Last night, Finance Minister Nirmala Sitharaman said that the Indian government has decided to impose a 1 per cent tax at source (TDS) on the transfer of crypto and other virtual digital assets.
According to the Finance Bill 2022 presented at Budget 2022, this provision regarding TDS will come into effect from 1 July 2022, and not 1 April 2022.
“TDS (tax deducted at source) is more for tracking. It is not an additional tax, and not a new tax. It is a tax that will help people track it, but at the same time, the taxpayer can always reconcile it with the total tax to be paid to the government,” media reports quoted Sitharaman as saying in a statement in Lok Sabha.
“Any person responsible for paying to a resident any sum by way of consideration for transfer of a virtual digital asset, shall, at the time of credit of such sum to the account of the resident or at the time of payment of such sum by any mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income tax thereon,” she said, quoting an excerpt from Section 194S of the Income Tax Act, 1961.
What Is TDS?
Tax Deducted at Source is the amount of income tax that is deducted at the time of receiving any specified payments, such as rent, commission, certain gains, salary, and interest, among others. As the name suggests, the tax is to be deducted at the source, meaning when you receive this certain payment, it will come to your hand with the TDS deducted (at source).
For example, let’s say you are employed at a salary of Rs 25,000. Your employer will deduct Rs 2,500 (10 per cent TDS), and give you the balance as your salary. In addition, he will issue you a TDS certificate against the deduction in the manner of Form 16/16A to help you with your tax filing.
Let’s take another example. Let’s suppose you purchase Rs 5,000 worth of Ethereum (ETH) on any crypto exchange, and then sell it at Rs 6,000 a month later. Here the crypto exchange will give you Rs 5,940 (1%) and issue you a TDS certificate for Rs 60.
Is Deducting TDS Same As Deducting Tax?
The Income Tax Department deducts TDS to know about a transaction originating on a user’s permanent account number (PAN). Therefore, the TDS certificate, which has to be mandatorily given to you by the paying company, should be furnished at the time of filing your I-T Return.
There are different reasons why a TDS has to be deducted and if it can be refunded back.
Let’s take the example of TDS on salary. Let’s say, your employer deducts Rs. 2,000 as TDS on your salary of Rs 20,000 per month. So at the time of filing the income tax return, you can adjust this TDS against your total tax to be paid, which would be nil in this case. So, instead of paying the tax, you will receive a tax refund in this case. (Slab rate 0 to Rs 2.5 lakh - nil tax)
Let’s now take the example of TDS for digital asset. Let’s say you sold your Ethereum, which you bought for Rs. 5,000, at Rs. 6,000. So here, your TDS was Rs. 60, and capital gains were Rs. 1,000. According to the present law, as per section 115BBH of the Income Tax Act, 1961, you must pay 30 per cent tax on virtual digital assets gains. So you will have to pay a total tax of Rs 300 on this transaction (Rs. 1,000*30%= Rs. 300), but since you have already paid Rs 60 as TDS, so your total tax liability will be Rs. 240 (Rs. 300-60).