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India’s relationship with cryptocurrency remains complex, marked by a large user base, regulatory uncertainty, and high taxation. Earlier this month, the Financial Intelligence Unit (FIU) issued updated AML and CFT rules for Virtual Digital Asset (VDA) service providers, tightening compliance requirements and bringing crypto regulation back into focus ahead of the Union Budget 2026. In Budget 2025, the government retained the existing VDA tax framework despite industry appeals for relief, a regime first introduced in Budget 2022 when cryptocurrencies were formally classified as VDAs. Under the Income Tax Act, Sections 115BBH and 194S continue to govern the taxation of cryptocurrencies, NFTs, and other digital tokens.
VDAs include cryptocurrencies such as Bitcoin and Ethereum, NFTs, and other blockchain-based tokens, serving as digital forms of value. In India, their use has grown significantly, with millions involved in trading, investing, and building around them. Despite this growth, regulatory uncertainty and taxation continue to create challenges, leaving adoption strong but progress cautious.
To address the risks of money laundering and illicit financing associated with the cryptocurrency industry, and to bring India into compliance with international standards such as FATF recommendations, FIU-India has updated its AML and CFT guidelines. Stricter KYC standards, customer identification verification, record-keeping, and frequent reporting are among the mandatory compliance criteria that the updated framework imposes on cryptocurrency exchanges and VDA service providers.
Like banks, platforms must also monitor transactions, identify suspicious activity, and carry out regular risk assessments. The regulations reinforce the government’s intention to increase control and accountability in cryptocurrency transactions involving Indian users and apply to any organisation providing VDA-related services to customers in India, including overseas platforms.
The new guidelines aim to strengthen trust and transparency in crypto transactions. Stricter compliance measures can make users feel more secure, while also aligning India’s rules with global standards as countries such as the US, Singapore, and those in the EU tighten oversight. This places India more firmly within the international regulatory framework.
In the 2022 Budget, India introduced a flat 30 percent tax on income from the transfer of VDAs, along with a 1 percent Tax Deducted at Source (TDS) on every transaction, regardless of profit or loss. Additionally, crypto received as a gift is taxed in the hands of the recipient.
Since the 2022 announcements, the crypto industry has seen little change, with no major updates or clarifications in subsequent budgets. This prolonged uncertainty has slowed progress, as start-ups hold back, investors remain cautious, and skilled professionals look overseas. More than taxation, the lack of clarity has become the main barrier to growth.
Frequent traders have found the 1 percent TDS on cryptocurrency transactions burdensome, and many have switched to overseas platforms where these regulations do not apply. Reducing the rate to 0.01 percent would make compliance more feasible, lessen the temptation for users to relocate overseas, and retain oversight while easing the burden.
Unlike most other asset classes, losses from cryptocurrency trades cannot currently be offset against gains, which discourages balanced trading. Additionally, Web3 start-ups want to be able to deduct conventional business expenses such as wages, infrastructure, and office costs, just like other firms.
Indians are thought to have exchanged around ₹5 lakh crore on offshore markets between October 2024 and October 2025, resulting in the outflow of money, jobs, and data. These platforms operate outside Indian jurisdiction, which limits monitoring, weakens grievance redressal, and raises systemic risks, especially during periods of global financial turmoil.
The challenge lies in enforcing laws that ensure safety without obstructing progress. Regulations should act as guardrails to promote innovation and provide structure. Clear support for compliant platforms can reduce the influence of non-compliant participants and eliminate the need for blanket prohibitions.
The VDA sector is seeking clearer regulations in Budget 2026 to reduce uncertainty and provide a solid foundation for expansion. In addition, fairer taxation is considered necessary to encourage compliance, support revenue generation, and enable more sustainable innovation. Leading centres for Web3 development, such as Singapore, strike a balance between innovation and regulation. With its vast talent pool, scale, and rising demand, India has the potential to play a significant role in shaping the global development of digital assets.
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