Section 115BBH: Taxation of Crypto in India Explained

What was once considered a risk is now a standard mode of payment across the world. Virtual digital assets, such as cryptocurrencies and NFTs, are widely used for trading and money transfers.

In India, regulations for new-age currencies have been established only in the last 5 years. Section 115BBH of the Income Tax Act was introduced, in particular, to lay out the tax rules for these digital assets.

In this guide, you'll learn what Section 115BBH of the Income Tax Act is, who falls under its scope, and how the 30% flat tax rate is computed on Virtual Digital Asset (VDA) income. You'll also discover deduction restrictions, filing requirements, compliance obligations, penalties for non-compliance, comparison with other tax provisions, case studies, common misconceptions, and best practices for tax planning.

Key Takeaways

• Understanding Section 115BBH helps Indian crypto investors, freelancers receiving VDA payments, and businesses dealing in cryptocurrencies stay compliant avoiding heavy penalties of 50–70% of unpaid tax + potential legal proceedings.
• Income from VDA transfers is taxed at a flat 30% rate, regardless of holding period or income slab.
• No deductions allowed except the original acquisition cost. Losses cannot be set off against any other income including other VDA transactions.
• 1% TDS under Section 194S applies on VDA transactions exceeding ₹50,000 in a financial year (₹10,000 for specified persons).
• All transfer events trigger taxation: crypto-to-crypto swaps, crypto-to-INR conversion, payments in crypto, mining rewards, staking, airdrops, and gifts above ₹50,000.
• For Indian businesses receiving cross-border crypto payments: Xflow offers an RBI-approved fiat alternative that avoids VDA tax exposure while maintaining FEMA compliance.

Section 115BBH of the Income Tax Act was introduced in the Union Budget (2022-23). As the backbone of India’s cryptocurrency tax regulations, Section 115BBH governs the taxation of income from Virtual Digital Assets.

A Virtual Digital Asset or VDA includes cryptocurrencies and NFTs. These are assets that operate on the blockchain. Section 115BBH treats VDAs as income streams, with consistent tax rules. Here’s a short overview:

• Income from the transfer of VDAs is taxed at 30%.
• You cannot claim most expenses or deductions against this income, except for the original acquisition cost of the asset.
• A 1% TDS is applicable on VDA transactions exceeding ₹50,000 (₹10,000 in certain cases) in a financial year.
• Losses from VDA transactions cannot be adjusted against any other income or gains.
• If you receive crypto or NFTs as a gift, it is taxed under “Income from Other Sources,” unless it falls under exemptions (such as gifts from close relatives or those below ₹50,000).

Section 115BBH does not explicitly state applicability. Any individual or company that gains income from the transfer of a Virtual Digital Asset must pay taxes as per Section 115BBH. This means that if your business trades across borders and receives or makes a payment using VDAs, the gains you make will be taxed.

All activities listed below will fall under the rules of Section 115BBH:

• Trading cryptocurrency using fiat currency
• Exchanging one cryptocurrency for another
• Spending some VDA to purchase goods or services
• Receiving cryptocurrency as payment for services
• Earning cryptocurrency through mining
• Receiving VDA as a gift
• Earning rewards through staking
• Receiving airdropped tokens
• Getting a salary in VDA form

They apply even when you’re using NFTs or stablecoins for your business payments. Next, we’ll see how these activities are taxed under Section 115BBH.

Under Section 115BBH, income from Virtual Digital Assets (VDAs) is taxed at a flat rate of 30%. Additional TDS calculations and regulations apply. Here are the main tax computation rules you need to know:

1. First, as mentioned, a 30% flat rate is applicable to income that is generated from the transfer of VDAs. This is applied at the end of each financial year, and it’s calculated on the profits that you have made.
2. Next, no deduction (outside of the acquisition cost) is permitted. Losses cannot be set off against other income.
3. 1% TDS is applicable to all crypto asset transactions.

Note that these computations apply to any income generated as a result of VDA transfers. Let’s take an example. If you’re using a crypto payment gateway in your business, then any gain on your crypto transactions will also be taxed under this section.

Income that gets generated from VDAs is usually classified as:

• Capital gains, when the VDA is treated as an investment and then sold.
• Business income, when the VDA is routinely traded to make a profit.

Under section 115BBH of the Income Tax Act, both such incomes are to be taxed at 30%. The scope of income types is quite large. It includes crypto gifts, crypto conversions, and DeFi incomes, among others.

Another important aspect of this section is how it treats deductions.

Taxpayers cannot claim deductions for any expenses they incur outside the original acquisition cost. Loss set-offs are also not allowed, which means that losses arising from VDA transactions can’t be adjusted against other types of income.

What does this mean for a typical business owner? One, these restrictions significantly limit how much you can reduce your taxable income. Also, if your business happens to lose money on crypto transactions, they cannot be offset against business income, or even the profits from other VDA transactions.

If you’re earning a profit from a VDA transfer, Section 115BBH applies to you. The income and profit you earn have to be reported before the ITR due date.

If you miss the due date and do not report such crypto income, you’ll face penalties and legal consequences. Filing on time, and preferably early, will give you enough time to rectify any errors and verify TDS entries.

There are a few reporting obligations you need to be aware of when it comes to Section 115BBH. To stay compliant with the section itself and broader Income Tax Act regulations, you should do the following:

Maintain detailed records

Compliance becomes much easier if you have detailed, accurate records of all VDA transactions. As a general rule, keep a log of all VDA transactions, gifts, staking rewards, and airdrops. These records will help you with compliance procedures down the line.

Accurately calculate taxable income (and pay tax!)

Calculate the 30% tax on the profits of taxable income. Having an accurate number beforehand will help you pay the right amount of tax.

Comply with Section 194S

Section 194S determines TDS rules. Make sure that a 1% TDS has been deducted on all the applicable transactions, which will help you stay compliant with both Sections 194S and 115BBH.

File ITR correctly

Finally, make sure that you have filed your Income Tax Returns correctly. Report all VDA income accurately, and verify TDS credits wherever necessary.

If you miss out on these compliance obligations, the ITD may trigger penalties or inquiries — let’s take a quick look at them in the next section.

What happens if you don’t pay tax on your VDA transactions, pay it late, or are non-compliant with parts of Section 115BBH?

Here are possible consequences you should be aware of:

1. The Income Tax Department may impose a penalty ranging from 50% to 70% of the unpaid tax amount.
2. If there is a mismatch between your reported income and actual transactions, you may receive a notice and be subject to further investigation. Keeping and reporting accurate records can help you avoid this.
3. If there are instances of tax evasion, ITD can initiate legal proceedings.
4. Crypto exchanges operating in India may freeze or restrict accounts of users who fail to comply with tax regulations. You could end up with limited access to funds.

ITD can also audit past transactions, demanding unpaid taxes for previous years. This is on top of the penalties and interest!

Chapter XII of the Income Tax Act, 1961, was enacted to determine tax in certain special cases. One of the sections within it is Section 115BBH, as we have discussed in this article so far. Other than the 115BBH, chapter XII includes tax provisions like:

• Section 115BBE: Determine taxes on any unexplained income, investments, and cash credits.
• Section 115A: Determine taxes for non-residents on interests, dividends, or fees, for technical services.
• Section 115AB: Determine taxes on long-term capital gains for financial organizations that are overseas.

Section 115BBH specifically deals with income from Virtual Digital Assets (VDAs) and introduces a flat 30% tax rate. Within Chapter XII, this section brings clarity and much-needed compliance to the digital asset world in India.

Let’s illustrate how Section 115BBH works.

Suppose your international business receives cryptocurrency worth INR 2,40,000 as payment for services through a crypto payment gateway. A few weeks later, you decide to convert this crypto into INR. At this time point, its value has risen to INR 3,00,000. In this case, the gain of INR 60,000 will be taxed at a flat 30%.

This means you will be liable to pay INR 18,000 (plus any other applicable amount) as tax on the gains arising from this transaction.

Some taxpayers may have misconceptions about Section 115BBH, owing to the various tax regulations in the country. We’ll discuss a few common ones here.

Crypto losses can be adjusted.

Business owners commonly hold the misconception that losses from a VDA transfer can be adjusted against the profit from a different VDA transfer, business income, or some other capital gains. Section 115BBH explicitly mentions that such losses cannot be adjusted.

Expenses can be deducted.

Another key point in Section 115BBH is that no deductions, other than the acquisition cost, will be allowed. As someone trading VDAs, you will have to bear miscellaneous costs like platform and trading fees.

Tax will only apply when I convert to INR.

Tax applies to all transfers, including crypto-to-crypto swaps and crypto-to-INR swaps.

Small mistakes won’t matter.

Any errors in information or a lack of record organization, can have large, downstream effects.

Section 115BBH sets clear rules for the taxation of VDAs in India. It’s an important regulatory framework for cryptocurrencies and related assets in India, but some limitations remain.

The benefits first: Section 115BBH brings much-needed clarity. It charts out exactly how VDA income is to be taxed, removing any existing ambiguity. It also makes calculating taxable income straightforward.

However, some discussions are yet to be made. Because no deductions are allowed, expenses like miscellaneous fees can’t be claimed. TDS rates can be adjusted further so that international trading activities become easier. Adjustments for loss set-offs are much needed.

It’s important to follow the right approach towards planning your taxes. Here, some best practices can help.

There are a few ways you can simplify tax planning under Section 115BBH. If you’re actively using VDAs or running an international business with a strong crypto component, it’s worth following these practices:

• Maintain detailed records of every transaction. This is the single most important step in your tax planning journey!
• Try to plan your overall taxes. Deductions under Section 115BBH might be limited, but you can still explore other ways to optimize your total tax liability.
• Ensure proper compliance with TDS rules. Follow the 1% TDS requirements in order to avoid any penalties.
• Consider holding your VDAs longer. If you have fewer transactions, it may lead to less frequent taxation, which could prove to be a good strategy in the long term.
• Finally, if you have to, then seek professional advice for complex situations. Expert guidance can be a great leg to stand on when planning your taxes.

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