Cryptocurrency, a digital form of currency utilizing encryption algorithms for transactions, has gained significant traction in recent years. In a landmark move, the Indian government officially categorized digital assets, including cryptocurrencies, as Virtual Digital Assets in the Union Budget of 2022.
However, the implications of this decision extend to taxation, particularly concerning the profits derived from cryptocurrency transactions. While the government has set a flat tax rate of 30 percent on income from the transfer of virtual digital assets such as crypto and NFTs (non-fungible tokens), the effective tax rate investors face may vary due to additional charges.
The 30 percent tax rate is not the sole component of the taxation structure. Investors are also subjected to a cess charge of 4 percent and a 1 percent tax deducted at source (TDS), resulting in a total tax rate of 35 percent on cryptocurrency profits.
To illustrate, consider a scenario where an investor sells shares worth Rs 100,000 on a crypto exchange, earning a profit of Rs 50,000. Post-tax deductions, only Rs 32,500 will be credited to the investor’s account. This reflects the impact of the 1 percent TDS, the 30 percent flat tax rate, and the 4 percent cess charge on the profit. Consequently, the total taxation rate on profits becomes 35 percent, translating to a tax payment of Rs 17,500 on a profit of Rs 50,000.
In response to the taxation framework, Esya Centre, a New Delhi-based Technology Policy Think Tank, has proposed amendments to the 1 percent tax deducted at source (TDS) policy on cryptocurrencies. The think tank advocates for lowering the TDS tax rate to 0.01 percent, aiming to mitigate the financial burden on investors while fostering growth in the Indian Virtual Digital Asset Market.
The findings of Esya Centre’s study, titled “Impact Assessment of Tax Deducted at Source on the Indian Virtual Digital Asset Market,” underscore the need for a nuanced approach to cryptocurrency taxation, balancing regulatory objectives with the interests of investors and market development.
