The Finance Act of 2022 introduced Section 194S into the Income-tax Act of 1961, effective from July 1, 2022. This applies a 1% TDS deduction on payments for transferring virtual digital assets (VDAs) like cryptocurrencies and non-fungible tokens (NFTs), when the transaction exceeds Rs 10,000 or Rs 50,000 for specified individuals in a fiscal year. Tax deduction is reported via Form 26Q.

For instance, when purchasing cryptocurrency valued at Rs 1,00,000, a 1% TDS of Rs 1,000 must be deducted, paying Rs 99,000 to the seller, and depositing Rs 1,000 to the government.

Who is a Specified Person?

The TDS liability under Section 194S kicks in for VDA transfers exceeding Rs 50,000 per year for specified individuals and Rs 10,000 for others. 'Specified Person' includes:

• Individuals or Hindu Undivided Families (HUFs) without business/professional income.
• Individuals or HUFs with business income up to Rs 1 crore.
• Individuals or HUFs with professional receipts up to Rs 50 lakh.

The Central Board of Direct Taxes (CBDT) has issued guidelines for TDS on VDAs.

Key Guidelines for Section 194S

Transfer of VDA (in cash) via Exchange

If using an exchange (not owning the VDA), involving several parties, the exchange must deduct TDS unless payment goes through a broker, in which case both the broker and exchange should deduct tax. An agreement may be made for the broker to handle TDS, with the exchange reporting via Form No. 26QF.

Transfer of VDA (in kind) through Exchange or Broker

Payments can be in kind or VDA-to-VDA. Here, the exchange might deduct tax on both transaction legs. Without an exchange, the payer handles TDS deduction. Exchanges must record these trades and convert the withheld tax into primary VDAs (e.g., Bitcoin, Ethereum), which are converted into INR for deposit.

TDS under Section 194S vs Section 194Q

If TDS is deducted under Section 194S, it does not need to be deducted again under Section 194Q. Deductions should be on the net consideration, excluding GST and other charges.

Payment Gateways and TDS

Payment gateways involved in transactions are not required to deduct TDS under Section 194S.