Section 194S of Income Tax Act – TDS on Virtual Digital Assets (VDAs)

What Is Section 194S Of Income Tax Act, 1961?

First things first: any number, code, information, or token created by digital representation or cryptographic techniques that isn't Indian or foreign money is referred to as virtual digital asset (VDA). This definition is in accordance with new provision (47A) in Finance Act of 2022 that is found in Section 2 of Income-tax Act, 1961 (ITA). 

Moreover, taxation on all income from sale of cryptocurrency, virtual currency assets (VDAs), & non-fungible tokens (NFTs) was implemented under Finance Act 2022. Under Section 115BBH of ITA, this will be subject to flat tax rate of 30% (plus cess & surcharges). This is going to take effect on April 1, 2022.

Who Is Responsible For Deducting TDS Under Section 194S?

When specified person's payment for transfer of VDA exceeds ₹ 50,000 during financial year, or ₹ 10,000 in other situations, TDS liability under 194s of income tax act becomes applicable.
In this context, "specified person" refers to: -People or HUFs without income under "profits & gains of business & profession."

• People or HUFs with up to ₹ 1 crore in revenue from their businesses.
• People or HUFs with up to ₹ 50 lakh in professional receipts.

Furthermore, clarification on TDS deduction on VDAs has been provided by Central Board of Direct Taxes (CBDT) in recent guidelines.

Who is a Specified Person Under Section 194S?

A Specified Person under Section 194S generally includes:

• An individual or HUF whose total sales/turnover/gross receipts do not exceed ₹1 crore (business) or ₹50 lakh (profession) in the financial year immediately preceding the year of the VDA transfer; or
• An individual or HUF who does not have any income under the head “Profits and gains of business or profession”.

Why this definition matters: the TDS threshold differs based on whether the buyer/payer is a specified person.

• If the payer is a Specified Person, Section 194S applies when the aggregate consideration paid to a resident seller exceeds ₹50,000 in a financial year.
• For others (non-specified persons), Section 194S applies when the aggregate consideration exceeds ₹10,000 in a financial year.

Provisions Of Section 194S

194s of income tax act mandates that TDS be withheld at rate of 1% from any individual transferring VDA to resident. This deduction must be made at time of payment or when resident's bank account is credited, whichever comes first. Form 26Q is form that should be used to report TDS deducted under 194s to government. Furthermore, TDS must only be withheld if recipient resides in India.
 requirements for reporting such transactions are provided in Form No. 26Q for assessment year (AY) 2022–2023. Likewise, for case of designated individuals, Form No. 26QE has been developed. Furthermore, non-filers of income returns are not subject to Section 206AB provision that allows TDS to be deducted at higher rate.

Rate Of TDS Under Section 194S

Section 194S of Income-tax Act, 1961, introduced TDS (Tax Deducted at Source) on payments related to virtual digital assets (VDAs), including cryptocurrencies & non-fungible tokens (NFTs). Here are key points:
TDS Rate: TDS rate under Section 194S is 1%. If you’re involved in transactions related to VDAs, this means that 1% of transaction value will be deducted as TDS.
A 1% deduction of consideration is required for taxes. Tax must be withheld at rate of 20% if payee fails to provide their PAN.

How Is TDS Under Section 194S Calculated?

Transaction Scenarios:

Transfer through Exchange (not owning VDA):

• If VDA transfer occurs via exchange (which doesn’t own VDA), exchange deducts TDS at 1% & remits balance to seller.
• If multiple parties are involved, buyer or their broker may also be responsible for TDS.

 exchange must furnish quarterly report in Form No. 26QF.

Transfer in Cash through Exchange (not owning VDA):

• Similar to above scenario, but transaction involves cash.
• Exchange deducts TDS at 1% & pays balance to seller.
• If payment is through broker, both parties may deduct tax.
• Alternatively, exchange & broker can agree on TDS responsibility.

When Is TDS Under Section 194S Deducted & Deposited?

194s mandates that TDS be withheld at rate of 1% from any individual transferring VDA to resident. This deduction must be made at time of payment or when resident's bank account is credited, whichever comes first. Form 26Q is form that should be used to report TDS deducted under section 194s of income tax act to government. Furthermore, TDS must only be withheld if recipient resides in India.

Key Features of Section 194S

Here are the main features to understand Section 194S quickly:

• Applies to VDAs: Covers transfers of virtual digital assets such as crypto and NFTs.
• Resident-focused: Triggered when payment is made to a resident for transfer of a VDA.
• TDS rate: 1% on the consideration (not on “profit”).
• Threshold-based:
  • ₹50,000 aggregate threshold for specified persons
  • ₹10,000 aggregate threshold for others
• Non-cash complexity: If consideration is in kind (or partly in kind), tax must be ensured before the transfer is completed.
• Applies even on exchanges: Where VDAs are transacted through exchanges, the compliance mechanism may involve the exchange/broker facilitating deduction and reporting as per applicable guidelines.
• In addition to 115BBH tax: TDS under 194S is a collection mechanism; it does not replace the separate tax treatment applicable to VDA income.

Exemptions Or Thresholds For TDS Under Section 194S

Is there rule that requires every assessee who purchases these VDAs to deduct TDS? No, there are some exceptions to rule. In event that total value of consideration given to resident is less than ₹ 50,000 in given fiscal year, specified person must deduct TDS; in all other cases, threshold limit is ₹ 10,000 in given fiscal year. Additionally, this specified person may be individual or Hindu undivided family (HUF) with turnover from business not exceeding ₹ 1 crore or turnover from profession not exceeding ₹ 50 lakh in previous year, or it may include individual or HUF with no business income.

Consequences Of Not Deducting TDS Under Section 194S

 Act's Section 271C contains penalties for failing to deduct tax at source. According to this section, anyone who has neglected to pay full amount of tax due under section 115-O (Tax on Distributed Profits), deduct any portion of tax as required under Chapter XVII-B (Tax Deduction at Source – TDS), or comply with proviso to section 194B (Tax on Winnings from Crossword, Lottery, Puzzles, etc.) may be penalized with amount equal to tax that they neglected to deduct or pay. Act's Section 276B provides for prosecution in event that taxes under Chapter XII-D (as mandated by Section 115-O) or XVII-B (deduction at source) are not paid to credit of Central Government.

Latest Update on Section 194S

A key update in recent amendments is that the linkage of Section 194S to higher TDS for non-filers (via Section 206AB) has been removed (as part of wider changes in the law). In effect, this reduces one layer of complexity that earlier required checking whether the seller was a “specified person” for higher-rate TDS due to return-filing status.

That said, the core structure remains the same for most taxpayers:

• 1% TDS on consideration for transfer of VDAs to resident sellers, subject to thresholds
• Compliance still hinges on correct valuation (especially for non-cash consideration) and timely deposit/return filing.

Conclusion

Section 194s of income tax act deals with tax implications on commission payments & brokerage fees. This section mandates tax deduction on commission, ensuring that income from brokerage is subject to TDS (Tax Deducted at Source) on commission. Payments to resident agents & remuneration to agents are also covered under this section. This means that any taxation on agent commission must be deducted at source, ensuring proper compliance & reporting.