Cryptocurrencies and Non-Fungible Tokens (NFTs) have generated enormous interest across the world in the last decade, and India has been no exception. Millions of Indian investors have entered the market, some exploring digital currencies as an investment tool while others experimenting with NFTs as a means of buying and selling unique digital assets.
However, with this excitement has also come a fair share of confusion, particularly when it comes to taxation and regulation. Over the last few years, the Indian government has taken steps to clarify how cryptocurrencies, NFTs, and other forms of virtual digital assets (VDAs) will be treated under Indian law. Yet, many investors still find themselves puzzled by the complexity of these rules.
This article aims to clear up that confusion by breaking down the legal, financial, and regulatory framework surrounding crypto and NFTs in India. We will discuss what exactly counts as a virtual digital asset, how taxation applies, what exceptions exist, how NFTs are treated, and why political and community debates around crypto taxation continue to play such a big role in shaping the industry’s future in India.
Understanding NFTs and Their Role in India
Before diving into taxation, it’s important to fully understand what NFTs are. Non-Fungible Tokens, or NFTs, are essentially digital proof of ownership for a unique underlying asset. They are built using blockchain technology, most commonly on networks such as Ethereum. Unlike fungible tokens such as Bitcoin or Tether, where each unit is interchangeable, NFTs represent something unique and cannot be exchanged one-for-one with another NFT.
NFTs can represent a wide variety of digital and physical assets. These include:
- Digital art, which has become the most popular form of NFTs, enabling artists to monetize their work in new ways.
- Collectibles, such as limited-edition sports cards, music tracks, or exclusive video content.
- Domain names, purchased and secured on the blockchain.
- Virtual game items, like skins, avatars, or land inside metaverse platforms.
- Physical assets, where ownership rights to a real-world object are mirrored on the blockchain.
In India, NFTs gained momentum in 2021–2022 as a wave of digital creators, celebrities, and even cricket leagues launched collections. However, regulatory and tax uncertainty soon followed, particularly once the government introduced rules that placed NFTs within the broader category of virtual digital assets.
Cryptocurrencies and Their Categories
To properly understand Indian crypto laws, it is useful to divide cryptocurrencies into categories. Broadly, cryptos fall into six types:
- Non-fiat-backed currencies such as Bitcoin (BTC) and Monero (XMR), which are independent of any central authority.
- Fiat-backed currencies, better known as stablecoins, such as Tether (USDT), which maintain their value by being pegged to a real-world currency like the US dollar.
- Utility coins such as Ether (ETH) or Filecoin (FIL), which are used to power decentralized applications or pay transaction fees.
- Governance tokens like Uniswap (UNI), which allow holders to vote on decisions within decentralized projects.
- NFTs not backed by tangible assets, where the value is tied to the uniqueness of the digital collectible itself.
- NFTs backed by tangible assets, where the blockchain token represents a legal right to a real-world item.
Under Indian law, the first five categories all fall under the definition of Virtual Digital Assets (VDAs) as per section 2(47A) of the Income-tax Act.
Virtual Digital Assets Under Indian Law
The recognition of VDAs in the Income-tax Act was a pivotal moment. It provided clarity to investors but also introduced new obligations. Some of the most important legal provisions relating to VDAs are:
- VDAs are treated as property under section 56 of the Income-tax Act, which means income earned from them can be classified as “income from other sources.”
- TDS obligations exist under section 194S, where one percent tax is deducted at source on transactions involving VDAs. This provision was introduced to track crypto transactions more effectively.
- Guidelines have been issued by the government clarifying when TDS applies and when it does not. For example, transactions on recognized exchanges may follow a different process compared to peer-to-peer transfers.
- Special provisions under section 206AB apply to cases where the seller has not filed income-tax returns, further increasing the compliance burden.
- Taxation at 30 percent under section 115BBH applies to income from VDAs. This tax is flat, without the benefit of standard deductions or set-offs against other income.
This framework makes India one of the more heavily taxed jurisdictions when it comes to cryptocurrencies and NFTs, something that has raised concerns among industry stakeholders.
What Does Not Qualify as a VDA?
The government has clarified that not every digital instrument is a VDA. For example:
- Gift cards and vouchers are excluded.
- Mileage points earned from airlines are not considered VDAs.
- Reward points or loyalty programs offered by retailers are exempt.
- Subscriptions to websites, platforms, or applications do not fall under the VDA definition.
These exceptions are important because they ensure that ordinary consumer benefits are not mistakenly taxed as crypto assets.
NFTs Backed by Tangible Assets
One of the trickiest areas of law is how NFTs backed by real-world items are treated. According to the Indian government, an NFT will not be considered a VDA if it satisfies two conditions:
- The transfer of the NFT results in the transfer of ownership of the underlying tangible asset.
- The transfer of ownership of the underlying asset is legally enforceable.
For example, if an NFT represents ownership of a physical painting, and the legal transfer of that painting is enforceable under contract law, then the NFT itself may not be treated as a taxable VDA. This distinction is vital for industries exploring blockchain applications for real estate, logistics, or luxury goods authentication.
The Political and Community Debate
Not everyone agrees with the current tax structure. In March, Ritesh Pandey, a parliamentarian from the Bahujan Samaj Party (BSP), raised strong concerns in the Lok Sabha. He argued that the one percent TDS requirement could promote “red tapism” while discouraging innovation in this emerging asset class.
The crypto community has echoed similar concerns, pointing out that such a heavy compliance burden could push transactions underground, encourage capital flight, or drive Indian startups abroad. They argue that a more balanced framework is needed to encourage responsible innovation while still ensuring the government collects its fair share of tax revenue.
How Crypto Taxation Affects Investors
For everyday investors, these laws have very real consequences. Anyone buying or selling crypto on Indian exchanges is now subject to TDS deductions, which means their profits shrink before they even calculate income tax. The flat 30 percent rate under section 115BBH also makes it less attractive compared to other investment options such as equities or mutual funds, which enjoy more favorable taxation.
Moreover, the inability to offset crypto losses against gains from other assets is another major disadvantage. For example, if an investor makes a profit in Bitcoin but a loss in Ethereum, those cannot be netted against each other for tax purposes.
Compliance Challenges and Future Outlook
The compliance requirements around VDAs are still evolving. Exchanges are expected to deduct TDS, maintain transaction records, and provide annual reports. Peer-to-peer transactions, however, remain harder to monitor, raising questions about enforcement.
The future of crypto regulation in India will depend heavily on how the government balances innovation with control. While the current laws provide a starting point, the debate is far from over. Industry bodies, think tanks, and parliamentarians continue to lobby for a more nuanced approach.
Many experts believe India could eventually adopt a licensing regime for exchanges, tighter KYC requirements, and a central bank digital currency (CBDC) framework that coexists with private cryptocurrencies.
Conclusion
Crypto and NFTs have created both excitement and complexity in India. By formally recognizing them as Virtual Digital Assets, the Indian government has taken an important step toward regulation, but the heavy tax burden has left investors and industry stakeholders seeking reforms.
NFTs backed by tangible assets enjoy certain exemptions, while non-VDA digital benefits such as loyalty points remain unaffected. However, the broader debate around innovation, taxation, and compliance will likely continue to shape India’s crypto future in the coming years.
For now, anyone participating in the crypto or NFT market in India must carefully follow the existing laws, maintain clear records, and be prepared for evolving regulatory requirements. As the ecosystem matures, the hope is that India will develop a more balanced policy framework that encourages growth while ensuring financial security and compliance.
