What is Section 194S of the Income Tax Act?

What is Section 194S of the Income Tax Act?

Section 194S – TDS on Transfer of Virtual Digital Assets (VDAs)

This section says that whenever someone transfers (sells or gives) a virtual digital asset (like cryptocurrency, NFTs, etc.), the person making the payment must deduct Tax Deducted at Source (TDS).

Key Points:

  1. Who deducts TDS?
    • The person who pays for buying the VDA must deduct TDS.
  2. Rate of TDS:
    • 1% of the payment amount.
  3. When to deduct?
    • At the time of making the payment, or
    • At the time of crediting the amount to the seller (whichever happens first).
  4. Exemptions (when TDS is not required):
    • If the payment in a financial year does not cross:
      • ₹50,000 (for individuals/HUFs who are not in business or whose turnover is below audit limit),
      • ₹10,000 (for others).
  5. Special Rule for Exchanges/Platforms:
    • If the transaction happens through an exchange, the exchange may need to deduct the TDS instead of the buyer.
  6. No double deduction:
    • If TDS has already been deducted once under this section, it should not be deducted again for the same transaction.

👉In short:
Whenever you buy crypto or any other digital asset, the buyer (or the exchange) must deduct 1% TDS and deposit it with the government, provided the payment crosses the specified limits.

In Other Words:

Section 194S – Tax Deduction at Source on Transfer of Virtual Digital Assets (VDAs)

  1. Obligation to Deduct Tax
    Any person who pays a sum to another person for the transfer of a virtual digital asset shall deduct income tax at the rate of one percent (1%) of such sum.
  2. Timing of Deduction
    The deduction shall be made at the time of:
    • crediting the sum to the account of the payee, or
    • making the payment,
      whichever is earlier.
  3. Threshold Limits
    No tax shall be deducted under this section if the total value of consideration paid during the financial year does not exceed:
    • ₹50,000, where the payer is an individual or Hindu Undivided Family (HUF) not carrying on business or profession, or carrying on business/profession with turnover below the audit limit;
    • ₹10,000 in any other case.
  4. Responsibility in Case of Exchanges/Marketplaces
    Where the transfer of a virtual digital asset takes place through an exchange, and the exchange either itself pays the consideration or facilitates the payment, the exchange shall be responsible for deducting the tax.
  5. Avoidance of Double Deduction
    If tax has already been deducted under this section for a transaction, no further deduction shall be required on the same transaction.
  6. Other Provisions
    The provisions of this chapter relating to tax deduction at source shall apply, so far as may be, to deductions under this section.

Practical Explanation of Section 194S (TDS on Crypto / Virtual Digital Assets)

  1. What this section is about
    • It applies to transactions involving Virtual Digital Assets (VDAs) like cryptocurrencies, NFTs, and similar digital assets.
    • Whenever you buy a VDA, the person making the payment (buyer or exchange) must deduct 1% TDS before paying the seller.
  1. When TDS is deducted
    • TDS is deducted at the time of payment or when the amount is credited to the seller’s account, whichever comes earlier.
  1. How much TDS to deduct
    • 1% of the total payment amount.
  1. Exemptions (small transactions don’t need TDS)
    • If you are an individual or HUF (not running a business, or running one below audit limit):
      • No TDS if the total yearly payments for VDAs are up to ₹50,000.
    • For everyone else:
      • No TDS if the total yearly payments are up to ₹10,000.
  1. Transactions through exchanges/platforms
    • If you’re buying through a crypto exchange:
      • The exchange itself usually deducts and pays the TDS.
    • This avoids multiple parties deducting tax for the same deal.
  1. Key things to remember
    • The buyer (or exchange) must deduct the tax, not the seller.
    • If TDS is already deducted once on the transaction, it won’t be deducted again.
    • The seller can claim the deducted TDS while filing their income tax return.

👉 In simple words:
When you buy crypto or NFTs, 1% TDS is cut from the payment (unless it’s a small amount within exemption limits). If you use an exchange, they usually handle this for you.

Alright, let’s go with a real-life example so Section 194S feels crystal clear. 👇

🔹 Example 1 – Individual Buying Crypto

  • You buy Bitcoin worth ₹1,00,000 from a seller.
  • As per Section 194S, 1% TDS must be deducted.
  • So, you pay:
    • Seller = ₹99,000
    • Government (TDS) = ₹1,000
  • Later, the seller can claim this ₹1,000 as credit when filing their income tax return.

🔹 Example 2 – Through a Crypto Exchange

  • You buy Ethereum worth ₹50,000 via an exchange.
  • The exchange deducts ₹500 (1%) as TDS and pays ₹49,500 to the seller.
  • The exchange then deposits that ₹500 with the government on your behalf.
  • You don’t need to worry about filing the TDS separately — the exchange does it.

🔹 Example 3 – Small Buyer (Exemption Applies)

  • You’re a student who casually buys NFTs worth ₹20,000 in a year.
  • Since you are an individual not running a business and the total is below ₹50,000, no TDS is required.

✅ Takeaway:

  • Who pays TDS? Buyer (or exchange, if used).
  • How much? Always 1%.
  • When exempt? If total yearly purchases are below ₹50,000 (for small individual/HUF buyers) or ₹10,000 (for others).