194S TDS – Virtual Digital Assets, Rate & Deduction Rules

Key Takeaways

1. Section 194S mandates 1% TDS on consideration paid for the transfer of crypto or NFTs, with deduction triggered only when payment for the transfer is made.
    
2. Under Section 194S, TDS is deducted by the person paying consideration, usually the buyer; exchanges or brokers deduct only if paying or contractually assigned.
    
3. To avoid losing TDS credit, report VDA income correctly in Schedule VDA, match Form 26AS/AIS, and file the right ITR form.

Bonus Point: Effective from July 1, 2022, Section 194S introduced 1% TDS on consideration paid for transferring virtual digital assets like cryptocurrencies and NFTs, ensuring early tax tracking.

Bought or sold crypto or NFTs and noticed a small tax cut before payment? That’s Section 194S TDS at work, designed to track digital asset transactions and ensure taxes are captured right when money changes hands.

Section 194S mandates 1% TDS on crypto and NFT transfers. Like a digital toll gate, a small tax is deducted instantly to track and monitor transactions.

Let’s say Riya buys cryptocurrency worth ₹1,00,000 from a resident seller. Before paying, she deducts ₹1,000 as TDS and pays ₹99,000 to the seller. The deducted amount is deposited with the government and later reflected in tax records.

What Is Section 194S TDS?

Section 194S steps in whenever virtual digital assets like crypto or NFTs change hands. In simple terms, if you’re paying a resident for transferring a digital asset, you must pause before paying the full amount. 

The law requires you to deduct 1% TDS on the transaction value and deposit it with the government. Think of it as the tax department’s way of tracking digital asset trades right at the payment stage.

Who Is the Deductor Under Section 194S?

Section 194S clearly lays down who must deduct TDS when a virtual digital asset (VDA) like crypto or NFTs is transferred. The rule focuses on who makes the payment and how the transaction is structured. Since digital asset trades can happen in many ways, the deductor changes based on the situation.

The person responsible for paying consideration for a VDA transfer must deduct 1% TDS. However, depending on whether the deal happens directly, through an exchange, or via a broker, the responsibility can shift.

Deductor in Different Scenarios
 

• OTC (Over-the-Counter) Deals: When the buyer and seller deal directly and know each other, the buyer deducts TDS.
• VDA-for-VDA Exchange: When assets are swapped, both parties may need to deduct TDS as each is a buyer and seller.
• Exchange Pays Seller Directly: If the exchange pays the seller, the exchange deducts TDS.
• Payment via Broker: Both the exchange and the broker are liable, but a written agreement can shift responsibility to the broker.
• Exchange-Owned VDA: The buyer or broker deducts TDS, unless the exchange agrees in writing to pay it.
• VDA Swap via Exchange: Buyer and seller are primarily responsible, but the exchange may deduct TDS under the agreement.
• Payment Gateways: Payment gateways are not deductors under Section 194S. TDS applies only to the person paying consideration; gateways deduct TDS only if they themselves make the payment.

Section 194S ensures that TDS is deducted at the right point, no matter how complex the digital asset transaction is. The key is understanding who pays whom and having clear agreements in place.

What Is Covered Under Section 194S?

Section 194S deals with 1% TDS on payments made for buying or selling virtual digital assets like cryptocurrencies and NFTs. Simply put, whenever money is paid to transfer a digital asset, a small part of it is deducted as tax. 

This rule was introduced to keep a close watch on digital asset transactions in India. It has been applicable since 1 July 2022, making crypto trades more transparent for tax purposes.

194S TDS Rate

Under Section 194S, the rule is refreshingly straightforward. Whenever a virtual digital asset (like crypto or NFTs) is transferred, TDS is deducted at a flat rate of 1% on the transaction value. No surcharge. No health & education cess. What you see is what you deduct.

Key Points at a Glance
 

The higher TDS provisions under Section 206AB have been removed from 01-04-2025, so non-filing history no longer triggers higher rates under 194S.

Let’s understand it with the help of an example

Riya buys cryptocurrency worth ₹1,00,000 from a resident seller.

• She deducts ₹1,000 (1%) as TDS
• The seller receives ₹99,000
• Riya deposits the ₹1,000 with the government

However, if the seller does not provide PAN, TDS shoots up to ₹20,000 (20%).

Section 194S keeps crypto taxation clean, flat, and transparent, but PAN compliance is non-negotiable. Always verify details from official government notifications, as tax laws evolve.

194S TDS – Income Under Which Head in ITR?

Income covered under Section 194S arises from the transfer of Virtual Digital Assets (VDAs) such as cryptocurrencies and NFTs. Under Section 115BBH, this income is taxed at a flat 30% rate, plus applicable surcharge and cess, irrespective of whether the activity is investment-based or trading-based.

The distinction between capital gains and business income does not change the tax rate. It only affects how the income is reported and which ITR form is used. Occasional investors generally report it under capital gains using ITR-2, while frequent or systematic traders report it as business income using ITR-3.

How to Show 194S TDS in ITR?

To correctly claim TDS deducted under Section 194S:

• Choose ITR-2 or ITR-3 (ITR-1 is not allowed)
• Verify TDS details in Form 26AS/AIS
• Report each crypto/NFT transaction in Schedule VDA
• Compute tax under Section 115BBH
• Claim TDS credit in Taxes Paid & Verification

Correct reporting ensures your 194S TDS credit is not lost or questioned.

Conclusion

Section 194S makes crypto and NFT taxation simple but strict. A flat 1% TDS ensures transparency at the transaction stage, while correct reporting in Schedule VDA protects your TDS credit. Clear knowledge of who deducts tax, updated PAN details, and proper matching of Form 26AS/AIS are essential to stay compliant and avoid unnecessary tax notices.

FAQs

Q: What is TDS, and how is it accounted for?

TDS is tax deducted by the payer at the time of payment and deposited with the government, giving the payee credit against their final tax liability.

Q: I have TDS under Sections 194S and 194H, which ITR should I file in 2024?

You should file ITR-3, as Section 194H indicates business/professional income, and 194S VDA income can also be reported there.

Q: Which ITR should I file if TDS is deducted under Sections 194S and 194C?

You should file ITR-3, since having VDA income under Section 194S makes ITR-4 inapplicable, and ITR-3 allows reporting both contract income and crypto transactions.

Q: Do I need to fill Schedule VDA if TDS under Section 194S was deducted only on withdrawing INR from a wallet?

No, if there was no sale or transfer of crypto, Schedule VDA is not required; however, reconcile the 194S TDS in Form 26AS/AIS and explain the withdrawal if sought.

Q: What is the most important thing to remember while filing ITR for Section 194S TDS?

Always report crypto/NFT transactions in Schedule VDA, choose the correct ITR form, and match TDS with Form 26AS/AIS to avoid losing credit or receiving notices.