When the Indian government introduced a 30% flat tax on crypto earnings in 2022, the move was seen by many as a bold step to bring the rapidly growing but largely unregulated digital asset market into the fold of formal finance. However, three years later, the consequences are clearer and more complex. While the tax may have curbed excessive speculation and brought compliance into focus, it has also delivered a chilling effect on retail investors in India’s tier-2 and tier-3 cities — once a thriving demographic at the heart of the country’s crypto boom.
The question that now looms large: Has India’s taxation policy unintentionally shut the door on financial inclusion through crypto in semi-urban and rural India?
The Rise Before the Tax Storm
Back in 2020–2021, India witnessed an unprecedented surge in retail participation in cryptocurrencies. A report by Chainalysis in 2021 ranked India second globally in crypto adoption, driven not by institutional players but by millions of small-town users.
Young investors from towns like Bhilai, Indore, Kanpur, Jaipur, and Ranchi were turning to crypto apps like WazirX, CoinSwitch, and CoinDCX, often investing as little as ₹500 or ₹1,000 at a time. For many, crypto was more than a financial instrument — it was a pathway to prosperity, education, and self-empowerment in regions where traditional financial systems had long underdelivered.
However, that optimism began to fade with the 2022 Union Budget.
The 30% Flat Tax: A Blunt Tool
The Finance Act of 2022 introduced a flat 30% tax on earnings from all virtual digital assets (VDAs), regardless of the income type of the investor. Importantly:
No deductions (other than the cost of acquisition) were allowed.
No set-off against losses from other sources.
A 1% TDS (tax deducted at source) was also applied on every transaction above ₹10,000.
The intent was to regulate and discourage risky speculation. But the implementation hit low-income investors the hardest.
“Someone making ₹20,000 a month in Raipur who earns ₹5,000 in crypto gains pays the same 30% tax as a millionaire in Mumbai making ₹5 crore,” says Rahul Kaushik, a crypto tax adviser. “This isn't progressive taxation; it’s flat and harsh.”
Tier-2 and Tier-3 Investors Pulling Back
The data speaks volumes. According to CREBACO Global, user activity on major Indian crypto exchanges dropped by over 70% within a year of the tax announcement. Smaller towns and non-metro regions accounted for the majority of the drop.
Many investors, faced with high taxation and no relief on losses, simply stopped trading. Others moved their trading activity to international exchanges that don’t fall under India’s tax net — ironically increasing the regulatory blind spot the tax was meant to close.
“Most of our tier-2 users stopped investing after the TDS hit them,” confirms a regional community head from a leading Indian crypto exchange. “They weren’t day traders. They were salaried workers, freelancers, and students. Now they feel punished for trying to participate.”
Financial Inclusion or Rejection?
One of the most cited benefits of crypto — particularly in emerging economies — is financial inclusion. Blockchain doesn’t discriminate by geography, education, or income. With just a smartphone and an internet connection, rural Indians were accessing decentralized finance, cross-border payments, and investment opportunities otherwise out of reach.
Now, many of these gains are being reversed.
Crypto was never about getting rich quick for everyone. For many tier-2 users, it was about building small savings, dollar-hedged income, and participating in global markets. Taxing them like high-risk gamblers misunderstands the entire motivation.
The Shadow Market and the Risk of Pushing Users Underground
One unintended consequence of the strict tax regime has been the rise of underground and peer-to-peer (P2P) crypto trading, particularly in WhatsApp and Telegram groups. These platforms often bypass regulated exchanges and use untracked wallets — undermining the government’s goal of financial transparency.
Regulations should guide users to safer systems, not push them toward grey markets. The current policy is creating exactly the kind of opaque financial behavior it wanted to avoid.
Is There a Better Way?
Many experts argue that taxation is necessary — but not in its current form. The 30% flat rate with no offset provisions is seen as punitive rather than regulatory.
Recommendations being widely discussed in policy circles include:
A progressive tax structure, where lower-income investors are taxed at a reduced rate.
Allowing set-off and carry-forward of crypto losses, in line with equity market treatment.
Reducing TDS from 1% to 0.01%, to support liquidity without compromising oversight.
Differentiating between long-term investors and day traders, a distinction already present in equity taxation.
So far, the government has shown limited signs of re-evaluating the framework. The Inter-Ministerial Committee on Virtual Digital Assets, established in late 2024, has begun stakeholder consultations — but no timeline for reform has been announced.
The Road Ahead for the Rural Investor
In the absence of regulatory reform, the rural and semi-urban crypto investor is caught in a limbo — eager to participate in the digital economy, but punished for doing so through legitimate channels.
For a country that has prioritized “Digital India” and “financial empowerment for all”, the current crypto tax regime risks alienating exactly those it seeks to uplift.
Unless policies evolve to reflect ground realities, India may find itself with a digital economy that’s innovative in Delhi and Bangalore — but silent in Bharat.