Cryptocurrency has been a hot topic worldwide, and India is no exception. Over the past few years, the use of digital currencies like Bitcoin, Ethereum, and others has been growing rapidly in the country. While the cryptocurrency ecosystem in India has witnessed significant growth, it remains a complex and often murky area in terms of regulation. The Indian government and financial institutions have had mixed views on cryptocurrencies, leading to a volatile legal landscape. This article aims to break down the key aspects of cryptocurrency regulations in India, helping users, investors, and businesses navigate this evolving space.
India’s relationship with cryptocurrency began with cautious optimism, as blockchain technology and cryptocurrencies offered innovative solutions to financial inclusion, cross-border payments, and more. However, the regulatory environment remained uncertain, and the country’s regulatory bodies were unsure about how to treat digital currencies.
The first significant regulatory action came in April 2018, when the Reserve Bank of India (RBI), the country’s central bank, issued a circular that effectively banned financial institutions from dealing in cryptocurrencies. The circular prohibited banks and financial service providers from offering services related to virtual currencies like Bitcoin.
This created a significant roadblock for the crypto industry in India, as it became difficult for investors and businesses to convert crypto assets into fiat currency or use their digital assets in real-world transactions.
In 2020, the Supreme Court of India delivered a landmark judgment, ruling that the RBI’s banking ban on cryptocurrencies was unconstitutional. The Court concluded that the ban was disproportionate, as it violated the fundamental right to trade and carry on business.
This ruling provided a significant boost to the cryptocurrency ecosystem in India, with many exchanges and startups resuming operations and services for crypto traders and investors.
While the Supreme Court’s ruling allowed cryptocurrency businesses to operate freely again, the regulatory framework surrounding digital currencies in India remains unclear.
The government has been weighing various approaches, including outright bans and regulations aimed at ensuring investor protection and financial stability. Here’s a look at some of the key regulatory developments and challenges India faces regarding cryptocurrencies.
In December 2021, the Indian government proposed a draft bill titled The Cryptocurrency and Regulation of Official Digital Currency Bill. The bill aimed to regulate cryptocurrencies and introduce a central bank-backed digital currency (CBDC). The draft bill sought to create a legal framework for cryptocurrency usage while limiting its scope in some areas. It also suggested a potential ban on private cryptocurrencies in India, although it left the door open for the regulation of certain cryptocurrencies.
However, the bill has faced significant delays, and as of now, there is no official word on when it will be passed or whether it will retain its original provisions. The government has been cautious, primarily due to concerns over the use of cryptocurrencies in illegal activities such as money laundering and terrorism financing, as well as the potential for financial instability.
While the government has not yet passed a clear regulation on the legality of cryptocurrencies, it has introduced some tax measures to govern their use. In the Union Budget for 2022-23, Finance Minister Nirmala Sitharaman announced a taxation framework for cryptocurrencies and digital assets. This move marked a significant shift in the government’s stance on digital currencies, as it acknowledged the growing role of cryptocurrencies in the economy.
Cryptocurrency transactions are now taxed as capital gains. If you sell or trade cryptocurrency for a profit, the gain will be subject to taxation. Short-term capital gains (for assets held for less than three years) are taxed at 30%, while long-term capital gains (for assets held for over three years) are taxed at 20%.
A 1% TDS is levied on cryptocurrency transactions above a certain threshold. This means that crypto exchanges are required to deduct 1% of the transaction amount at the time of transfer.
One of the most controversial provisions is that losses incurred from cryptocurrency trading cannot be offset against other income or future gains, making it challenging for investors to mitigate losses through tax deductions.
Cryptocurrencies are also subject to tax when they are gifted or inherited, and the recipient will be taxed based on the fair market value of the crypto asset.Anti-Money Laundering (AML) and Know Your Customer (KYC)
Another important area of regulation is the requirement for exchanges and wallet providers to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) guidelines. India’s financial regulatory body, the Financial Intelligence Unit (FIU-IND), mandates crypto exchanges to ensure that they adhere to these standards in order to combat illegal activities such as money laundering, fraud, and terrorist financing.
Crypto exchanges operating in India must perform due diligence by verifying users' identities before allowing them to trade on their platforms. This has created additional administrative overhead for exchanges, but it also ensures that the crypto ecosystem operates in a more transparent and secure manner.
Alongside regulations for private cryptocurrencies, the Indian government has shown significant interest in developing a Central Bank Digital Currency (CBDC). In 2022, the Reserve Bank of India announced plans to pilot a digital rupee (e₹) as part of its efforts to modernize the financial sector and reduce reliance on physical cash. The introduction of a CBDC is expected to provide more control over digital currency transactions while maintaining the benefits of cryptocurrencies such as efficiency and lower transaction costs.
The digital rupee would operate alongside physical currency and could be used for a wide range of purposes, from retail transactions to wholesale banking activities. If successful, a CBDC could provide a more regulated and stable alternative to private cryptocurrencies, though the government has clarified that the two will remain distinct.
Cryptocurrency regulations in India are still in a state of flux. While the Supreme Court’s intervention in 2020 and recent tax announcements have provided some clarity, the government’s proposed bill, potential ban on private cryptocurrencies, and the push for a digital rupee still leave much uncertainty.
For now, businesses, investors, and users must be cautious, stay informed, and adapt to the regulatory changes as they come.
Cryptocurrency has great potential to revolutionize various sectors in India, but navigating the regulatory landscape will require both patience and careful planning. With the right legal framework, India could emerge as a global leader in cryptocurrency and blockchain technology.
