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TDS on cryptocurrency transactions explained with examples: New crypto tax from July 1

TDS on cryptocurrency transactions explained with examples: New crypto tax from July 1

The Indian government took the crypto industry by storm when Finance Minister Nirmala Sitharaman announced that Virtual Digital Assets (VDA) will be taxed. There are different layers of taxation involved with cryptocurrency and one of those layers will be TDS or Tax Deducted at Source. The new Finance Bill of 2022 has introduced a new section called 194S in the Income Tax Act, 1961.

According to the new law, the government will levy 1% TDS on any consideration paid for the transfer of VDA. Every time a buyer purchases any Crypto, they will have to deduct and withhold 1% of the transaction value as TDS. This amount will have to be further paid to the Government.

The new law governing TDS tax on VDA will be applicable from July 1. Only crypto trades made after June 30 11:59 pm will fall in this ambit of TDS. However, If you have placed orders before the 1st of July 2022, but the trade happens on or after the 1st of July 2022, the TDS provisions will apply.

Where will TDS be applicable?

TDS would be deducted on each trade where a Crypto asset is exchanged for INR or another Crypto asset. However, there are different permutations and combinations of a trade which you’ll need to understand to get a grasp of the new tax.

Situation 1: No TDS would be deducted from the buyer on buying Crypto using INR, while the seller of the Crypto asset would be liable to pay TDS.

Eg.: A buyer purchases a crypto coin for Rs 100. The seller receives just Rs 99 (after 1% TDS deduction). However, the buyer receives one complete token.

Situation 2: If a Crypto asset is bought by paying with another Crypto asset, i.e., trading one Crypto asset for another, the TDS would be payable by both sides.

Eg.: If 1 Crypto coin is sold for say 10 ETH. The crypto coin seller receives 10 ETH by paying 1.01 BTC (after 1% TDS addition). The buyer receives only 0.99 Crypto coin (after 1% TDS deduction).

Situation 3: When it comes to peer-to-peer (P2P) trades. 1% TDS would be deducted before a USDT sell order is placed. No TDS has to be paid by the P2P USDT buyer.

Note: The 1% TDS will be deducted from the receivable INR or Crypto amount, depending on the transaction.

Additional conditions

As per Section 206AB of the Income-Tax Act, 1961, if the user has not filed their Income Tax Return in the last 2 years and the amount of TDS is ₹50,000 or more in each of these two previous years, then the TDS to be deducted (for Crypto-related transactions) will be at 5%. For simplicity.

Payment of TDS in INR

Whatever TDS the government claims, will need to be paid in INR. In case any TDS is collected in Crypto, it first has to be converted to INR.

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