New Delhi: India has taken a careful approach to virtual digital assets (VDAs). Recently, RBI Governor Sanjay Malhotra reiterated that India remains cautious about VDAs while supporting technologies such as distributed ledgers and tokenisation. He also stressed the importance of preserving trust, financial integrity and effective oversight as new technologies enter the financial system.
The same principle is relevant to the taxation of VDAs. India currently imposes a 1% Tax Deducted at Source (TDS) on VDA transactions, along with a 30% tax on capital gains. When introduced, the 1% TDS was intended to create a record of transactions and improve tax visibility in a fast-growing market. It was therefore not simply a revenue measure, but also a tool for tracking activity and strengthening compliance.
The challenge is that the tax has also influenced where Indians choose to trade. Indian exchanges are required to deduct 1% of the transaction value whenever a user transfers their asset. For an investor who trades frequently, repeated deductions can prove costly by limiting the capital available for the next transaction. Offshore platforms serviang Indian users, however, do not create the same immediate tax friction because they do not operate under India’s tax norms or provide the same level of user-level tax data.
Over time, this difference has created an uneven playing field between compliant Indian platforms and offshore platforms. The TIOL Knowledge Foundation’s second report on the “Impact of Taxation on Virtual Digital Assets in India” illustrates the scale of the problem. The report states that following the introduction of the 1% TDS, most users shifted to offshore platforms, causing trading volumes on Indian platforms to shrink by almost 90%. Despite the sector continuing to grow, domestic exchanges now facilitate barely 5.4% of India’s crypto trading volume, down from approximately 60% prior to 2022.
The report also estimates that uncollected TDS from offshore exchanges for FY 2025-26 alone stands at roughly ₹9,001 crore, approximately 17.6 times the entire domestic TDS collection of the previous year.
This matters for compliance as much as it does for the domestic industry. Indian exchanges registered with the Financial Intelligence Unit operate within India’s reporting and anti-money laundering framework. Transactions taking place through these platforms are therefore easier for Indian authorities to identify, monitor and supervise. When activity moves to offshore platforms, particularly those outside India’s regulatory reach, obtaining the same level of information becomes more difficult.
The tracking of VDA transactions is necessary and should continue. However, these numbers raise an important question: how can India preserve transaction visibility without creating incentives for activity to move outside the country’s regulatory perimeter?
One proposal is to reduce the TDS rate from 1% to 0.01%. The TIOL report argues that a lower TDS rate would help retain visibility on transactions while substantially reducing the cost of trading through compliant Indian platforms. A lower rate could incentivise users to return to domestic platforms and potentially increase tax revenue by bringing more trading activity back into the domestic market.
A lower TDS, therefore, would not necessarily dilute oversight. Instead, it could help bring more VDA activity back onto compliant domestic platforms, expand the share of transactions reported to Indian authorities and strengthen the industry’s overall tax contribution.
As India continues to balance innovation with financial stability, the priority should be to ensure that compliant domestic platforms are not placed at a structural disadvantage to offshore alternatives. Creating a more level playing field could help keep more VDA activity within India’s regulatory perimeter, where transactions are easier to monitor, report and tax.
