1.Introduction
The Republic of India, the largest country in the South Asian subcontinent, spans approximately 2.98 million square kilometers, making it the 7th largest country in the world by area, with a population of 1.44 billion. Since 2021, India has emerged as the fastest-growing major economy globally, maintaining an average economic growth rate of 6.5%, which is double the global average. According to estimates from the International Monetary Fund (IMF), India’s GDP reached $3.53 trillion in 2023, surpassing the UK to become the world’s fifth-largest economy. In April 2024, the IMF revised India’s economic growth forecast for 2024-2025 upwards from 6.5% to 6.8%, citing strong domestic demand and a growing working-age population as key drivers.
In recent years, much of India’s economic activity has been driven by investment, with the country’s annual investment-to-GDP ratio increasing from 31.6% before the pandemic to 33.7% in 2023, largely thanks to the government’s push for infrastructure investments. This rise has offset the sluggish growth in private consumption, government spending, and a slowdown in external demand. Alongside this, India’s market appeal to investors has also increased. According to Morgan Stanley, India’s stock market has already become the fourth-largest globally and is expected to become the third-largest by 2030, with multinational corporations expressing record-high confidence in the country’s investment prospects.
However, India also faces significant imbalances, with a stark contrast between total GDP and per capita GDP. The country exhibits a heavily skewed economic and industrial structure, along with vast disparities in living standards across different regions. While India ranks as the world’s fifth-largest economy by total GDP, it lingers around 140th in terms of per capita income, significantly lower than countries like China, Mexico, and South Africa.
- Overview of India’s Basic Tax System
2.1 India’s Tax Structure
India’s tax system is founded on the provisions of the Indian Constitution. According to Article 265 of the Constitution: “No tax shall be levied or collected except by the authority of law.” The power to levy taxes is primarily divided between the central government and the states, with local city governments responsible for collecting a small number of taxes. The central and state governments have clearly defined taxing powers. Central taxes include both direct and indirect taxes, with direct taxes comprising corporate income tax, personal income tax, property tax, and others, while indirect taxes include Goods and Services Tax (GST), customs duties, and more.
India’s tax administration is mainly managed by the Indian Revenue Service (IRS), with the Central Board of Direct Taxes (CBDT) overseeing matters related to direct taxes such as income tax and property tax. The Central Board of Excise and Customs (CBEC) manages customs, central excise, service taxes, and other indirect tax matters. The state governments primarily collect GST, stamp duties, state excise duties, entertainment taxes, land revenue taxes, and more. In areas not covered by GST, such as petroleum products and alcohol, states continue to levy VAT (or sales tax in states where VAT has not been implemented). Local city governments are responsible for collecting property tax, entry tax, and taxes on public utilities such as water and drainage.
India’s tax collection strictly adheres to the principle of “legality of taxation.” As India follows the common law system, its tax laws (statutory law) are constantly updated and refined, yet they are still influenced by case law interpretations. Case law refers to legal principles or rules established in higher court judgments, which have binding or persuasive authority over future tax cases.
2.2 Corporate Income Tax
In India, businesses are required to pay corporate income tax on their profits. India does not have a separate capital gains tax; instead, capital gains are included in the taxable income of corporations. The Income Tax Act of 1961 outlines key provisions like minimum alternate tax, dividend tax, and the share buyback distribution tax. However, the Finance Act of 2020 abolished the dividend distribution tax, and now taxes dividends directly in the hands of shareholders. The fiscal year runs from April 1 to March 31 of the following year.
Resident companies are defined as those incorporated in India or having their Place of Effective Management (POEM) in India, which is the place where key management and commercial decisions are made for the business as a whole.
Taxable income is classified into four categories:
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Business profits or gains;
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Income from property, which includes residential or commercial properties, unless used for business operations;
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Capital gains;
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Income from other sources, such as lottery winnings, prizes from competitions, and interest on securities. Competitions include horse races, card games, and other forms of gambling.
Tax-exempt income includes:
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Partnership firm profits;
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Long-term capital gains;
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Income from overseas labor;
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Government bond income;
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Relief fund income.
The base corporate income tax rate for domestic companies is 30%. In addition, companies must pay applicable surcharges and health and education cess. Some companies benefit from lower preferential tax rates:
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Small and medium-sized enterprises (SMEs) with annual turnover or total revenue not exceeding INR 4 billion are subject to a 25% corporate tax rate if they do not avail of tax exemptions or incentives;
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Companies engaged in production, manufacturing, or research and development (R&D) and registered on or after March 1, 2016, are subject to a 15% corporate tax rate, with a 10% surcharge;
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Royalties earned from patents developed and registered in India (with at least 75% of R&D expenditure incurred in India under the Patent Act of 1970) are subject to a 10% corporate tax rate;
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Domestic limited liability partnerships (LLPs) are taxed at 30%, the same rate as unincorporated partnerships;
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Foreign companies and foreign-established LLPs are taxed at 40%, among others.
Non-resident companies and their branches are typically subject to a 40% corporate income tax rate, with an additional 2% surcharge (if net income exceeds INR 10 million but is less than INR 100 million) or 5% (if net income exceeds INR 100 million), along with a 4% health and education cess on the taxable amount.
India offers numerous corporate income tax incentives, including full or partial tax exemptions, reduced tax rates, rebates, accelerated depreciation, and special deductions. These incentives apply across a broad range of industries, including export-oriented enterprises, businesses in free trade zones and technology parks, infrastructure development, hospitality, tourism, businesses in development zones, research companies, mineral oil production, cold chain facilities, shipping, aviation, tea/coffee/rubber industries, news agencies, and waste management. For example, newly established companies manufacturing products or providing services in Special Economic Zones (SEZs) are eligible for multiple tax benefits, including a 100% tax exemption on profits and gains for the first five years, a 50% exemption for the next five years, and, under certain conditions, another 50% exemption for five years thereafter. Approved developers can also enjoy longer periods of tax exemptions.
2.3 Personal Income Tax
Indian residents are taxed on their worldwide income. Individuals residing in India but not classified as ordinary residents are only required to pay taxes on income earned or deemed to be earned in India, income received in India, or income received abroad but controlled by individuals or companies based in India.
Non-residents are only required to pay taxes on income earned, received, or deemed to be earned in India. Non-residents may also be taxed on income derived from business connections in India, income from any assets or sources in India, or gains from the transfer of assets located in India (including shares of companies incorporated in India).
In India, income is taxed progressively under a tiered system. The income tax of foreign nationals in India depends on their tax residency status. According to the Income Tax Act of 1961, individuals are taxed at progressive rates based on their residency status and income levels. Non-employment income is taxed at varying rates depending on the type of income. Resident individuals are subject to a comprehensive tax system with a progressive tax rate structure.
The calculation method is as follows: taxpayers sum up all types of income (salary income, property income, business income, capital gains, and other income). After deducting tax incentives, exempt income, pre-tax deductions (such as insurance premiums, medical expenses, educational expenses, charitable donations), and allowable losses from previous years, the balance constitutes the taxable income. Taxable income is then subject to progressive tax rates to determine the tax liability.
After calculating the basic tax liability, additional surcharges, education cess, and secondary and higher education cess are added to determine the total tax liability. Non-resident taxpayers are subject to the same tax rates as resident taxpayers, and if annual net income exceeds INR 10 million, they are also required to pay a 15% surcharge and a 4% health and education cess.
The following benefits are eligible for tax exemptions under specific conditions:
Company-provided housing: Housing provided by the company is eligible for tax relief.
Accommodation for employees working in specific locations: This includes accommodation provided to employees working in mining areas, onshore oil exploration zones, project construction sites, dam sites, power plants, or offshore work locations.
Employer-paid contributions to the following items, if within specified limits, are not included in the employee’s taxable salary: Reimbursed medical expenses;Contributions to India’s retirement benefit funds, including provident fund, gratuity, and pension funds.
Certain allowances, such as house rent allowance (HRA) and leave travel allowance (LTA), may be tax-exempt or included in the taxable income at a lower value, provided specific conditions are met. Any additional allowances paid at the start or end of employment must be included in the taxable salary.
Additionally, life insurance premiums, social security contributions, and tuition and other fees for full-time education at universities, colleges, or other educational institutions can be deducted from income, up to a maximum of RS150,000.
2.4 Goods and Services Tax (GST)
India’s GST replaced the previous sales tax system, which was governed by the Central Sales Tax Act of 1956 and applied to intra-state, inter-state, and international sales and trade. In 2005, VAT replaced sales tax, and from July 1, 2017, GST further replaced VAT as part of India’s tax reform. GST now encompasses various taxes, including VAT, central excise tax, vehicle tax, goods and passenger tax, electricity tax, entertainment tax, and other taxes. It is an indirect tax applied on transactions and is similar to a value-added tax.
Certain products, such as petrol, diesel, aviation turbine fuel (ATF), natural gas, alcohol for human consumption, and crude oil, are still excluded from GST. GST is a comprehensive tax levied on the supply of all goods and services.
The current GST has four main tax rate slabs:5%,12%,18%,28%
These rates represent the combined tax rates of CGST (Central GST) and SGST (State GST), with each authority levying 50% of the total tax rate. Additionally, two special rates of 0.25% and 3% apply to items such as diamonds, unprocessed gems, and gold and silver. Excluding exports, which are zero-rated, there are effectively six different GST rates in India.
Furthermore, certain products such as cigarettes, tobacco, carbonated drinks, gasoline, and motor vehicles are subject to an additional cess on top of the GST rate, ranging from 1% to 204%. Most goods have a GST rate of less than 18%, with specific luxury items and harmful products subject to the highest 28% tax rate, along with the additional cess.
- India’s Cryptocurrency Taxation System
3.1 Overview of India’s Crypto Tax
The Indian Income Tax Department (ITD) introduced Section 2(47A) in the Income Tax Act to define “Virtual Digital Assets” (VDAs). This definition is quite comprehensive, covering all types of crypto assets, including cryptocurrencies, NFTs, and tokens.
In the 2022 budget, the Finance Minister introduced Section 115BBH, effective from April 1, 2022, which imposes a 30% tax (plus applicable surcharges and a 4% cess) on profits from cryptocurrency transactions. This rate aligns with India’s highest income tax bracket (excluding surcharges and cess) and applies to all private investors, traders, or anyone transferring crypto assets within a fiscal year. Importantly, the 30% tax rate is applied uniformly, regardless of the income type, meaning both investment and business income, as well as short-term and long-term gains, are taxed at the same rate.
In addition to the 30% tax, Section 194S mandates that from July 1, 2022, a 1% Tax Deducted at Source (TDS) is applied to crypto asset transfers if transactions exceed RS50,000 in a fiscal year (or RS10,000 in certain cases), ensuring that all crypto transactions are tracked. Exemptions include: Holding crypto assets (HODLing); Transferring crypto between personal wallets; Receiving crypto gifts valued under RS50,000; Receiving crypto gifts from immediate family members.
Indian investors must declare their income from trading cryptocurrencies or NFTs as either capital gains (if the assets are held as investments) or business income (if used for trading). From the 2022-2023 fiscal year onwards, a dedicated schedule for reporting crypto and NFT gains, called the “Schedule - Virtual Digital Assets,” was introduced in income tax returns. This schedule continues to be relevant for the 2023-2024 fiscal year.
3.2 Specific Application of Crypto Tax
The 30% crypto tax applies in the following cases: Selling cryptocurrency in exchange for Indian rupees or other legal tender; Conducting crypto-to-crypto transactions, including stablecoins; Using cryptocurrency to pay for goods and services.
However, not all crypto activities are subject to the 30% tax. In some cases, the Income Tax Department treats it as “other income,” in which case it is taxed based on the individual’s income tax bracket (see section 2.3). Such cases include: Receiving crypto gifts (as the recipient); Mining cryptocurrency; Receiving wages in crypto; Staking rewards; Airdrops.
If the crypto is subsequently sold, traded, or used, profits are subject to the 30% tax.
The ITD has not yet provided specific guidelines for DeFi transactions, so existing income tax laws apply. DeFi transactions that may be taxed at personal income tax rates include: Earning new tokens, governance tokens, or reward tokens through liquidity mining; Referral rewards; Income from play-to-earn games or platforms like Permission.io or Brave.
Even if tax is paid when these tokens are received, any future sale, exchange, or usage of the tokens will be subject to the 30% tax on profits.
3.3 Tax Deducted at Source (TDS)
In India, investors must pay 1% TDS on the transfer of crypto assets. TDS is a tax collected at the source, and its primary purpose is to capture transaction details and track investments made by Indian crypto investors. Key points regarding TDS:
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TDS applies to transactions conducted after July 1, 2022;
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When trading on Indian exchanges, the exchange deducts and remits the TDS to the government;
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In P2P or international exchange transactions, the buyer is responsible for deducting the TDS;
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In crypto-to-crypto trades, both the buyer and seller must each pay 1% TDS.
It is important to note that if the transaction value is less than RS50,000 in a fiscal year (RS10,000 in certain cases), no TDS is required. These limits apply to “specified persons,” which include individuals or Hindu Undivided Families (HUFs). For individuals with no business income in the previous fiscal year, or if their sales/turnover does not exceed RS10 million (or RS500,000 for professional income), the TDS limit is reduced to RS10,000.
When trading on Indian exchanges, TDS is usually handled directly by the exchange, so investors do not need to take further action during tax filing. However, in P2P or international exchange trades, specified persons must ensure TDS is deducted and reported. In such cases, TDS must be filed using Form 26QE within 30 days of the end of the month in which the deduction occurred. Currently, Form 26QE is not yet available on the income tax portal, so investors are awaiting guidance from the ITD on how to remit TDS. All non-specified persons must obtain a TAN number, file Form 26Q quarterly, and remit the TDS by the 7th day of the following month. TDS credits can be claimed during tax filing to reduce the overall tax liability.
3.4 Losses and Theft-Related Tax Regulations
Under Section 115BBH, crypto losses cannot be used to offset profits from crypto or other forms of income. Indian crypto investors also cannot claim deductions for expenses related to crypto, except for the cost of acquisition (purchase price).
The ITD has not issued clear guidance on how to handle lost or stolen crypto. However, based on Indian court rulings on the loss or theft of other assets, losses resulting from hacking, fraud, or theft are typically not taxed. That said, due to the strict rules on deducting crypto losses, investors may find it challenging to claim deductions for losses from stolen or lost crypto assets.
- Overview of India’s Cryptocurrency Regulatory Framework
India’s cryptocurrency industry is currently navigating a period of significant uncertainty, marked by the absence of a comprehensive national regulatory framework and the fluctuating stance of regulatory authorities toward cryptocurrencies. The proposed Indian Cryptocurrency Bill has been viewed as a potential game-changer, expected to pave the way for the issuance of a Central Bank Digital Currency (CBDC) by the Reserve Bank of India (RBI), signaling progress that could position India at the forefront of the global CBDC revolution. However, the reality is much more complex. After years of deliberation and multiple revisions, the bill remains undefined, and its stance on private cryptocurrencies is still ambiguous and contradictory.
The trajectory of this bill reflects the global struggle to effectively regulate digital assets. While governments worldwide recognize the potential of blockchain technology and digital currencies, concerns about financial stability, investor protection, and preventing illegal activities persist. A recent statement from India’s Ministry of Finance further complicated the situation, indicating that there is no current legislative proposal to regulate digital asset transactions. This statement came as a surprise to many, especially given the ongoing discussions surrounding the Cryptocurrency Bill, highlighting the conflicting views within the Indian government on crypto regulation and the challenges policymakers face in keeping pace with the rapidly evolving crypto sector.
Faced with these top-down regulatory challenges, there has been growing support within the Indian crypto industry for self-regulation. This approach seeks to strike a balance between the unregulated freedom of the market and strict government control. Industry-led self-regulation initiatives could involve establishing best practices, implementing robust Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures, and creating consumer protection mechanisms. By proactively addressing regulatory concerns, the crypto industry could demonstrate its commitment to responsible growth and potentially alleviate some of the government’s worries.
In fact, some Indian cryptocurrency exchanges have already taken steps in this direction. For example, WazirX, one of India’s largest crypto exchanges, has implemented strict KYC procedures and cooperates with law enforcement agencies to prevent illegal activities. However, self-regulation may not fully resolve all regulatory issues and could lead to conflicts of interest. Despite these challenges, self-regulation could play a key role in the short to medium term, especially given the current regulatory uncertainty.
Though India lacks a comprehensive cryptocurrency regulatory framework, the country has implemented some oversight measures, primarily focusing on taxation and anti-money laundering. As previously discussed, these measures include a 30% tax on crypto trading profits and the introduction of Tax Deducted at Source (TDS). In terms of anti-money laundering, cryptocurrency exchanges operating in India must comply with the Prevention of Money Laundering Act (PMLA). These actions represent a pragmatic approach to crypto regulation, where the government imposes certain controls on the industry without explicitly legalizing or banning cryptocurrencies.
In 2024, Binance, one of the world’s largest cryptocurrency exchanges, successfully registered as a reporting entity in India, marking a significant turning point in the country’s crypto regulatory landscape. Binance’s compliance with India’s AML standards aligns with the government’s efforts to curb illegal activities in the crypto space. Binance’s registration may serve as a catalyst for India to develop a more comprehensive regulatory framework for cryptocurrencies. This move could also encourage global crypto participants to operate within India’s regulatory environment and potentially prompt the government to provide more detailed guidelines for the industry.
- Summary and Outlook of India’s Cryptocurrency Taxation and Regulatory Framework
Although India has not yet established a comprehensive regulatory framework for cryptocurrencies, it has taken initial steps to manage the sector through taxation. In the absence of detailed legislation in other regulatory areas, some exchanges have adopted self-regulation measures, such as implementing strict Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.
Looking ahead, as the global crypto market continues to evolve, the Indian government is likely to introduce more robust regulatory policies. The successful registration of international players like Binance as a reporting entity in India demonstrates their willingness to adapt to local regulatory environments, which could encourage the government to develop more detailed guidelines. This would help strike a balance between financial security and innovation, fostering both growth and regulation in the crypto sector.
Tax compliance and AML efforts will remain key factors in ensuring the continued healthy development of India’s crypto ecosystem. For all countries, the rise of cryptocurrencies presents an ongoing challenge of adapting to technological advances, balancing innovation with risk, and gradually aligning with international standards. The ultimate goal is to create a more stable and mature market environment that promotes the sustainable growth of the cryptocurrency industry.
References:
[1]Wijaya, D. A., Liu, J. K., SuwaRSono, D. A., & Zhang, P. (2017). A new blockchain-based value-added tax system. In Provable Security: 11th International Conference, ProvSec 2017, Xi’an, China, October 23-25, 2017, Proceedings 11 (pp. 471-486). Springer International Publishing.
[2]Cho, S., Lee, K., Cheong, A., No, W. G., & Vasarhelyi, M. A. (2021). Chain of values: Examining the economic impacts of blockchain on the value-added tax system. Journal of Management Information Systems, 38(2), 288-313.
[3]2023 Comprehensive Guide to India’s Cryptocurrency Taxation: Policies, Optimization, and Compliance Key Points.Deep Tide TechFlow.
[4]Wang Tuo, & Liu Xiaoxing.(2021). The Origin, Technological Evolution, and Future Trends of Digital Currency.Shenzhen Social Sciences.
[5]Zhang Ping, & Wang Jingmin.Research on Improving Tax Compliance through Blockchain Technology from the Perspective of Behavioral Finance. Journal of Central University of Finance and Economics, (10), 3-9.
[6]India Imposes 30% Massive Income Tax on Cryptocurrency Transactions.(n.d.).
[7]Taxation and Legitimacy Issues of Cryptocurrency in India.Law.asia.
[8]Cryptocurrency Regulation in India in 2024. ComplyCube.
References:
[1]Wijaya, D. A., Liu, J. K., SuwaRSono, D. A., & Zhang, P. (2017). A new blockchain-based value-added tax system. In Provable Security: 11th International Conference, ProvSec 2017, Xi’an, China, October 23-25, 2017, Proceedings 11 (pp. 471-486). Springer International Publishing.
[2]Cho, S., Lee, K., Cheong, A., No, W. G., & Vasarhelyi, M. A. (2021). Chain of values: Examining the economic impacts of blockchain on the value-added tax system. Journal of Management Information Systems, 38(2), 288-313.
[3]2023 Comprehensive Guide to India’s Cryptocurrency Taxation: Policies, Optimization, and Compliance Key Points.Deep Tide TechFlow.
[4]Wang Tuo, & Liu Xiaoxing.(2021). The Origin, Technological Evolution, and Future Trends of Digital Currency.Shenzhen Social Sciences.
[5]Zhang Ping, & Wang Jingmin.Research on Improving Tax Compliance through Blockchain Technology from the Perspective of Behavioral Finance. Journal of Central University of Finance and Economics, (10), 3-9.
[6]India Imposes 30% Massive Income Tax on Cryptocurrency Transactions.(n.d.).
[7]Taxation and Legitimacy Issues of Cryptocurrency in India.Law.asia.
[8]Cryptocurrency Regulation in India in 2024. ComplyCube.