Section 194S of Income Tax Act

Key Highlights

• Section 194S of Income Tax Act was introduced through the Finance Act 2022 and became effective on July 1, 2022.
• This section mandates Tax Deduction at Source (TDS) on income derived from Virtual Digital Assets (VDAs) such as cryptocurrencies, non-fungible tokens (NFTs), and digital securities.
• TDS deductible in cases of payment made for the transfer of VDA is more than ₹50,000 for specified persons and ₹10,000 in other cases.
• The responsibility to deduct TDS under Section 194S lies with buyers, exchanges, and other entities making payments for VDA transactions.
• Taxpayers involved in VDA transactions need to collect TDS certificates from deductors and claim tax credits while filing their Income Tax Returns (ITRs).
• Section 194S aims to regulate and monitor transactions involving VDAs to enhance transparency and compliance within the digital asset ecosystem.

TDS on Cryptocurrency, NFT, VDA - Section 194S of the Income Tax Act

The Finance Act 2022 introduced a new section 194S in the Income Tax Act, 1961 (ITA) that became effective on July 1, 2022.

Through section 194S of the Income Tax Act, of 1961, the Government of India has started charging TDS on virtual digital assets (VDAs). So if you are someone who trades in VDAs such as cryptocurrencies and non-fungible tokens (NFTs), then this article is for you.

Let's delve into the nitty-gritty of section 194S of Income Tax Act, 1961.

What Is Section 194S of Income Tax Act?

In order to trace dealings in VDAs, the government has introduced a provision where it will deduct 1% TDS on the payments made in trading of VDAs. This TDS will be deducted only if the transaction made in dealings with VDAs crosses ₹10,000 or ₹50,000 in case of specified persons in a year of purchase. The purpose of introducing this section is to keep the transactions of VDAs in check and oversee their dealings.

What Is a Virtual Digital Asset?

A Virtual Digital Asset (VDA) is a digital representation of value or ownership that exists purely in electronic form and is typically managed on a blockchain or similar decentralised ledger. Examples include cryptocurrencies, non-fungible tokens (NFTs), and digital securities. They are intangible, often tokenised, and enable various uses such as transactions, investments, and ownership proofs in virtual or real-world assets. Regulatory frameworks for VDAs are evolving globally as these assets become more mainstream.

Virtual Digital Assets Covered in Section 194S:

• Cryptocurrency: Cryptocurrency is a type of digital or virtual currency that uses cryptography for security and operates on decentralised networks (blockchains).
• Non-Fungible Tokens (NFTs): Non-Fungible Tokens (NFTs) are unique digital assets that represent ownership or proof of authenticity of a specific item or piece of content using blockchain technology.

Also Read: What is TDS (Tax Deducted at Source)? - Meaning, Filing & Rates

Who Is a Specified Person under Section 194S of Income Tax Act?

Tax deducted at source (TDS) deductible in cases of payment made for the transfer of VDA is more than ₹50,000 for specified persons and ₹10,000 in other cases.

A specified person under 194S TDS section includes the following:

• Individuals or HUFs with business income not exceeding ₹1 crore.
• Individuals or HUFs with professional receipts not exceeding ₹50 lakhs.
• Individuals or Hindu Undivided Families (HUFs) who do not earn income from 'profits and gains of business and profession.'

Key Features of Section 194S

• The transfer of a Virtual Digital Asset using cash through an Exchange that does not hold the VDA.
• If a Virtual Digital Asset is transferred using cash through an Exchange that does not possess the VDA, the transaction sequence might appear as follows:

In this scenario, a buyer would make a payment to the exchange (either directly or through a broker). Subsequently, the exchange is obligated to transfer the payment to the owner of the VDA (either directly or through a broker).

In this situation, multiple entities are engaged, with the exchange responsible for deducting TDS when making payments to the seller. However, if the transaction involves a broker facilitating payment between the seller and the exchange, both parties are accountable for tax deductions.

Alternatively, an arrangement can be made between the exchange and the broker where the broker assumes responsibility for deducting TDS on all transactions of this nature. The exchange must submit a quarterly report using Form No. 26QF within the stipulated deadline.

TDS Exemption under Section 194S

However section 194S allows a TDS deduction, it has its own exemptions. A TDS would not be deducted under section 194S of the Income Tax Act, 1961 other than these following scenarios:

• A designated individual must deduct TDS when the total consideration paid to a resident is below ₹50,000 in a financial year. For any other scenario, the threshold limit for deduction is ₹10,000 within the financial year.
• Moreover, this designated entity may include an individual or Hindu Undivided Family (HUF) meeting the criteria of turnover not exceeding ₹1 crore from business or ₹50 lakh from profession in the previous year. It could also encompass an individual or HUF without any income from a business.

Note: It is important to note that section 194S is only applicable to cases where you are purchasing VDA from an Indian tax resident.

Who Should Deduct TDS Under Section 194S?

The obligation to deduct TDS under section 194S varies depending on the scenario:

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

The buyer of the VDA is responsible for deducting TDS at a rate of 1%. - The buyer must submit Form 26Q and 26E for compliance.

2. Transfer of VDA through an Exchange where the VDA is not owned by the Exchange (in cash)

Case 1

If the buyer makes payment to the exchange (either directly or through a broker),
- The exchange holds the primary responsibility for deducting TDS.
- TDS deduction is exclusively within the purview of the exchange.
- The exchange is required to file Form 26Q.

Case 2

If the payment between the seller and the exchange is facilitated through a broker,
- Both the exchange and the broker share the primary responsibility for TDS deduction.
- TDS deduction can be undertaken solely by the broker if there exists a formal agreement stating so.
- The broker must file Form 26Q, while the exchange must file Form 26QF.

Transfer of VDA through exchange and VDA owned by exchange

Case 1

When the buyer makes payment to the exchange through a broker,

- The broker assumes the primary responsibility for deducting TDS.
- The exchange may handle tax payment if there exists a documented agreement where the exchange undertakes TDS deduction.
- The exchange must file Form 26QF and the Income Tax Return (ITR).

Case 2

When the buyer directly credits or makes payment to the exchange,
- The buyer bears the primary responsibility for deducting TDS.
- The exchange can undertake tax payment if there is a written agreement specifying that the exchange will handle tax deductions.
- The exchange is required to file Form 26QF and the Income Tax Return (ITR).

Transfer of VDA in Kind

Case 1

When the transaction does not involve an exchange,

• The buyer holds the primary responsibility for deducting TDS.
• If the seller provides a challan, the buyer may provide consideration in kind.
• The buyer must file Form 26Q and Form 26QE.

Case 2

When the transaction occurs through an exchange,

• The exchange assumes the primary responsibility for deducting TDS.
• The exchange can proceed with tax deduction based on a written contractual agreement between the parties involved.
• The exchange is obligated to file Form 26Q.

Also Read: What are the various types of ITR forms?

Get TDS Certificate under Section 194S

A TDS certificate will be given to the deductee that they can claim at the time of filing their ITR.
No matter if you are a buyer, seller, exchange, or broker, its essential to follow the newly introduced section 194S of Income Tax Act.It helps in regulating a more stable financial ecosystem. Government of India has simplified each element under TDS 194S.If you are confused about how to file your ITR (income tax return), then seeking professional help would be beneficial.

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