Virtual Digital Assets in India: Tax Obligations, PMLA Compliance, and the Emerging Regulatory Framework

India does not yet have a standalone cryptocurrency legislation, but virtual digital assets are now subject to a multi-layered regulatory regime spanning the Income-tax Act, the Prevention of Money Laundering Act, and an evolving Securities and Exchange Board of India framework. Understanding these overlapping obligations is essential for exchanges, brokers, and individual investors who hold or trade in cryptocurrencies and other digital tokens.

Taxation of Virtual Digital Assets

Section 115BBH of the Income-tax Act, 2025 imposes a flat 30 per cent tax on income from the transfer of any virtual digital asset. No deduction is allowed except the cost of acquisition, and losses from VDA transactions cannot be set off against income from any other source, including other VDA transactions. Section 194S requires 1 per cent tax deduction at source on consideration paid on transfer of VDAs. The TDS threshold is Rs 50,000 per financial year for specified persons, such as individuals or HUFs whose business turnover falls below the tax audit threshold, and Rs 10,000 per financial year for all other persons.

PMLA Obligations for VDA Service Providers

By notification S.O. 1072(E) dated 7 March 2023, the Ministry of Finance brought virtual digital asset service providers within the scope of the Prevention of Money Laundering Act, 2002. Entities carrying on exchange of VDAs for fiat currencies, exchange between different forms of VDAs, transfer of VDAs, safekeeping or administration of VDAs, or provision of financial services related to VDA offerings are now classified as reporting entities under the PMLA. They must maintain records, appoint a Principal Officer, and report suspicious transactions to the Financial Intelligence Unit. From January 2026, the FIU has mandated Enhanced Due Diligence for all registered crypto exchanges, requiring identity verification even for previously anonymous users.

SEBI's Multi-Regulator Framework

Since April 2025, SEBI has been working towards a multi-regulatory model for VDA oversight under which different categories of digital assets would be supervised by different regulators based on their economic characteristics. VDAs that function like securities would fall under SEBI's jurisdiction. Those that function like currencies or payment instruments would remain with the Reserve Bank of India. No comprehensive VDA Act has been enacted as of March 2026, but the regulatory perimeter has been progressively expanded through the PMLA notification and SEBI's active monitoring of crypto tokens that resemble securities.

Practical Takeaways

Indian residents trading in VDAs must disclose all VDA transactions in their income tax returns even if the overall liability is nil. The 30 per cent flat tax applies to each transfer and losses cannot be carried forward to subsequent years. VDA exchanges operating in India must register with the FIU, implement KYC and AML procedures, and report suspicious transactions. Foreign exchanges accepting Indian customers without FIU registration are in violation of India's PMLA obligations, and Indian residents using such unregistered platforms face regulatory exposure. The framework is evolving rapidly and participants should monitor SEBI and CBDT circulars closely.