A trader in a Mumbai co-working space watched a sell order fill as a 1 percent deduction appeared on their ledger, the cut taken before profit was calculated. India now taxes gains from virtual digital assets at a flat 30 percent and requires a 1 percent Tax Deducted at Source on each transfer. The Central Board of Direct Taxes reported that an automated compliance sweep in mid-June 2026 uncovered ₹888.82 crore, about $104 million, in undisclosed crypto income and produced more than 44,000 notices. Taxpayers must meet the ITR filing deadline for the 2025-26 financial year, which falls on July 31, 2026.
On an exchange dashboard the 1 percent TDS posts as a separate line at transfer time, effectively locking up working capital because the levy is withheld on every transaction rather than settled at year-end. The law behind that withholding is Section 194S, and it forces tax to move with each transfer or sale of a Virtual Digital Asset. That change, together with a flat 30 percent tax on VDA gains regardless of an investor's income slab, reshapes the cash flow and compliance burden for households, active retail traders and exchanges.
What the rules require
The tax code is strict about what you can deduct when you calculate gains. Only the cost of acquisition is allowed as a deduction, and taxpayers may not set off losses across different crypto assets. Typical trading costs such as brokerage fees or internet bills aren't permitted deductions. Under the updated filing requirements taxpayers must disclose transaction-level detail on Schedule VDA, covering individual trades, token swaps, transfers between wallets and disposals. Aggregate-only reporting is no longer adequate because the Income Tax Department has ramped up automated data matching that links exchange records, TDS certificates and annual information statements to returns.
Exchanges registered with Indian authorities now record and pass user-level transaction data to the tax department under updated reporting rules. Where TDS has been deducted, taxpayers should claim the credits in their annual return by matching entries against Form 26AS and other tax reports. If there are mismatches taxpayers may need to file corrected returns or respond to formal notices. The Central Board of Direct Taxes said its mid-June 2026 sweep used those automated comparisons to find ₹888.82 crore in unreported VDA income and to issue more than 44,000 notices.
How to prepare your return
Practical filing begins with record discipline and reconciliation. First, consolidate complete transaction histories from every platform you used during the financial year, including international exchanges, and reconcile INR deposits and withdrawals where needed. Second, categorise each entry as a buy, sell or transfer, and for every sale identify date of acquisition and date of transfer so you can calculate the gain based only on acquisition cost. Third, cross-check TDS credit entries against Form 26AS and reconcile any mismatches with exchange-provided tax reports. Fourth, prepare Schedule VDA with transaction-level disclosures: individual trades, swaps, wallet transfers and disposals must be listed, not summarised.
Many Indian exchanges supply tax-ready reports that ease reconciliation, but records from offshore platforms will typically require manual work. When TDS has been deducted retain the exchange certificate and ensure the amount is reflected in Form 26AS so you can claim the credit in ITR-2 or ITR-3. Where discrepancies remain you may need to submit a corrected return or answer a notice.
The department's automated systems can also trigger reassessments for earlier financial years, so incomplete or informal reporting in prior years has become a live exposure.
The compliance posture is clearly broader than a single filing season. The Income Tax Department and the Central Board of Direct Taxes have automated the linkage between exchange data and taxpayers' returns, creating a data-driven enforcement environment. That's what produced the mid-June discovery of ₹888.82 crore in unreported VDA income and the wave of notices to more than 44,000 accounts. For active traders that means reporting must match exchange records precisely, or the automated checks will surface inconsistencies.
Finally, plan for cash flow effects. Because Section 194S withholds 1 percent at each transfer the levy can lock up capital on every trade. Traders and smaller households should factor in that withholding when they calculate liquidity needs for trading and settling liabilities for the year.
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The next fixed milestone is the July 31, 2026 filing deadline for returns that include VDA disclosures on ITR-2 or ITR-3. Reconcile Form 26AS with exchange TDS certificates now, and expect automated notices or reassessments if records do not match.
This article was created with AI assistance.
