TDS Under Section 194S of Income Tax Act: Applicability, Threshold Limit, Rates in full details

Section 194S of Income Tax Act:- Keeping up with the changing world of finance and taxation is crucial. In the 2022 budget, Finance Minister Smt. Nirmala Sitharaman introduced a significant update to the Income Tax Act known as Section 194S for TDS. This new section 194S of Income Tax Act focuses on taxing virtual digital assets (VDAs) and cryptocurrencies, aiming to improve government control over these transactions. In this guide, we’ll break down everything you need to understand about the taxation of virtual digital assets.

What is Section 194S of Income Tax Act?

In the 2022 budget, Finance Minister Smt. Nirmala Sitharaman brought in a new TDS section called 194S. This section is all about applying TDS (Tax Deducted at Source) to the transfer of virtual digital assets and cryptocurrencies. The idea behind this is to help the government keep an eye on these transactions. So, they introduced a new rule where 1% of the value will be deducted if the transfer involves a virtual digital asset worth more than Rs. 10,000.

Under which head is the income subjected to TDS as per Section 194S categorized?

The income subject to TDS under Section 194S is categorized under the “Income from Other Sources” head. In more straightforward terms, if you engage in transactions involving virtual digital assets (VDAs) or cryptocurrencies and TDS applies as per Section 194S, the resulting income from these transactions will be classified under the “Income from Other Sources” category for tax purposes. This classification is crucial for determining the correct tax treatment based on the regulations outlined in the Income Tax Act.

TDS rate under Section 194S for transactions involving virtual digital assets or cryptocurrencies?

The TDS (Tax Deducted at Source) rate under Section 194S is 1%. This means that if you’re involved in transactions related to virtual digital assets (VDAs) or cryptocurrencies and the provisions of Section 194S apply, 1% of the transaction value will be deducted as TDS. It’s important to be aware of this rate to ensure compliance with tax regulations when engaging in such transactions.

Understanding Section 194S: Applicability of TDS on Virtual Digital Asset Transactions

TDS (Tax Deducted at Source) under Section 194S is applicable when you’re involved in transactions related to virtual digital assets (VDAs) or cryptocurrencies. In simple terms, if you engage in such transactions, the provisions of Section 194S come into play, requiring the deduction of a specified percentage (1%) from the transaction value as TDS. It’s essential to be aware of this applicability to ensure compliance with tax regulations in the context of virtual digital asset transactions.

Who is a Specified Person Under Section 194S?

• TDS under Section 194S applies when the payment made for transferring virtual digital assets (VDA) exceeds Rs. 50,000 for specified persons and Rs. 10,000 for others.
• A specified person is an individual or Hindu Undivided Family (HUF) without income from business or profession.
• Individuals or HUFs with business income up to Rs. 1 crore are also considered specified persons under this section.
• Individuals or HUFs with professional receipts up to Rs. 50 lakhs fall under the category of specified persons for the purpose of TDS under Section 194S.
• These specifications help in determining when TDS obligations come into play based on the nature and extent of income for individuals and HUFs involved in VDA transactions.

Who Should Deduct TDS Under Section 194S?

TDS Responsibilities in Different VDA Transfer Scenarios: A Simplified Guide

1. Peer-to-peer (P2P) transfer of VDA:
   • The buyer is in charge of deducting TDS at a rate of 1%.
   • The buyer is required to file Forms 26Q and 26E.
2. Transfer of VDA through Exchange (Not Owned by Exchange):
   • Case 1: Payment to Exchange Directly or via Broker
     • The exchange is responsible for TDS deductions.
     • Only the exchange has the authority to deduct the tax..
     • Form 26Q filing is required by the exchange.
   • Case 2: Payment via Broker between Seller and Exchange
     • Both the exchange and the broker share TDS responsibilities.
     • The broker deducts TDS if there’s a written agreement.
     • Form 26Q by the broker, and Form 26QF by the exchange.
3. Transfer of VDA through Exchange (VDA Owned by Exchange):
   • Case 1: Payment to Exchange via Broker
     • The broker takes the lead in TDS deduction.
     • Exchanges can pay tax per agreement.
     • Form 26QF and ITR filed by the exchange.
   • Case 2: Direct Payment to Exchange by Buyer
     • The buyer is responsible for TDS deductions.
     • Exchange can pay tax if agreed.
     • Exchange files for Form 26QF and ITR.
4. Transfer of VDA in Kind:
   • Case 1: Non-Exchange Transaction
     • The buyer deducts TDS.
     • Consideration is given in kind with the provided challan.
     • Forms 26Q and 26QE were filed by the buyer.
   • Case 2: Transaction via Exchange
     • The exchange takes TDS responsibility.
     • Tax is deducted based on a written agreement.
     • Form 26Q filed by the exchange.

Under Section 194S:- Issue of TDS Certificate

When TDS (Tax Deducted at Source) is deducted on the transfer of virtual digital assets (VDA), the deductor provides a TDS certificate to the deductee in Form 16A. The deductee can use this certificate to claim credit during the filing of their Income Tax Return (ITR).

The introduction of this TDS section outlines clear rules for these transactions, showing the government’s commitment to a more regulated financial system.

Whether you’re a buyer, seller, exchange, or broker, it’s crucial to follow these rules. Make sure to file TDS returns on time and stay updated on the latest tax changes. If you have questions about TDS under Section 194S, seeking professional advice is a good idea.