Virtual Digital Assets and Their Taxation for NRIs

With cryptocurrencies, non-fungible tokens (NFTs), and other digital assets, Virtual Digital Assets (VDAs) in India among investors have emerged as a significant investment avenue. With the rapid growth of the digital asset market, NRIs also started investing in these assets.

Further, recognizing this need, the government of India, through the Finance Act, 2022, for VDA, introduced a taxation system. This provision comes into effect on April 1, 2022, on both individuals and businesses working within the VDAs has created a significant impact.

So, being an investor in VDA, under Schedule VDA, you also need to mention its information in your ITR-2 and ITR-3. Confused? This blog will help you understand all about the virtual digital assets and their taxation for NRIs. So read on and solve all your doubts.

What Are Virtual Digital Assets (VDAs)?

Before moving on to the tax implications of VDA, let's first understand what virtual digital assets are. In simple terms, VDAs are a digital representation of value. It includes popular cryptocurrencies such as Ethereum and Bitcoin, as well as NFTs. Considering this, you can transfer, trade, or use them for several financial activities.

A VDA encompasses any detail, number, token, or code produced through cryptographic or other digital representations. Here, it does not include Indian or foreign currency. Under the provision of (47A) in section 2 of the Income Tax Act, 1961, this definition of VDA was formally introduced. Additionally, the definition was established under the Finance Act of 2022 to cover a wide range of digital assets.

Further, in India, after the 2022 Union Budget, VDAs gained significant popularity. To clarify how tax will be imposed on the profits from these assets, it introduced a taxation structure. However, the regulatory environment of VDA is still evolving.

So, this was all about VDA. Moving ahead, let's know how these assets are taxed in India.

How Are VDAs Taxed in India?

Regardless of the income slab rate of an individual, under section 115BBH of the Income Tax Act, income generated from VDA is subject to a 30% tax rate. This tax rate is imposed on the profits generated from VDAs. It also includes NFTs and cryptocurrencies.

Considering this, only the acquisition cost of VDA is deductible. It does not include the mining or transaction fees in deductible expenses. Additionally, you cannot set off the losses from any other sources from the profits generated from VDAs.

This is how VDAs are taxed in India. Moving on, let's look at the tax obligations of VDA for NRIs.

NRI-Specific Taxability: When Do VDAs Get Taxed in India?

It is well-known that NRIs pay tax only on income that arises, accrues, is received, or is deemed to arise or accrue in India. Considering this, for VDAs, it generally means tax imposed when:

• NRIs cash out or trade on Indian exchanges or via Indian-resident counterparties, such as P2P, INR pairs with Indian users.
• NRIs receive VDA income, such as rewards, salary, or consulting fees, from Indian businesses or residents.

Further, if an NRI using foreign bank accounts entirely buys and sells VDA on foreign exchanges, and the gains from that are not received in India. In this scenario, the profits from those VDAs are generally treated as foreign-sourced and outside the tax scope of India for that year.

However, once you return to India and your resident status from NRI changes to ROR, your global income from VDA becomes taxable in India. Additionally, for your foreign holdings, you may need to provide disclosure.

So, this was all about NRI-specific taxability on VDAs. Moving ahead, now let's know under section 194S, TDS on VDA transactions.

TDS on VDA Transactions: Section 194S

Section 194S states that TDS at the rate of 1% should be deducted from any payment made to an Indian resident for the transfer of VDA. The TDS should be deducted either during the payment or when the bank account of the resident is credited, whichever occurs first. This provision certifies that the collection of tax at the point of transaction reduces the risk of tax evasion.

Additionally, the deducted TDS using Form 26Q or Form 26QE for a specified person should be reported to the Indian government. To ensure accurate records, certify that the TDS is collected, documented correctly, and remitted to the government; it is vital to report it.

Further, along with 30% income tax, a 1% TDS is imposed on all VDA transactions more than INR 10,000 (for non-specified individuals) and INR 50,000 (for specified persons) in a financial year. To improve the VDA tracking, the TDS is deducted at the point of transaction (both sales and purchases). For NRIs, the TDS is generally deducted by the Indian buyers or Indian exchanges on the sale transactions routed through India.

Considering this, under section 194S, a specified person is:

• An individual/HUF having gross receipts/ total sales in a year, immediately preceding the year in which it is transferred, should not be more than INR 50,00,000 for a profession or INR 1 crore for businesses.
• A person not having any earnings under the head Income from Business & Profession.

Moreover, when the consideration is in exchange for another VDA or in kind, or when it is half in cash and in kind, but for the entire transfer, the cash does not fulfill the TDS liability. In this scenario, the individual should pay the tax before such consideration. Additionally, from the provisions under sections 203A and 203AB, specified individuals who made the payment are exempt.

Further, Section 194S states that once tax is deducted under Section 194S, no other TCS/TDS provision will apply to the transaction. However, if tax is deducted under both sections 194O and 194S, then under section 194S, the TDS will also be deducted.

Apart from this, for NRIs, 1% TDS is not a final tax. Under section 115BBH, they still need to pay 30% tax and then claim the tax credit when filing ITR against their total tax obligation. It means that high-income NRI traders on Indian platforms should monitor the impact of liquidity. This is because TDS will be deducted from the gross consideration each time.

This was all about TDS on VDA under section 194S. Moving on, let's see how VDA is reported in the ITR.

Reporting VDAs in the ITR

In the Budget 2022, Schedule VDA in ITR-2 and ITR-3 was introduced by the Indian government. Considering this, all the taxpayers, including NRIs, when filing their ITR, need to report their VDA and their information in Schedule VDA. The schedule states acquisition date, transfer date, cost of acquisition, sale value, and resulting income on which 30% tax is imposed separately from slab income.

It is vital to accurately report this income in your ITR. On VDA transactions, the 1% TDS provides the Indian government with the details of these dealings. Hence, to avoid notices or penalties, it is advisable to mention all your income related to VDA upfront.

Further, NRIs dealing in both foreign and Indian exchanges should maintain detailed trade logs. It includes TDS certificates and INR conversions to negotiate their Schedule VDA with Form 26AS/ AIS. Additionally, should avoid the mismatch notices. It may provide tax relief from double taxation where DTAA applies. However, generally, most treaties do not yet have any VDA-specific article. It creates potential obscurities in interpretation, and most gains often fall under "capital gains" or "other income."

Final Thoughts

Lastly, taxation of Virtual Digital Assets in India is comprehensive but strict, levying a flat 30% tax on capital gains, with limited tax deductions and no loss set-off provisions. Additionally, based on the investor's residency status and the platform or exchange used for transactions, the tax implications vary. Considering this, for Indian residents, all VDA are taxed at 30% regardless of where the transaction occurs. However, VDA taxes India on NRIs for offshore transactions, which may have limited tax exemptions.

Further, if you need any assistance in reporting your VDA in your ITR, connect with Savetaxs. Our team will help you accurately calculate your income and taxes. With us, fill your Schedule VDA accurately and avoid misreporting of it or getting a notice from ITR.