This article explores the cryptocurrency regulations in India, covering the legal status, taxation on crypto, and the stance of the Reserve Bank of India (RBI). Learn how these regulations are shaping the future of the Indian crypto industry, including government policies and tax obligations for cryptocurrency traders and investors.
Cryptocurrency Regulations in India: Legal Status, Taxation & Future Outlook
Introduction to Cryptocurrency Regulations in India
Bitcoin and other cryptocurrencies have surged in popularity worldwide, prompting India to continually refine its regulatory approach. In the early years, Indian authorities were largely cautious and skeptical about crypto. The Reserve Bank of India (RBI) and the government issued several warnings, citing concerns over consumer protection and illicit use. In 2018, the RBI took a drastic step by barring banks and regulated financial institutions from dealing with or facilitating cryptocurrency transactions. This meant that Indian crypto exchanges suddenly couldn’t access banking services, a move that disrupted the fledgling crypto industry.
CA Divaker Jagga-Crypto Expert
The 2018 banking restriction was challenged in court, and after nearly two years, the Supreme Court of India struck it down in 2020. The court’s decision gave a new lease of life to crypto businesses and enthusiasts in India, reopening the doors for exchanges to work with banks. However, the regulatory climate remained uncertain. In 2019, even while the Supreme Court case was pending, a government-appointed committee drafted a bill proposing a ban on cryptocurrencies and even penalties for dealing in them. That draft bill, which was never introduced in Parliament, underscored the Indian authorities’ ambivalence—torn between curbing potential risks and not stifling innovation.
In the years since the Supreme Court verdict, India’s approach has evolved from an outright ban stance to a wait-and-watch mode. The government has not imposed any new blanket ban on crypto trading. Instead, it has signaled that it prefers a regulated framework developed in collaboration with global partners rather than unilateral action. Meanwhile, despite the lack of dedicated legislation, India introduced measures like taxation on crypto trading and bringing crypto activities under anti-money laundering laws.
Current Legal Status of Cryptocurrencies in India
In practical terms, cryptocurrencies are neither outright illegal nor fully legal in India. There is currently no law that bans individuals from buying, holding, or selling crypto assets. After the Supreme Court overturned RBI’s banking ban in 2020, crypto trading became accessible again through exchanges operating in the country. The Indian government has since treated crypto as an emerging asset class that is subject to certain regulations (like taxes), even though it is not recognized as legal tender.
Government officials have clarified this ambivalent legal status. Cryptocurrencies are not illegal, but they are also not officially sanctioned currency. While you can own and trade cryptocurrencies, you cannot use Bitcoin or any other crypto as currency to pay for goods or services, and it doesn’t have official backing from the government or RBI.
At the moment, there are a few restrictions and guidelines that indirectly shape the legal status of crypto. All crypto exchanges operating in India must comply with standard financial regulations like Know-Your-Customer (KYC) norms and reporting requirements. In 2023, the government expanded the scope of the Prevention of Money Laundering Act (PMLA) to cover virtual digital assets, meaning crypto exchanges now have to follow anti-money laundering protocols similar to banks and payment companies. This move aims to prevent misuse of crypto for illicit activities and adds a layer of oversight.
Reserve Bank of India's (RBI) Stance on Cryptocurrency
The Reserve Bank of India – the country’s central bank – has been one of the most skeptical voices on cryptocurrencies. RBI’s stance has evolved from caution to outright opposition over the years, largely due to concerns about financial stability. In 2013, the RBI issued public advisories about the risks associated with virtual currencies. By 2017, as crypto popularity spiked, RBI and the Finance Ministry warned investors about price volatility, hacking, and fraud risks. This cautious approach culminated in the infamous April 2018 RBI circular that prohibited all regulated entities (like banks and lending institutions) from dealing in or providing services for cryptocurrencies.
That 2018 ban was a watershed moment. Crypto exchanges had to either shut down, move overseas, or find creative solutions for transactions. However, after a legal battle, the Supreme Court set aside RBI’s circular in 2020, declaring it unconstitutional. Post this court victory for the crypto industry, RBI did not re-impose a similar ban, but its skepticism remained. In fact, some banks were still hesitant to support crypto businesses even after 2020, citing the old circular. The RBI had to issue a formal clarification, telling banks that the 2018 circular was no longer valid and cannot be quoted as a reason to deny services. This clarification explicitly reminded banks that the Supreme Court’s judgment supersedes RBI’s 2018 order, thereby allowing bank transactions for crypto trading to resume normally.
Despite the Supreme Court setback, RBI hasn’t changed its fundamental view. Top RBI officials frequently highlight the risks of crypto. The RBI Governor has warned that cryptocurrencies have no intrinsic value and pose serious threats to macroeconomic stability. He even likened cryptocurrency to the tulip mania of the 17th century, implying it could be a speculative bubble. Similarly, RBI Deputy Governor has delivered a scathing critique, calling cryptocurrencies “akin to Ponzi schemes” and arguing that banning them was the most sensible option for India. This reveals the central bank’s belief that regulation might legitimize something fundamentally problematic – hence their preference to prohibit it outright.
In line with its skeptical stance, the RBI has been a big proponent of creating a central bank digital currency (CBDC) as a safe alternative to private cryptos. The RBI argues that a digital rupee (backed by the central bank) can harness the benefits of blockchain technology without the risks that come with volatile private tokens. In late 2022, the RBI launched pilot programs for the Digital Rupee – first for wholesale transactions and then for retail use. This move shows RBI’s strategy: rather than endorse cryptocurrencies, develop a sovereign digital currency under its control.
Taxation of Cryptocurrencies in India
One clear sign that India has moved toward regulating (rather than banning) crypto is the introduction of tax rules on crypto transactions. In 2022, the government announced a detailed tax framework for “virtual digital assets” (VDAs), which includes cryptocurrencies and non-fungible tokens (NFTs). These tax provisions were a landmark because it was the first time crypto was specifically defined in India’s tax law. Here’s a breakdown of how cryptocurrencies are taxed in India:
- 30% flat income tax on profits: (refer Section 115BBH of Income Tax Act) If you sell or transfer cryptocurrency at a profit, the gain is taxed at a flat 30% rate. This rate applies regardless of how long you held the asset (so no distinction between short-term or long-term gains) and is among the highest tax rates, similar to the rate for lottery winnings. An additional surcharge and 4% health & education cess also apply on this tax, effectively making the tax slightly above 30%. Importantly, you cannot deduct any expenses (like exchange fees, electricity for mining, etc.) while calculating this taxable profit – only the cost of acquiring the crypto is allowed as a deduction.
- No loss set-off: (refer Section 115BBH of Income Tax Act) If you incur losses in crypto trading, those losses cannot be used to offset gains from any other income or even other crypto trades. For example, you cannot subtract a Bitcoin trading loss from your stock market profits or vice versa. Moreover, you can’t carry forward crypto losses to the next financial year. Essentially, the government will tax your profits heavily, but your losses are entirely your own problem (they give no tax relief for losses).
- 1% TDS on every transaction: (refer Section 194S of Income Tax Act) TDS stands for Tax Deducted at Source. From July 2022, any crypto exchange (or person) facilitating a crypto trade must deduct 1% of the transaction value as TDS and deposit it to the government. This applies once your total trades in a year cross a small threshold (₹50,000 per year for most individuals, or ₹10,000 for certain cases). The purpose of this 1% TDS is two-fold: it helps the government track all significant crypto transactions, and it acts as an advance tax (you can claim credit for the TDS when filing your return).
- Gifts are taxed: (refer Section 56(2)(x) of Income Tax Act) If you receive cryptocurrency as a gift (for instance, someone sends you crypto without you paying), that is also taxable in the hands of the recipient, under the rules for taxing gifts. Such crypto gifts above ₹50,000 in value are taxed as income at the same 30% rate. Essentially, the government doesn’t want people to bypass taxes by “gifting” crypto.
These provisions are laid out in the Income Tax Act (after insertion of Section 115BBH for taxation of VDAs and Section 194S for TDS). To comply, crypto investors in India now must keep detailed records of their trades and report their crypto gains in the annual tax return. The taxation has made crypto trading less lucrative and more paperwork-intensive, but it has also lent a sort of de facto legitimacy – by taxing crypto, the government is implicitly acknowledging that trading is happening and is here to stay.
Government Policies and Upcoming Regulations
While India does not yet have a dedicated law governing cryptocurrencies, the government has been actively formulating policies and proposals. Over the past few years, there have been multiple attempts to introduce a Cryptocurrency Bill in Parliament – reflecting the government’s intent to create a legal framework for crypto. The most talked-about was the “Cryptocurrency and Regulation of Official Digital Currency Bill”, which first appeared on the parliamentary agenda in early 2021. This bill aimed to ban all “private” cryptocurrencies (effectively all non-government-issued ones like Bitcoin) while laying the groundwork for an official digital currency (the Digital Rupee). However, this bill was never formally introduced for debate, and it kept getting postponed amid discussions and revisions.
One reason for the delay is that the government realized the issue is complex and global. In recent public statements, officials have indicated that India will not rush into a unilateral ban or sweeping law without international coordination. The Finance Minister and other officials have repeatedly said that effective crypto regulation requires collective action by major economies, given the borderless nature of these digital assets. During India’s G20 presidency in 2023, cryptocurrency regulation was a priority topic. India worked with bodies like the International Monetary Fund (IMF) and Financial Stability Board (FSB) to develop a unified approach.
Domestic regulation is expected to differentiate between Central Bank Digital Currency (CBDC) and other private cryptocurrencies, with CBDC to be promoted as the sovereign digital currency of India. The government's focus will likely shift to regulating the trading, exchanges, and taxation of private cryptos. At present, the government is likely waiting for a clearer global consensus on crypto laws before acting on national regulations.
Security, Fraud, and Risks in Crypto Trading
Investing in cryptocurrencies comes with a number of security risks and fraud concerns, and Indian authorities are well aware of these. Beginners should understand that the crypto market is highly volatile and largely unregulated – which means there’s little protection if something goes wrong. Unlike a bank account, if your crypto exchange fails or your digital wallet is compromised, there is no government-insured safety net to reimburse you. Scams and Ponzi schemes have unfortunately targeted many Indian investors in the past decade.
Regulators have been cracking down on crypto-related fraud and illegal activities. The Enforcement Directorate (ED) and local police have investigated several cases of money laundering and drug trafficking payments involving crypto. For example, some crypto exchanges have come under ED scrutiny for allegedly not following anti-money-laundering norms. These actions signal that even though there isn’t a dedicated crypto law, general laws against fraud, money laundering, and financial terrorism do apply to crypto transactions.
The RBI and government have also issued strong warnings to the public about crypto risks. The RBI’s stance (calling crypto a Ponzi scheme or worse) is partly to discourage people from speculative mania that could lead to big losses. The Finance Ministry as early as 2017 compared investing in cryptocurrencies to participating in a Ponzi scheme, highlighting that there is no underlying asset or sovereign guarantee backing these values. Price volatility is extreme – it’s not uncommon for cryptocurrencies to swing 20-30% in a matter of days. New investors need to be prepared for this rollercoaster and invest only what they can afford to lose.
On the security front, technological risks are also present. If you hold your own crypto in a private wallet, safeguarding your private keys is crucial – losing them can mean losing access to your funds permanently. If you keep crypto on an exchange, you face counterparty risk: exchanges can be hacked or even shut down overnight.
Future of Cryptocurrency Regulations in India
Looking ahead, the future of cryptocurrency regulations in India appears to be moving toward a balanced approach – neither an outright ban nor a hands-off attitude. The consensus emerging in policy circles is that completely banning crypto might not be practical (or even beneficial, considering the technology and economic potential), but letting it run wild is also not an option. Therefore, India is likely to introduce comprehensive regulations that legitimize certain aspects of crypto under strict oversight. This could include a licensing regime for crypto exchanges and wallet providers, clear guidelines on which crypto activities are permissible, and strong disclosure and security requirements to protect users.
One expected development is the formal introduction and passage of a cryptocurrency bill in Parliament. Government officials have hinted that they were reworking the previous draft to accommodate the rapidly changing global crypto landscape. After observing how other countries like the US, UK, and EU are handling crypto, India will likely borrow best practices. For instance, India might classify cryptocurrencies as assets (not currency) – meaning you can invest and trade in them, but they won’t be used in everyday payments. If classified as assets, the regulatory oversight could fall under agencies like SEBI for trading aspects (much like stocks or commodities).
Ultimately, India’s approach could evolve into one of the largest regulated crypto markets, given the country’s huge number of users. As long as you stay informed about the latest rules and comply with any new regulations, you can be part of the crypto ecosystem in India. Change is on the horizon, so continue to follow news from Parliament and regulators. Crypto in India is moving from a legal grey area to a defined framework – and being a well-informed, compliant participant will be the best way to navigate this future landscape.