How TDS on cryptocurrency is deducted? How to pay TDS on VDAs? What is section 194S? What are the tax implications of purchasing Virtual Digital Assets?

1. TDS Provisions on Investments in Virtual
Digital Assets – A Detailed Analysis
In the Union Budget 2022, the government came up with provisions regulating the taxability of
investments in Virtual Digital Assets (VDAs), commonly known as cryptocurrencies. One such
provision was the introduction of section 194S with effect from 1st
July, 2022, which requires the
buyer of the VDA to deduct tax at source at 1% of the consideration payable to the seller. Also, CBDT
issued certain guidelines considering the difficulties that may arise with complying with the
requirements of this section, where the VDAs are transferred through an Exchange. In the below
article, we will, one by one, shed light upon the provisions of section 194S and all the related
guidelines.
Section 194S
Let us first look at what section 194S says about TDS on payment on transfer of VDAs. So, as per
section 194S of the Income Tax Act, any buyer of virtual digital assets is required to deduct one per
cent of the consideration payable to any resident for the transfer of such VDAs as Income-tax and
deposit the same to the government.
For example: If Mr. Kapoor purchases cryptocurrency for a sum of Rs. 60,000 from Mr. Verma in a
financial year, he will have to deduct one per cent of Rs. 60,000, i.e., Rs. 600, as Income-tax and pay
the balance of Rs. 59,400 to Mr. Verma.
The section further clarifies that in a case where the consideration for transfer of VDA is -

2. a) wholly in kind or in exchange of another VDA, or
b) partly in kind and partly in cash but the part in cash is not sufficient to meet the liability of
TDS in respect of the whole of such transfer,
the buyer shall, before paying the consideration to the seller, ensure that the tax required to be
deducted has been paid to the government in respect of such consideration for the transfer of VDA.
The section also provides situations where the taxpayer is exempted from complying with the
provisions of this section. Such cases are:
a) the consideration is payable by a specified person, and the total value of such consideration
is up to Rs. 50,000 during the financial year; and
b) the consideration is payable by any person other than a specified person, and the total value
of such consideration is up to Rs. 10,000 during the financial year.
So, if a person falls in either of the above categories, he is not required to deduct tax at source under
this section.
For example: If Mr. Aman (other than a specified person) buys any Virtual Digital Asset from Mr.
Rohan for Rs. 8,000 during FY 2022-23, he will not be required to deduct tax under section 194S as
the total value of the consideration payable by Mr. Aman to Mr. Rohan for the VDA does not exceed
Rs. 10,000 in the financial year.
On reading the above few lines, you must be thinking about who is a specified person. So, for section
194S, a specified person is an individual or HUF who:
a) does not have any income under the head “Profits and gains from business or profession”,
or
b) whose total sales from his business are up to one crore rupees or gross receipts from his
profession are up to fifty lakh rupees during the financial year immediately preceding the
financial year in which the VDA is transferred.
The next point in the section states that section 194S will override the provisions of section 194O,
i.e., if, on a transaction, section 194O, as well as section 194S, both are applicable, then tax shall be
deducted on such transaction under section 194S and not u/s 194O. Section 194O deals with TDS on
certain sums paid by the e-commerce operator to the e-commerce participant.
Section 194S further mentions that section 203A shall not apply to a specified person. It implies that
a specified person will not have to obtain a TAN (Tax Deduction Account Number) for deducting tax
under section 194S.
So, this was all about section 194S in itself. Let us now look at the guidelines issued by the
government for deducting tax on transferring VDAs through Exchanges in the following portion.
Also Read:Significant Amendments , Income Tax Act in Finance Bill, 2022
Guidelines for TDS on Transfer of VDAs through Exchange
Where VDAs are transferred through an Exchange, usually multiple parties like buyer, seller,
Exchange and broker get involved in a single transaction. Consequently, there arises a possibility of
tax deduction requirements u/s 194S at different stages that may result in a compliance burden on
multiple parties involved in such a transaction.

3. Hence, to remove the difficulties for transactions taking place on or through an Exchange, the CBDT
has issued certain guidelines under the following scenarios:
1) If the transfer of VDA is taking place directly between buyer and seller
The first case is where the transaction occurs directly between buyer and seller and no third
party is involved. In this case, the buyer shall be responsible for deducting tax on the
consideration payable for the transfer of the VDA if it exceeds the applicable threshold limit
under section 194S.
2) If the transfer of VDA happens via an Exchange (VDA is not owned by the Exchange)
It is the second scenario where the transfer of VDA happens through an Exchange, and the
Exchange does not own the VDA. In this case, the buyer would credit or make payment to the
Exchange. Then the Exchange would be required to credit/make payment to the owner of the
Virtual Digital Asset being transferred, either directly or through a broker. Based on the fact that
whether a broker is involved in the transaction, this scenario can be understood under the
following two categories:
a) If the Exchange is directly crediting or making payment to the seller
In this case, only the Exchange will be responsible for deducting tax at the time of crediting
or transferring payment from the buyer to the seller of the VDA.
b) If the Exchange is crediting or making payment to the seller through a broker
In this case, where the Exchange credits/makes payment to the seller through a broker, both
the broker and the Exchange shall be responsible for deducting tax u/s 194S. However, if
there is a written agreement between the broker and the Exchange that the broker would
deduct tax on such credit/payment, then the broker alone may deduct the tax under section
194S of the Act.
3) If the transfer of VDA happens via Exchange (VDA is owned by the Exchange)
The last case is where the transfer of VDA happens on or through an Exchange, and VDA is also
owned by the Exchange. In this situation, as only two parties are involved, the buyer and seller,
i.e., Exchange, it will be the responsibility of the buyer of VDA to deduct tax at source. However,
it might happen that the buyer does not know whether or not the Exchange owns the VDA being
transferred. In such a scenario, the Exchange might enter into a written agreement with the
buyer or his broker that the Exchange would pay tax in all such transactions.
A taxpayer buying Virtual Digital Assets can fall under any of the above-discussed scenarios based on
the parties involved in the transaction. As the conditions vary in each situation, the taxpayer must
understand and comply with the TDS requirements as applicable in his case.
Another point the circular clarified is that, on purchasing VDAs, the tax under section 194S shall be
deducted on net consideration after excluding GST.
Also Read:Higher TDS for Income Tax Return Defaulters w.e.f. 01.07.2021-Decoding section 206AB
Depositing and Reporting Requirements of TDS on VDAs
Time Limit for Depositing TDS to the Government

4. • The time limit to deposit the tax remains the same for section 194S, like any other TDS section.
That is, the taxpayer has to deposit the tax deducted under section 194S within seven days from
the end of the month in which it is deducted. But, for the tax deducted in March, the taxpayer
can deposit it till the following 30th
of April.
• However, this time limit would differ for a specified person under section 194S. A specified
person will have to pay the tax deducted on purchasing VDAs to the government within thirty
days from the end of the month in which it has been deducted.
For example: If you do not have a business or professional income and deduct tax on purchasing
VDAs in September 2022, you will have to pay it to the government by 31st
October, 2022.
Reporting of TDS on VDAs to the Government
• After deducting the tax, the buyer will have to file a quarterly statement in Form No. 26Q (TDS
Return filed for reporting TDS on any payment other than salary) with the tax department.
• However, in cases where the Exchange pays the tax under section 194S, the Exchange will be
liable to furnish a quarterly statement in Form 26QF for all such transactions of the quarter.
• Whereas, on deducting tax u/s 194S, a specified person referred to in section 194S will have to
file the challan-cum-statement in Form 26QE within thirty days from the end of the month in
which the deduction is made.
• The department has also introduced Form 16E, a certificate of deduction of tax at source that
has to be furnished by the specified person to the seller of the digital asset within fifteen days
from the due date of filing Form 26QE.
Applicability of Section 194S
The taxpayers must note that though section 194S has become effective from 1st
July, 2022, the
aggregate value of all the transactions from 1st
April, 2022 will be added to see if they exceed the
applicable threshold limit for the applicability of the TDS provisions u/s 194S for the financial year
2022-23. However, the consideration paid for the transfer of VDA before 1st
July, 2022 would not be
subjected to TDS under section 194S of the Act.
For example: Suppose you enter into the transactions to purchase cryptocurrencies twice in FY 2022-
23: once on 16th
April, 2022 for Rs. 20,000 and another on 4th
October, 2022 for Rs. 40,000. In this
case, to determine the applicability of section 194S based on the threshold limit, Rs. 20,000 will be
added to Rs. 40,000 and the total amount of Rs. 60,000 will be considered for FY 2022-23. However,
you will be liable to deduct tax on the consideration paid for buying cryptocurrencies only on
4th
October, 2022, i.e., Rs. 40,000 and not on the entire amount of Rs. 60,000 as the sum of Rs.
20,000 pertains to the first transaction that took place before 1st
July, 2022.
Let’s Sum up
The introduction of section 194S is one of the crucial steps of the government toward bringing the
dealings involving the transfer of Virtual Digital Assets into the ambit of taxation. The taxpayers
should be well-equipped to comprehend and fulfil all the compliances relating to investments in
VDAs and maintain the appropriate documentation to support these transactions.
Source: https://www.manishanilgupta.com/blog-details/tds-provisions-on-investments-in-virtual-
digital-assetsa-detailed-analysis