194S
Understanding Section 194S: TDS on Virtual Digital Assets
In this post, we will talk about Section 194S of the Income Tax Act, which deals with TDS on Virtual Digital Assets (VDAs) like cryptocurrencies and NFTs. We’ll cover who needs to deduct tax, applicable thresholds, how TDS is handled through exchanges, and other essential details related to compliance.
Let’s look at each section in detail:
- What is Section 194S?
- Who is a Specified Person Under Section 194S?
- What are Virtual Digital Assets (VDAs)?
- Transfer Of VDA (In Cash) Through An Exchange (Who Does Not Own VDA)
- Exchange Of VDA(in kind) Via Broker, Barter For Another One
- If TDS Deducted By Exchange In Kind
- Rate Of TDS Under Section 194S
- Exemptions Or Thresholds For TDS Under Section 194S
- Consequences Of Not Deducting TDS Under Section 194S
- FAQs
What is Section 194S?
In Budget 2022, the Finance Minister introduced Section 194S to bring TDS on virtual digital assets (VDAs) like cryptocurrencies. The aim was to help the government keep track of these transactions. As per this section, a 1% TDS is to be deducted on the transfer of a VDA if the transaction value exceeds ₹10,000.
Who is a Specified Person Under Section 194S?
TDS under section 194S is charged when the payment for transferring virtual digital assets (VDAs) exceeds Rs. 50,000 for certain individuals and Rs. 10,000 in other situations.
A specified individual includes:
- Individuals or HUFs without any income from company or profession
- Individuals or HUFs having business revenue of up to Rs.1 crore
- Individuals or HUFs having a professional income of up to Rs. 50 lakh
What are Virtual Digital Assets (VDAs)?
Virtual Digital Assets, or VDAs, refer to any information, code, number, or token that is created digitally using cryptographic methods. These do not include traditional currencies like the Indian rupee or foreign money.
The definition was officially added to the Income Tax Act, 1961, through the Finance Act of 2022 under Section 2(47A). It covers a wide range of digital assets such as cryptocurrencies (like Bitcoin and Ethereum) and Non-Fungible Tokens (NFTs). With the growing use and value of these assets, the government introduced this definition to bring clarity in taxation.
Transfer Of VDA (In Cash) Through An Exchange (Who Does Not Own VDA)
If a Virtual Digital Asset (VDA) is sold on or through an exchange that doesn’t own the VDA, the exchange must deduct 1% TDS and pay the rest to the seller. When multiple parties are involved, the buyer or their broker is responsible for deducting TDS.
However, the exchange and the buyer or broker can agree that the exchange will handle the TDS payment. In that case, the exchange must pay the tax within the due date of the quarter and file a report in Form 26QF by the deadline.
Exchange Of VDA(in kind) Via Broker, Barter For Another One
In some cases, payments may be made in kind, partly in kind, or through barter. Here, the exchange might deduct TDS on both sides of the transaction, depending on the agreement. If there’s no exchange involved, the person making the payment is responsible for deducting and depositing the TDS.
If TDS Deducted By Exchange In Kind
- The exchange must keep a record of every trade where one VDA is exchanged for another.
- The tax collected in kind should be converted into a primary VDA like Bitcoin (BTC), Ethereum (ETH), USDT, or USDC – whichever can be easily changed into INR.
- This converted tax must be collected throughout the day, from midnight (00:00) to 11:59 PM (23:59).
- At the start of the next day (00:00), the exchange should convert the total VDA collected into INR by selling it at the current market rate.
- A contract note should be emailed to the customer, showing the TDS amount deducted in VDA and its value in INR after conversion.
- The INR amount must then be deposited into the government account within the specified due dates.
Rate Of TDS Under Section 194S
Section 194S of the Income-tax Act of 1961 deals with TDS on payments for virtual digital assets (VDAs) such as cryptocurrencies and NFTs.
Main points to know:
- A 1% TDS is deducted on the transaction value when buying or selling VDAs.
- If the seller doesn’t provide their PAN, the TDS rate goes up to 20%.
Exemptions Or Thresholds For TDS Under Section 194S
Not everyone who buys virtual digital assets (VDAs) has to deduct TDS. There are a few exceptions. If the total amount paid to a resident in a financial year is less than ₹50,000, a specified person needs to deduct TDS. In all other cases, the limit is ₹10,000.
A specified person can be an individual or a Hindu Undivided Family (HUF) whose business turnover was not more than ₹1 crore or professional receipts were not more than ₹50 lakh in the previous year. It also includes individuals or HUFs who don’t have any business income.
Consequences Of Not Deducting TDS Under Section 194S
Section 271C of the Income Tax Act deals with penalties for not deducting tax at source. If a person fails to:
- Pay the full tax under Section 115-O (tax on distributed profits),
- Deduct tax as required under Chapter XVII-B (TDS), or
- Follow the rule in the provision to Section 194B (tax on lottery, puzzle, crossword winnings); they may be penalised with an amount equal to the tax that was not deducted or paid.
Section 276B covers prosecution. If someone doesn’t deposit the tax deducted under Section 115-O or Chapter XVII-B with the Central Government, they can face criminal charges.
With that, we finish this post. Please leave any questions or comments in the area provided below, and we will gladly address them.
FAQs
Q. What is the rate at which tax is deducted under Section 194S?
Ans: Tax will be deducted at the rate of 1% of the consideration. If the payee does not provide his/her PAN, tax must be deducted at 20%.
Q. Is a valid Tax deduction and collection account number (TAN) required to deduct tax under this section?
Ans: No, TAN is not required for deducting taxes under Section 194S.
Q. What is the time limit for filing Form 26QE?
Ans: The tax deduction must be entered on Form-26QE within 30 days after the end of the month during which it was withheld.
Q. What is the largest amount that this provision exempts from taxation?
Ans: If a person pays less than ₹50,000 in a single financial year, no tax is required to be withheld. The threshold is ₹10,000 for others.
