Experts Recommend Lower TDS and Loss Set-Offs to Restore Market Balance
New Delhi: As India heads into the Budget 2026 cycle, a re-evaluation of its VDA tax rules seems increasingly necessary. Measures introduced to reduce speculation—such as a 30% tax on gains and 1% TDS—have resulted in unintended outcomes, including loss of domestic market activity and minimal revenue impact.
A recent report by the TIOL Knowledge Foundation highlights this contradiction. In FY 2022–23, during the first few months of the TDS regime, the government collected ₹158 crore. In FY 2023–24, its first full year of implementation, collections modestly increased to ₹180 crore. Over the same two years, total capital gains tax collected from VDAs amounted to roughly ₹706.52 crore. For FY 2024–25, the report estimates that domestic exchanges will remit around ₹450 crore in TDS. This reflects an increase of about 35% compared to the combined TDS collected in the previous two years. The rise can be attributed partly to growing VDA adoption in India and partly to global momentum, with the broader crypto industry now valued at nearly US$3.5 trillion. Even so, these figures tell only part of the story.
Meanwhile, the legal framework intended to enforce these tax obligations remains incomplete. Several foreign exchanges maintain that they are not required to comply because they lack a taxable presence in India. Yet many of these platforms already meet India’s “significant economic presence” thresholds of ₹2 crore in annual transaction value or more than 300,000 Indian users. Despite this, they continue to withhold neither tax nor user data. This persists even though Section 204 of the Income Tax Act defines the “person responsible for paying” to include non-residents and their authorized agents in India. As a result, enforcement gaps have effectively allowed offshore entities to operate without accountability.
To address these distortions, India’s crypto tax architecture needs a more balanced economic approach. Reducing the TDS rate under Section 194S from 1% to 0.01%, while making it fully creditable at the time of filing, could have a significant positive impact. Research and modeling by domestic policy think tanks indicate that such a calibrated, minimal rate would encourage compliance, draw trading volumes back to Indian exchanges, and ultimately increase revenue by expanding the tax base. At the same time, India should formally commit to adopting the OECD’s Crypto-Asset Reporting Framework (CARF), which aligns with G20 and IMF–FSB recommendations and would promote a consistent global standard for information sharing.
Budget 2026 offers a timely opportunity to implement these reforms. First, Section 194S should be amended to reduce the TDS rate to 0.01%, ensure that it is fully creditable, and apply it uniformly to all exchanges—domestic and foreign. Second, Section 115BBH should be amended to allow taxpayers to set off VDA losses within the same asset class and to apply standard rules for categorizing gains as capital gains or business income. Alongside these changes, FIU-IND should continue its enforcement efforts against unregistered offshore platforms serving Indian users, helping preserve financial integrity even as tax-related friction is reduced.
The benefits of such reforms are considerable. Economically, a neutral and compliance-focused tax regime would restore domestic liquidity, encourage voluntary disclosures, and generate a more stable and predictable revenue stream. Strategically, it would position India as a leader in balanced digital-asset regulation, aligned with G20 principles of transparency, accountability, and proportionality.
Ultimately, Budget 2026 does not have to choose between revenue and regulation. The real choice is between maintaining a system marked by opacity or moving toward one built on oversight and fairness. A smarter, globally aligned, and administratively practical framework would shift India’s crypto policy from punishment to participation—allowing the country to reclaim its rightful place in the global digital economy.
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