As the Income Tax Return (ITR) filing deadline of 31 July approaches, cryptocurrency investors should carefully review their tax records before submitting their returns. One of the most important aspects of crypto taxation is the 1% Tax Deducted at Source (TDS) under Section 194S of the Income Tax Act, 1961.
Many taxpayers mistakenly believe that this 1% TDS is an additional tax payable on cryptocurrency transactions. In reality, it is only an advance tax deducted at the time of transfer of a Virtual Digital Asset (VDA). If the TDS deducted exceeds the investor’s actual income tax liability, the excess amount can be claimed as a refund while filing the Income Tax Return.
This article explains when crypto investors are eligible for a TDS refund, the precautions to take while filing the ITR, and the common mistakes that may delay refunds.
Understanding the 1% TDS on Cryptocurrency Transactions
The Finance Act introduced Section 194S to ensure proper reporting and tax compliance for transactions involving Virtual Digital Assets such as cryptocurrencies and NFTs.
Under this provision, the buyer or the crypto exchange deducts 1% TDS on the total transaction value at the time of transfer. Importantly, this deduction is calculated on the gross sale consideration and not on the profit earned by the seller.
This means that TDS is deducted irrespective of whether the investor has made a profit or incurred a loss on the transaction.
For example, if an investor purchases cryptocurrency for ₹2,00,000 and later sells it for ₹1,80,000, resulting in a loss of ₹20,000, the buyer or exchange is still required to deduct 1% TDS on ₹1,80,000. Therefore, the investor suffers TDS even though no taxable gain has been earned.
When Can a Crypto Investor Claim a TDS Refund?
Since TDS under Section 194S operates as an advance tax, it is adjusted against the final income tax liability while filing the ITR.
A refund becomes available in situations where:
- The total tax liability is lower than the TDS already deducted.
- The investor has incurred losses or has little taxable income.
- The investor’s overall income falls below the taxable limit.
- Excess TDS has been deducted due to multiple transactions during the financial year.
After computing the total tax liability, if the TDS credit exceeds the tax payable, the Income Tax Department processes the excess amount as a refund, provided the return has been correctly filed.
Verify TDS Credit Before Filing Your Income Tax Return
Before filing the return, investors should carefully verify that the TDS deducted by crypto exchanges has been correctly reflected in their tax records.
The following documents should be checked:
- Form 26AS
- Annual Information Statement (AIS)
- TDS certificates issued by the crypto exchange or deductor
The amount of TDS claimed in the Income Tax Return should exactly match the amount reflected in Form 26AS. Any mismatch may result in denial of TDS credit or delay in processing the refund.
Correct Reporting of Crypto Transactions
Investors should ensure that every taxable crypto transaction is accurately disclosed in the Income Tax Return.
The sale consideration reported under Schedule VDA should match the transaction value on which TDS was deducted.
Failure to disclose all taxable transactions or reporting incorrect values may trigger notices from the Income Tax Department and delay refund processing.
Maintaining detailed transaction records throughout the year significantly reduces the possibility of reporting errors.
Choosing the Correct ITR Form
Selecting the appropriate Income Tax Return form is equally important.
Generally:
- ITR-2 is applicable where cryptocurrency income is taxable under the head Capital Gains.
- ITR-3 is generally applicable if crypto trading constitutes a business activity and the income is taxable under the head Profits and Gains of Business or Profession.
Choosing the wrong ITR form may lead to defective return notices or unnecessary scrutiny.
Taxpayers should evaluate the nature and frequency of their crypto transactions before deciding the applicable return form.
Reconciling Transactions Across Multiple Crypto Exchanges
Many investors trade cryptocurrencies through multiple exchanges and wallets, making tax reporting more challenging.
Before filing the return, investors should reconcile:
- Exchange-wise transaction reports
- Form 26AS
- Annual Information Statement (AIS)
- TDS certificates issued by each exchange
Any mismatch between these records should be resolved with the concerned crypto exchange before filing the Income Tax Return.
Proper reconciliation ensures that every TDS deduction is correctly reflected and prevents disputes during return processing.
Ensure Your Bank Account Is Pre-Validated
Even where a refund is due, it cannot be credited unless the taxpayer has a pre-validated bank account linked on the Income Tax e-filing portal.
Before filing the return, investors should verify:
- Bank account details
- IFSC Code
- PAN linkage
- Pre-validation status
Incorrect banking information may significantly delay the receipt of refunds.
Common Mistakes That Delay Crypto Tax Refunds
Several avoidable errors often result in delayed refunds or notices from the Income Tax Department.
Some of the most common mistakes include:
- Claiming excess TDS not reflected in Form 26AS.
- Reporting incorrect sale values in Schedule VDA.
- Omitting crypto transactions from the return.
- Using the wrong ITR form.
- Failure to reconcile transactions across different exchanges.
- Providing incorrect or non-validated bank account details.
- Ignoring discrepancies in AIS or Form 26AS before filing.
Taking sufficient time to review these aspects before submission can prevent unnecessary delays.
Final Thoughts
The 1% TDS deducted under Section 194S should not be viewed as an additional tax burden. Instead, it functions as a tax credit that is adjustable against the investor’s final tax liability.
Crypto investors should carefully reconcile all transactions, verify TDS credits in Form 26AS and AIS, accurately report Virtual Digital Asset transactions, and file the correct ITR form before the due date.
A properly prepared Income Tax Return not only ensures compliance with the law but also enables eligible taxpayers to receive their TDS refunds promptly without avoidable queries or processing delays.
Professional tax advice may be beneficial, particularly for investors with multiple exchange accounts, high trading volumes, or complex cryptocurrency portfolios.