Section 194S: The 1% TDS on Crypto and Virtual Digital Asset Transfers Every Trader Misses

If you bought or sold any cryptocurrency, NFT or other virtual digital asset (VDA) during FY 2025-26, a 1% tax was almost certainly carved out of the transaction before you ever saw the money. That deduction is Section 194S of the Income-tax Act, 1961, inserted by the Finance Act, 2022 and in force since 1 July 2022. Most traders never notice it until the figure refuses to match their bank statement at return-filing time. This guide walks through exactly what the section demands, works a live example, and flags the mistakes that surface most often in ITR scrutiny.

Section 194S sits alongside Section 115BBH, the flat 30% charge on VDA income that also arrived with the Finance Act, 2022. The two work as a pair: 194S collects tax at source on the gross transfer value, while 115BBH taxes the net gain at 30% at assessment. Understanding both is the only way to know whether that 1% is money you get back or money you simply pre-paid.

What the Section Says

Section 194S requires any person paying a resident consideration for the transfer of a virtual digital asset to deduct tax at 1% of that consideration. The deduction must happen at the time of credit to the resident's account or at the time of payment, whichever is earlier, which closes the loophole of deferring deduction by merely crediting an account first. Only payments to resident sellers fall within 194S; a payment to a non-resident is governed by Section 195 instead.

The 1% rate applies to the gross consideration, not the profit. Per the CBDT's guidelines, goods and services tax and any brokerage or service charge levied by the deductor for its own services are excluded from the amount on which the 1% is computed, so the base is the clean transfer value. A virtual digital asset itself is defined in Section 2(47A), which covers cryptocurrencies, non-fungible tokens and similar tokens, but excludes Indian and foreign currency.

Two threshold limits decide whether 194S bites at all in a financial year. The table below sets them out.

Once aggregate consideration in the year crosses the relevant threshold, 1% applies to the full consideration, not merely the excess. Transfers between 1 April 2022 and 30 June 2022 count towards the threshold but attract no deduction, because the section took effect only on 1 July 2022.

Who physically deducts depends on how the trade is routed. Where you trade through an exchange, the exchange deducts the 1% and reports it, typically filing a quarterly statement in Form 26QF. In a peer-to-peer deal with no exchange or broker in the middle, the buyer is the deductor and must withhold the 1% before paying the seller. If no PAN is furnished, the rate rises to 20% under Section 206AA, and a non-filer of returns can attract the higher rate under Section 206AB, so furnishing PAN is not optional in practice.

Worked Example

Take Rhea, a salaried individual with no business income, who sells Bitcoin worth Rs 5,00,000 on a registered Indian exchange in November 2025. Because she is a specified person and the consideration exceeds Rs 50,000, the exchange deducts 1% of Rs 5,00,000, which is Rs 5,000, and remits Rs 4,95,000 to her. That Rs 5,000 shows up in her Form 26AS and AIS as a 194S credit.

Now assume she had bought that Bitcoin for Rs 4,00,000. Her gain is Rs 1,00,000, taxed under Section 115BBH at a flat 30%, with no deduction permitted other than the cost of acquisition. The computation runs as follows.

The Rs 5,000 is not an extra cost; it is an advance against the Rs 31,200 liability, which Rhea claims as credit in her ITR exactly as she would with salary TDS. You can model the final slab-and-cess position for your other income using Oquilia's income tax calculator, and check the withholding mechanics with the TDS calculator.

Note what does not happen here: the Rs 30,000 flat tax does not change whether Rhea is on the old or new regime, because 115BBH overrides the slab rates for this income. If she had instead made a Rs 40,000 loss on a second coin, she could not set that loss against this Rs 1,00,000 gain, because 115BBH bars set-off entirely. For ordinary capital assets the arithmetic is different, which you can compare using the capital gains calculator.

Common Mistakes

The first and most common error is assuming 194S means no further tax is due. The 1% is only a 1% collection; the real charge is 30% plus 4% cess under 115BBH, so a profitable trader almost always owes more at filing. Treating the Rs 5,000 deduction in the example above as final would understate the liability by Rs 26,200.

The second is netting losses against gains. Section 115BBH prohibits set-off of VDA losses against VDA gains, and such losses cannot be carried forward either. A trader with a Rs 2,00,000 gain on one token and a Rs 1,50,000 loss on another still pays 30% on the full Rs 2,00,000, not on Rs 50,000. This is a frequent trigger in scrutiny because the AIS reports gross 194S credits that do not reconcile with a netted figure in the return. Our carry-forward losses glossary entry explains why normal loss rules do not rescue you here.

The third is the peer-to-peer blind spot. In a direct wallet-to-wallet deal, the buyer, not the exchange, is the deductor, and a buyer who skips the 1% deduction is liable under Section 201 as an assessee-in-default, with interest at 1% per month. Many individuals assume the obligation only exists on exchanges; the statute makes no such exception.

The fourth is forgetting that the threshold is aggregated across the whole financial year, not per transaction. Ten peer-to-peer trades of Rs 6,000 each by a specified person total Rs 60,000, crossing the Rs 50,000 line, so 194S applies even though no single trade reached the threshold. Reconcile your full-year 194S credits in the AIS before filing, and confirm your advance-tax position with the advance tax rules so you are not caught by interest under Sections 234B and 234C.

FAQ

Is the 1% TDS under Section 194S refundable?

It is refundable only to the extent it exceeds your actual tax liability. If your 115BBH tax on the gain is Rs 31,200 and TDS was Rs 5,000, nothing is refunded because you still owe Rs 26,200. If you sold at a loss and had no other tax due, the full 194S deduction would be refundable after you file your return and it reconciles with your Form 26AS and AIS credits.

Does Section 194S apply even if I made a loss on the trade?

Yes. The 1% is deducted on the gross consideration at the time of transfer, regardless of whether you profited. A Rs 3,00,000 sale triggers Rs 3,000 of TDS even if you bought the asset for Rs 3,50,000 and are sitting on a Rs 50,000 loss. You recover that Rs 3,000 as a refund at filing, since 115BBH leaves no tax on a loss and the loss cannot be set off.

Who deducts the tax in a peer-to-peer crypto sale?

The buyer deducts. In the absence of an exchange or broker, the person paying the consideration is the deductor under Section 194S and must withhold 1% before paying the resident seller. Where PAN is not furnished, the rate becomes 20% under Section 206AA, so sellers should always share PAN to keep the deduction at 1%.

Can I set off crypto losses against my salary or capital gains?

No. Section 115BBH prohibits setting off VDA losses against any other income, including salary, house property, or ordinary capital gains, and such losses cannot be carried forward to later years. This is unlike listed-equity capital losses, which do carry forward for eight assessment years.

What is the threshold below which no TDS is deducted?

For a specified person, which includes most salaried individuals and HUFs without large business turnover, the threshold is Rs 50,000 of aggregate consideration in a financial year. For everyone else, including companies and larger firms, it is Rs 10,000. Transfers before 1 July 2022 do not attract TDS but still count towards the threshold for FY 2022-23.

Does being on the new tax regime change the 30% crypto tax?

No. Section 115BBH charges VDA gains at a flat 30% irrespective of whether you are on the old or new regime, because it overrides the normal slab rates entirely. Your slab choice still matters for the rest of your income, which you can compare using the old vs new regime calculator.

Is 194S different from the TDS my exchange already shows?

No, they are the same thing. The 1% your exchange withholds and reports in Form 26QF is the 194S deduction. You do not deduct it again; you simply claim the credit shown in your AIS when you file, after reconciling it against your own transaction records for the year.