Introduction
India currently treats cryptocurrencies as Virtual Digital Assets (VDAs)—not legal tender but taxable investment assets under the Income Tax Act, 1961. Regulatory control remains dispersed across multiple bodies—FIU‑IND, RBI, CBDT, SEBI—while consumers face steep taxes (30 % on gains), transaction levies (1 % TDS), and uncertainty about a legal framework. A discussion paper is expected in June 2025, followed by potential legislation in late 2025 or early 2026, aiming to bring structure and oversight to this booming ecosystem.
Current Legal & Taxation Framework
VDA Tax Regime & Reporting Obligations
Under Finance Act 2022, crypto profits are taxed at 30 % and a 1 % TDS is levied on transactions over ₹10,000. Losses cannot be offset across crypto trades or other income sources, resulting in a sharp 90 % fall in domestic trading volumes.([turn0search11]turn0search10])
The Budget/Income Tax Bill 2025 introduces a formal definition of VDAs and a new section 285BAA, mandating that prescribed “reporting entities” (most likely exchanges and intermediaries) furnish transaction data to tax authorities. The regime becomes effective from 1 April 2026, with a 30-day correction window for reporting errors.([turn0search0]turn0search1]turn0search8])
AML/Compliance & FIU‑IND Oversight
Crypto exchanges and wallet providers must register with the Financial Intelligence Unit (FIU‑IND), follow AML/KYC norms, maintain records, and submit suspicious transaction reports. Major platforms like Binance, Coinbase, CoinSwitch, and CoinDCX are already FIU‑registered.([turn0search10]turn0search5])
Upcoming Discussion Paper & Draft Bill
June 2025 Discussion Paper
India is set to release a policy discussion paper in June 2025, aimed at exploring regulatory pathways and engaging stakeholders—from exchanges and fintech experts to legal scholars. This is the government’s first step toward formalizing policy for VDAs.([turn0search2]turn0search4])
Proposed Legal Structure
Though not yet introduced, drafts suggest:
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A standalone Crypto-Asset Regulation Act, defining VDAs, issuers, stablecoins, and service providers.
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Regulation by SEBI for security tokens and platforms; RBI for fiat-backed stablecoins and systemic oversight.
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Consumer protection provisions including licensing, KYC, data norms, token whitepaper requirements, and service provider liability.
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Government authority to prohibit tokens with adverse risk and establish a cross-regulatory council.([turn0search3]turn0search5])
Global Alignment & Tax Transparency
India has adopted the Crypto‑Asset Reporting Framework (CARF) endorsed by the OECD, enabling automatic exchange of information between jurisdictions about user holdings and transactions. Reporting entities must collect tax residency and identification data to support global tax compliance and cross-border oversight.([turn0search20])
Challenges & Regulatory Frictions
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Regulator Overlap: With FD, FIU, RBI, SEBI, and MeitY involved, overlapping mandates complicate implementation and clarity.([turn0search5])
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Tax Burden Deterring Innovation: The flat 30 % tax and inability to offset losses deter retail and institutional engagement, pushing many Indian investors offshore.([turn0search9]turn0search14])
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Uncertainty of Future Use Cases: Definitions around utility tokens, NFTs, DeFi, staking, and CBDC remain unclear and technically divergent.([turn0search5]turn0search18])
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Balancing Oversight & Innovation: Overregulation may stifle blockchain-based public goods such as IndiaChain or ONDC visuals; under-regulation risks consumer harm and money laundering.([turn0search3]turn0search10])
Opportunities & Reform Levers
| Reform Area | Recommendation |
|---|---|
| Legislation | Pass a standalone crypto‑asset law dividing regulatory roles between RBI, SEBI, and FIU‑IND. |
| Tax Adjustment | Lower transaction tax (e.g. from 1 % to 0.1 %) and allow partial loss set-off during transitional period. |
| Consumer Safeguards | Licensing of exchanges, token disclosures, fraud penalties, investor protection. |
| Technology Neutrality | Recognize CBDC (Digital Rupee) while permitting innovation in DeFi/NFT under sandbox rules. |
| Reporting & AML Alignment | Stick with CARF framework for cross-border transparency and FATF alignment. |
| Regulatory Coordination | Establish an inter-regulatory council for coherent rule-making and enforcement. |
Implications of Reform
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Market Revival: Clear legislation and moderate taxation can bring offshore volume back onshore and support retail expansion.
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Global Stakeholder Confidence: A stable legal framework and CARF adherence can help India host global exchanges like Coinbase and Binance under compliance norms.([turn0news13]turn0search20])
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Financial Stability: RBI oversight, particularly for stablecoins and systemic providers, can mitigate macro-financial and currency risks.([turn0search5]turn0search10])
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Inclusive Innovation: Tokenization of real-world assets and blockchain infrastructure can support small-town commerce and public digital infrastructure if properly regulated.
Conclusion
India stands at a critical inflection point in charting its crypto policy: moving from an ambiguous status quo to structured regulation. The Income Tax Bill 2025 and fiscal provisions are confidence-building steps, but the real shift will come with the June 2025 discussion paper and a comprehensive Crypto Regulation Bill.
A balanced legal framework—defining VDAs, licensing service providers, enabling innovation, aligning with CARF, and protecting consumers—will allow India to harness crypto‑asset potential while preserving financial stability and legal certainty. With global standards evolving, India must seize the momentum to regulate rather than restrict, to build clarity on-chain and confidence off-chain.