Guidelines under section 194S(6)

Section 194S of the Income-tax Act requires 1% TDS on transfer of Virtual Digital Assets to a resident, with thresholds of ₹50,000 for specified persons and ₹10,000 for others. CBDT issued guidelines under sub-section (6) to remove difficulties: exchanges are generally the deductors for on-exchange trades, brokers acting as counterparties deduct on proprietary trades, and VDA-for-VDA swaps require both parties to deduct in INR equivalent. Specified persons file Form 26QE and issue Form 16E, while the gain is taxed at 30% under Section 115BBH.

Mayank Wadhera

Published: 25 Jun 2022

Updated: 16 May 2026

4 min read

Section 194S of the Income-tax Act, 1961 was introduced to bring transfer of Virtual Digital Assets (VDAs) — cryptocurrency, NFTs and other notified digital tokens — within the TDS net. Recognising the operational complexities of peer-to-peer trades, exchanges and broker-mediated transactions, the CBDT was empowered under sub-section (6) of Section 194S to issue guidelines for removing difficulties. These guidelines remain critical for every VDA participant in FY 2026-27.

Overview of Section 194S

Section 194S requires any person responsible for paying consideration for the transfer of a Virtual Digital Asset to a resident to deduct TDS at 1% of such consideration. The deduction is to be made at the earlier of credit or payment. The threshold for non-deduction is:

₹50,000 for a specified person (individual/HUF without business income or with business turnover up to the audit threshold)
₹10,000 for any other person, in aggregate during the financial year

The need for CBDT guidelines

VDA transactions occur in multiple modes — between two users on an exchange, peer-to-peer, through brokers, against cash, against another VDA, or as part of a barter. Identifying who is the 'person responsible for paying' and how TDS is to be computed when consideration itself is in VDA is far from straightforward. CBDT therefore issued detailed guidelines to clarify these scenarios.

Key clarifications in the guidelines

Where transfer occurs on or through an exchange, the exchange is generally the person liable to deduct TDS, even if it is not technically a party to the transaction
If a broker also acts as a counterparty (proprietary trades), the broker is the person liable to deduct
Where consideration is paid in another VDA, TDS must be deducted by both parties, since each leg involves transfer of a VDA, and the tax must be paid in INR equivalent
Conversion of TDS into INR is to be done using the prevailing market value of the VDA at the time of deduction
Where payment gateways are interposed, the gateway is not the deductor — the contractually liable buyer or the exchange remains responsible
Operational protocol of paying TDS, filing challan-cum-statement in Form 26QE and issuing Form 16E is prescribed for specified persons

Reporting and challan requirements

Specified persons file Form 26QE — a challan-cum-statement — within 30 days from the end of the month in which deduction was made
Other deductors deposit TDS through Form 26Q and quote the buyer's PAN
Form 16E is the TDS certificate to be issued to the deductee within 15 days of the due date for Form 26QE
The deductee can verify deducted tax credit through AIS/TIS on the income-tax portal

Interplay with Section 115BBH

Section 115BBH taxes income from transfer of VDAs at a flat 30% (plus surcharge and cess) with no deduction other than cost of acquisition. Loss from one VDA cannot be set off against gain from another or against any other income. The TDS deducted under Section 194S is creditable against this tax liability when the deductee files their income-tax return.

Practical compliance pointers

Exchanges must build automated TDS deduction logic into the trading engine
Indian buyers transacting peer-to-peer must apply for a TAN where required and use Form 26QE
Document the fair market value source used to convert VDA to INR for TDS
Reconcile AIS / TIS with internal records monthly
Educate retail users — non-compliance can trigger penalty and disallowance of expenditure

Strategic considerations for VDA businesses

Section 194S has reshaped the economics of operating a Virtual Digital Asset business in India. Exchanges have rebuilt their trading engines to deduct TDS on a trade-by-trade basis, broker-dealers have separated proprietary and customer flows for clarity, and individual traders increasingly use Form 26QE for direct peer-to-peer purchases. Looking ahead, businesses should anticipate further refinements as the VDA ecosystem matures.

Build a trade-level TDS engine integrated with order management and settlement
Maintain a price oracle for fair-market-value computation on VDA-for-VDA swaps
File Form 26QE within 30 days of deduction for specified persons
Reconcile Form 16E issuance with monthly trading and withdrawal logs
Educate users on Section 115BBH so they treat TDS as creditable and not as final tax

Compliance excellence in VDA tax is a competitive differentiator — exchanges with clean tax operations attract institutional and high-net-worth users who prioritise governance. Sloppy compliance, conversely, has shut down platforms in past cycles, making this a strategic rather than purely tax issue.

Conclusion

The CBDT guidelines under Section 194S(6) have made an inherently complex regime workable. As VDA volumes recover and new tokens enter the Indian market in FY 2026-27, exchanges, brokers and individual traders alike must align their systems, documentation and tax filings with these guidelines to avoid TDS short-deductions, interest and penalty exposure.

Frequently Asked Questions

What is Section 194S of the Income-tax Act?

Section 194S requires every person paying consideration to a resident for transfer of a Virtual Digital Asset to deduct TDS at 1% of the consideration. The provision applies above prescribed thresholds and was introduced to bring crypto and NFT transactions into the tax net.

Why did CBDT issue guidelines under Section 194S(6)?

Section 194S(6) empowers CBDT to issue guidelines for removing difficulties. Since VDA transactions happen on exchanges, peer-to-peer and via brokers, CBDT clarified who deducts in each scenario, how VDA-for-VDA swaps work and how to report through Form 26QE and Form 16E.

Who deducts TDS on an exchange trade?

Where the transfer is on or through an exchange, the exchange is generally treated as the person responsible for deducting TDS under Section 194S, even though it is not a party to the trade. If a broker acts as counterparty on proprietary trades, the broker becomes the deductor.

How is TDS deducted when consideration itself is in VDA?

When one VDA is swapped for another, both parties are transferors. Each party must deduct TDS on the value of the VDA they are receiving, computed in INR equivalent using the prevailing fair market value at the time of the trade, and deposit the tax in cash.