying on the total income reduced by income from transfer of VOA.

Notwithstanding anything contained in any other provision of this Act,

  1. no deduction in respect of any expenditure (other than cost of acquisition) or allowance or set off of any loss shall be allowed to the assessee in computing the income
  2. no set off of loss from transfer of the VOA shall be allowed against income computed under any provision of this Act and such loss shall not be allowed to be carried forward to succeeding assessment years.

Understanding Taxation of VDAs

  • Chapter XII talks of Determination of Tax in Certain Special Cases and Sec 115BBH would fall under this Chapter. Sec 115BBH (2a) says that on transfer of a VOA only item available for deduction is the cost of acquisition and no other expenses are deductible. This indicates the tight view of the government of not providing legal recognition to such assets.
  • The government has paved way for introduction of CBDC (Central Bank Digital Currency) to be issued by RBI in the Budget 2022, extract of it is, “It is, therefore, proposed to introduce Digital Rupee, using blockchain and other technologies, to be issued by the Reserve Bank of India starting 2022-23. This is an effort towards pitching of a digital legal tender of exchange backed by a regulatory authority of the country against an unregulated cryto based currency.
  • Income from transfer of VDAs would attract a flat tax rate of 30% as per Sec 115BBH (la). However, some points are yet to be clarified regarding how to calculate income from transfer of digital assets? whether it would be INR to cryptocurrency,or cryptocurrencyto cryptocurrency. Set off of Losses and Carry forward of Losses

Sec 115BBH 2(b) also provides that no set off of losses on transfer of VDAs would be allowed against income from any head and also no carry forward of such losses would be allowed for future set offs.

Sec 194S-Tax Deduction on Payment on Transfer of Digital Assets (w.e.f. 01/07/2022)

  • Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to one per cent. of such sum as income-tax thereon:

    Provided that in a case where the consideration for transfer of virtual digital asset is

    1. wholly in kind or in exchange of another virtual digital asset, where there is no part in cash;


    2. partly in cash and partly in kind but the part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such transfer, the person responsible for paying such consideration shall, before releasing the consideration, ensure that tax has been paid in respect of such consideration for the transfer of virtual digital asset.
  • The provisions of sections 203A and 206AB shall not apply to a specified person.
  • NO TDS in case:
    1. The consideration is payable by a specified person and the aggregate value of such consideration does not exceed Rs. 50,000 during the financial year, or
    2. the consideration is payable by any person other than a specified person and the aggregate value of such consideration does not exceed Rs.10,000 during the financial year.
  • Sec 194S overrides Sec 1940 in case both are applicable.
  • If any difficulty arises in giving effect to the provisions of this section, the Board may, with the prior approval of the Central Government, issue guidelines for the purposes of removing the difficulty.
  • Every guideline issued by the Board under sub-section (6) shall be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person responsible for paying the consideration on transfer of such virtual digital asset.
  • Notwithstanding anything contained in section 194-0, in case of a transaction to which the provisions of the said section are also applicable along with the provisions of this section, then, tax shall be deducted under this section.

Explanation. For the purposes of this section”specified person” means a person,

  1. being an individual or a Hindu undivided family, having income under head “Profits and gains of business or profession” but where turnover from business or gross receipts from Profession do not exceed Rs 1 crore or Rs. 50 lacs respectively during preceding F.Y
  2. being an individual or a Hindu undivided family, not having any income under the head “Profits and gains of business or profession”.

Sec 56(2)(x) Proposed Amendment- Income from Other Sources. (w.e.f. 01/04/2023)

The explanation to Section 56(2)(x) is also amended, in order to provide for taxing in the hand of recipient, where a virtual digital assets has been received as gift or on transfer of the same for a consideration which is less than the aggregate fair market value of the VDA by an amount exceeding fifty thousand rupees,

  • The amendment has been brought in the explanation to Section 56(2)(x), whereby the expression “property” shall have the same meaning as assigned to it in clause (d) of the Explanation to clause (vii) and shall include virtual digital asset.

Some other areas of concerns which need clarifications are as follows:-

  1. Treatment of Peer to Peer or wallet to wallet transactions.
  2. Money laundering via provision for tax on gifted crypto assets is quite likely.
  3. Income from other types of virtual digital transactions such as income of miners, persons minting NFT, fees earned by crypto exchanges other intermediaries are not specifically being included and needs clarification.

(Source : Article published in Souvenir released at National Tax Conference held at Lucknow on 18th & 19th March, 2023)