Section 194S of the Income Tax Act

Explore Section 194S of the Income Tax Act governing TDS on cryptocurrency transactions in India.
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2 min
30 July 2025

Section 194S of the Income Tax Act is a significant provision that governs the taxation of cryptocurrency transactions in India. As the popularity of digital assets rises, understanding this section becomes essential for taxpayers and investors alike. This article delves into the intricacies of Section 194S, its implications, and its relevance in today’s financial landscape.

Latest update on Section 194S

From the financial year 2025–26 onwards, taxpayers will need to report income from Virtual Digital Assets (VDAs), such as cryptocurrency, under a new section in their Income Tax Return called Schedule VDA. This move is intended to bring greater clarity and improve transparency in how crypto-related gains are declared.

In addition to this, crypto exchanges will now be required to submit detailed transaction reports to the Income Tax Department. This ensures better tracking of virtual asset transactions and helps enforce tax compliance.

By streamlining both taxpayer reporting and exchange-level disclosures, the government aims to tighten regulations around VDAs and prevent non-compliance or under-reporting of income from crypto-related transactions. This change marks a significant step in the regulation and taxation of digital assets in India.

What is Section 194S of the Income Tax Act?

Section 194S of the Act mandates the deduction of tax at source (TDS) on payments made for the transfer of virtual digital assets, including cryptocurrencies. This provision aims to ensure that income arising from such transactions is appropriately taxed, thereby promoting compliance within the evolving digital economy.

Applicability of Section 194S

Section 194S of the Income Tax Act applies to any individual or entity making payments for the transfer of virtual assets. This includes transactions involving cryptocurrencies, tokens, and other forms of digital currencies. The provision is applicable to:

  1. Individuals and businesses: Both individuals and corporate entities involved in crypto transactions are required to comply with this section.
  2. Payments above a specified threshold: TDS is applicable when payments exceed a certain limit, ensuring that small transactions are not burdened with additional tax compliance.

When is Section 194S invoked?

Section 194S is invoked during the following scenarios:

  1. Transfer of virtual assets: When an individual or entity sells or transfers cryptocurrency or other digital assets.
  2. Payment threshold: The section applies when the total payment for such transfers exceeds the prescribed limit set by the Income Tax Department.

Key features of Section 194S

  1. TDS rate and calculation: Under Section 194S of the Income Tax Act, the TDS rate is set at 1% of the total payment made for the transfer of virtual assets. This rate is applicable to the gross amount of the transaction, making it crucial for taxpayers to account for TDS during their financial planning.
  2. Mode of payment: TDS under Section 194S must be deducted at the time of crediting the payment to the seller's account or at the time of payment, whichever is earlier. This provision emphasizes the need for timely compliance by both buyers and sellers in cryptocurrency transactions.
  3. Tax Identification Number (TIN): Both the payer and payee must have a valid Tax Identification Number (TIN) for the TDS deduction to be valid. This requirement ensures proper tracking and compliance within the tax system.
  4. Impact on transactions: The implementation of Section 194S may influence how individuals and businesses approach cryptocurrency investments. The additional tax burden could lead to increased costs and impact profit margins for traders and investors alike.
  5. Documentation and reporting: Taxpayers must maintain proper documentation of transactions involving virtual assets, including invoices, payment receipts, and tax deduction details. This documentation is crucial for accurate reporting and compliance with tax obligations.
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Steps to comply with Section 194S

What is a virtual digital asset?

As per Section 194S of the Income Tax Act, a Virtual Digital Asset (VDA) includes:

  • Cryptocurrencies: These are digital tokens, codes, numbers, or information generated through cryptographic means or any other method.

  • Non-Fungible Tokens (NFTs): A type of digital token that is unique and cannot be exchanged on a one-to-one basis like regular cryptocurrencies.

  • Other notified assets: Any other digital asset that may be notified by the central government through an official gazette notification.

These definitions ensure that all relevant types of virtual digital assets are covered under taxation, making it necessary for individuals transacting in these assets to follow appropriate tax rules.

To ensure compliance with Section 194S, taxpayers should adopt the following best practices:

  1. Timely TDS deduction: Always deduct TDS at the time of making payments for virtual asset transfers. Ensure that the deduction is done accurately to avoid penalties and interest on unpaid amounts.
  2. Maintain accurate records: Keep detailed records of all cryptocurrency transactions, including purchase and sale invoices, payment confirmations, and TDS deduction details. This practice will simplify compliance and ensure accurate reporting during tax filing.
  3. Consult a tax professional: Engaging with a qualified tax consultant or chartered accountant can provide valuable insights and assistance in navigating the complexities of Section 194S. They can help ensure compliance and provide guidance on tax planning strategies.
  4. Regular monitoring: Regularly review your financial transactions and tax obligations to identify any potential issues early on. This proactive approach can help mitigate risks associated with tax compliance.

Consequences of non-compliance with Section 194S

Failing to adhere to the provisions of Section 194S can lead to several adverse consequences:

  1. Penalties and interest: Taxpayers who do not comply with Section 194S may face penalties and interest on the unpaid TDS amounts. This can significantly increase the overall tax liability and create financial strain.
  2. Legal repercussions: Non-compliance can lead to legal actions from tax authorities, including audits and investigations, which can further complicate a taxpayer's financial standing and credibility.
  3. Impact on future transactions: A history of non-compliance can adversely affect future transactions, as financial institutions and partners may scrutinize a taxpayer’s compliance history more rigorously, complicating business relationships.

What is the amount of exemption available under Section 54B?

Exemption under Section 54B is the lowest of the following:

  • Cost of the newly purchased agricultural land

  • The actual capital gains made from the sale of old agricultural land

Here’s a simple example:

Particulars

Amount (Rs.)

Sale price of land

60,00,000

Less: Indexed cost of purchase (30,00,000 × 348/264)

39,54,545

Long-term capital gains

20,45,455

Cost of new agricultural land

45,00,000

Exemption allowed (lower of the two)

20,45,455


In this case, Rs. 20,45,455 is exempt from tax under Section 54B, as it is the lower of the capital gains and the amount spent on the new land.

 

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Best practices to avoid pitfalls under Section 194S

To minimize the risks associated with Section 194S, taxpayers should consider the following best practices:

  1. Stay informed: Keep updated with the latest developments regarding cryptocurrency regulations and tax implications. This proactive approach can help you adapt to changes in the regulatory landscape effectively.
  2. Invest wisely: When engaging in cryptocurrency investments, consider the potential tax implications and plan your transactions accordingly. Avoid impulsive decisions that may lead to unfavourable tax outcomes.
  3. Plan for tax liabilities: Incorporate tax liabilities into your financial planning. Setting aside funds for potential TDS obligations can help you avoid financial stress during tax season.

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How is exemption calculated in case of sale of agricultural land?

If you're claiming exemption under Section 54B, the new agricultural land purchased must not be sold within three years. Here's how different situations impact your exemption:

Scenario 1
You sell the new land within 3 years and its cost is less than the capital gains:

Result: The exemption is cancelled. The full amount received from the sale becomes taxable as capital gains. The cost of acquisition is considered to be NIL.

Scenario 2
You sell the new land within 3 years and its cost is more than the capital gains:

Result: The exemption is revoked. However, the cost of acquisition is reduced by the amount of exemption you had claimed earlier. This adjusted amount can be deducted while calculating your capital gains.

Scenario 3
You sell the new land after 3 years from the date of purchase:

Result: The exemption under Section 54B remains valid. You can also claim indexation benefit on the cost when calculating long-term capital gains from the sale.

Following these rules ensures that the exemption remains valid and you avoid unnecessary tax complications.

What happens to exemptions when agricultural land is sold?

When agricultural land is sold, any capital gains made from the sale are typically subject to taxation under the Income Tax Act, unless specific exemptions apply. The gains are calculated by subtracting the indexed cost of acquisition and selling expenses from the total sale consideration.

Section 54B allows taxpayers—both individuals and Hindu Undivided Families (HUFs)—to reduce or defer their capital gains tax liability if they reinvest the proceeds into purchasing another agricultural land.

To benefit from this exemption:

  • The original land must have been used for agricultural purposes for at least two years before the sale.

  • The new agricultural land must be purchased within two years from the sale date.

  • Both the old and new properties must qualify as agricultural land under Income Tax Act provisions.

If the proceeds are not fully reinvested by the ITR filing deadline, the unused portion should be deposited into a Capital Gains Account Scheme (CGAS) to still be eligible for the exemption. However, if the amount in CGAS is not utilised within three years, it becomes taxable in the year it lapses.

By following the right process and timelines, sellers of agricultural land can save significantly on capital gains tax while ensuring compliance with tax laws.

What is the Capital Gains Account Scheme (CGAS)?

The Capital Gains Account Scheme (CGAS) is useful if you’re unable to reinvest the capital gains before the ITR filing deadline. You can deposit the unutilised amount into a CGAS account with an authorised bank to preserve your exemption under Section 54B.

This ensures the tax benefit isn’t lost due to timing issues. However, if you fail to utilise this amount for buying new agricultural land within three years, the deposited amount becomes taxable as capital gains in the year the deadline expires. The tax will then apply based on your applicable income tax slab.

How to disclose agricultural land sale in ITR?

Sale of rural agricultural land
Rural agricultural land is not treated as a capital asset under the Income Tax Act. Therefore, any profits from its sale are not taxable. Such income is exempt under Section 10(1) and must be reported in Schedule EI of your ITR.

Sale of urban agricultural land
Urban agricultural land is a capital asset. Hence, its sale is taxable under capital gains. You must report it in Schedule CG of the ITR. While calculating gains, you can subtract the indexed cost of acquisition and improvement. Additionally, exemptions under Sections 54B, 54EC, or 54F may apply, depending on how you reinvest the capital gains.

TDS applicable on the sale of agricultural land

TDS at 1% under Section 194IA applies to property sales over Rs. 50 lakh. However, this rule does not apply to agricultural land—whether rural or urban—regardless of the transaction value.

Still, if you want to claim exemption under Section 54B, you must reinvest the sale proceeds in new agricultural land. If immediate reinvestment isn't possible, deposit the amount into a CGAS account before the ITR filing deadline to preserve your exemption eligibility.

Understanding this can help you avoid confusion and unnecessary deductions. When in doubt, consult a Chartered Accountant to ensure correct tax treatment for your agricultural property transactions.

Who is responsible for deducting TDS under Section 194S?

The responsibility to deduct TDS under Section 194S depends on the nature of the transaction and the involvement of intermediaries such as exchanges and brokers. Here's how the liability is determined in different scenarios:

1. Peer-to-peer (P2P) transfer of VDA

  • The buyer is required to deduct TDS at 1% of the transaction value.

  • The buyer must file Form 26Q and Form 26QE.

2. Transfer of VDA via an exchange (Exchange does not own the VDA)

Case 1: Payment made to the exchange directly or through a broker

  • The exchange is responsible for deducting TDS.

  • Only the exchange can deduct the tax.

  • The exchange must file Form 26Q.

Case 2: Payment between the seller and the exchange is routed through a broker

  • Both the exchange and broker are jointly responsible.

  • If a written agreement exists, only the broker may deduct the tax.

  • The broker must file Form 26Q and the exchange must file Form 26QF.

3. Transfer of VDA via an exchange (Exchange owns the VDA)

Case 1: Buyer pays the exchange through a broker

  • The broker is responsible for TDS.

  • If there is a written agreement, the exchange may deduct tax.

  • The exchange must file Form 26QF and include it in their ITR.

Case 2: Buyer pays the exchange directly

  • The buyer is responsible for TDS.

  • The exchange may deduct tax based on written agreement.

  • The exchange must file Form 26QF and report it in their ITR.

4. Transfer of VDA in kind (Non-Cash Consideration)

Case 1: Transaction not through an exchange

  • The buyer must deduct TDS.

  • TDS must be paid before transferring the VDA.

  • Buyer files Form 26Q and Form 26QE.

Case 2: Transaction through an exchange

  • The exchange is responsible for TDS.

  • The exchange may deduct tax under a valid contract.

  • The exchange files Form 26Q.

Conclusion

Section 194S of the Income Tax Act plays a crucial role in shaping the landscape of cryptocurrency taxation in India. By understanding its implications and adopting best practices, taxpayers can navigate its complexities effectively. Compliance with this provision is essential for maintaining financial stability and credibility in an increasingly digital economy.

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Frequently asked questions

What is Section 194S and who does it apply to?
Section 194S of the Income Tax Act mandates TDS on payments for the transfer of virtual digital assets, including cryptocurrencies. It applies to individuals and entities involved in such transactions, ensuring that income from these digital assets is properly taxed within the Indian taxation framework.
What are the rates under Section 194S?
Under Section 194S, the TDS rate is set at 1% of the total payment made for the transfer of virtual assets. This rate applies to the gross transaction amount, making it crucial for taxpayers to consider TDS deductions during their cryptocurrency trading activities.
How does Section 194S impact taxpayers?
Section 194S impacts taxpayers by introducing an additional tax compliance requirement for cryptocurrency transactions. It can lead to increased costs due to TDS obligations, affecting overall profit margins and necessitating meticulous record-keeping and reporting for compliance with tax laws.
Are there any compliance requirements under Section 194S?
Yes, compliance under Section 194S includes timely TDS deduction at the time of payment, maintaining accurate records of transactions, and ensuring both payer and payee have valid Tax Identification Numbers (TIN). Non-compliance can result in penalties and increased scrutiny from tax authorities.
How to calculate TDS under Section 194S?
To calculate TDS under Section 194S, determine the total payment for the transfer of virtual assets and apply the 1% rate to this amount. Deduct TDS at the time of payment or crediting to the seller's account, ensuring compliance with the timely deduction requirements.
I have sold rural agricultural land, and my only income is from farming. Do I need to file an income tax return?

If your only income is from agriculture and you’ve sold rural agricultural land (which is not taxable), then filing an Income Tax Return is not mandatory—provided your total income is less than Rs.2.5 lakh. This applies under Section 139(1) of the Income Tax Act.

What is the maximum cash allowed in a land sale transaction?

As per Section 269ST, you cannot accept over Rs. 2,00,000 in cash for a single transaction. If this limit is crossed, a penalty equal to the amount received may be imposed under Section 271DA. This rule applies even to agricultural land—rural or urban.

What exemption does Section 54B offer?

Section 54B provides tax exemption on capital gains from the sale of urban agricultural land, provided the land was used for farming for at least two years. To claim the exemption, you must purchase another agricultural land (urban or rural) within two years of the sale.

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What are the tax rules for selling urban agricultural land?

Urban agricultural land is a capital asset, so selling it attracts capital gains tax. From 23 July 2024, long-term capital gains will be taxed at 12.5% without indexation. However, you can still choose to pay 20% with indexation for land bought before that date. Short-term gains are taxed as per your income slab.

Can NRIs claim an exemption under Section 54B?

Yes, NRIs can claim Section 54B exemption if the agricultural land sold and the new land purchased are both located in India.

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Are capital gains taxable if the government compulsorily acquires agricultural land?

No. If the government acquires agricultural land under a legal process, any capital gains from that transaction are fully exempt from tax under Section 10(37).

What is the deadline for depositing TDS under Section 194S?

  • If tax is deducted in March, deposit is due:

  • By 7th April (for government deductors)

  • By 30th April (for others)

  • For any other month, TDS must be deposited within 7 days of month-end.

  • For example, TDS deducted on 25th April must be paid by 7 May.

When is TDS not required to be deducted under Section 194S?

TDS is not needed if:

  • A specified person pays, and the total during the year is Rs.50,000 or less.

  • A non-specified person pays, and the total during the year is Rs.10,000 or less.

How to file a TDS return under Section 194S?

You need to file quarterly returns:

  • April to June: File by 31st July

  • July to September: File by 31st October

  • October to December: File by 31st January

  • January to March: File by 31st May

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