What Are Digital Tokens Under the Income Tax Act?

Digital tokens, crypto, and NFTs are taxed at a flat 30% under India's Virtual Digital Asset (VDA) rules, plus 1% TDS on every transfer. The charging section moved from Section 115BBH of the old 1961 Act to Section 194(1) of the Income Tax Act, 2025, for transfers from 1 April 2026 onward. The rate has not changed. Only the section number has.

Table of Contents

1. What Are Digital Tokens Under the Income Tax Act?

2. Who Does This Apply To?

3. Old Act vs New Act: Section Mapping for Digital Tokens Tax

4. Digital Token Tax Rates and Rules for 2026

5. Examples With Full Working

6. How to Calculate Your Digital Token Tax

7. What If Something Goes Wrong?

8. Documents You Will Need

9. Penalties for Not Reporting Digital Tokens

10. Frequently Asked Questions

What Are Digital Tokens Under the Income Tax Act?

A "digital token" is not its own tax category. It sits under the wider term Virtual Digital Asset, or VDA, defined in Section 2(47A) of the Income-tax Act, 1961, and carried forward as Section 2(109) of the Income-tax Act, 2025. This covers crypto, NFTs, and any token built using cryptography, whether or not it counts as a capital asset.

The Finance Act 2025 sharpened this definition and named "crypto-asset" as its own sub-clause. That closes off any argument that a specific meme coin or exchange token sits outside the tax net. RBI's Digital Rupee (e-₹) and ordinary gift vouchers stay excluded, since neither one is a VDA.

Who Does This Apply To?

Tokens received as a gift or through an airdrop can be taxable the moment you receive them, as income from other sources. You will not owe anything further on that same value until you sell, swap, or spend it.

Old Act vs New Act: Section Mapping for Digital Tokens Tax

This is where most guides stay vague. Here is the exact mapping, checked against the Income Tax Department's own published section text.

Income earned up to 31 March 2026, that is FY 2025-26, gets assessed in AY 2026-27 under the old numbering. Income from 1 April 2026 falls under Tax Year 2026-27 and the new Act instead. Filing your return this July for FY 2025-26? You will still write "Section 115BBH" and "Section 194S" on your workings. The new numbers apply only to trades made after 1 April 2026.

Digital Token Tax Rates and Rules for 2026

Here is what this crypto tax under Income Tax Act 2025 rules actually looks like in numbers, not just descriptions of the rule.

• Tax rate: flat 30% plus 4% cess. Effective 31.2% before any surcharge.

• Surcharge: applies above ₹50 lakh total income, at the usual income-linked slabs.

• Deduction allowed: only cost of acquisition. Gas fees, brokerage, internet costs do not count.

• TDS: 1% of the sale amount, at ₹50,000/year for specified persons and ₹10,000/year for everyone else.

• Loss set-off: not allowed against any other income, not even a gain from a different token. No carry-forward.

• Gifts: non-relative gifts over ₹50,000 a year are taxed at slab rate as other income, not 30%. Relative gifts stay exempt.

• GST: exchanges have charged 18% GST on their own service fees, trading, withdrawal, and staking charges, since a CBIC clarification took hold in July 2025. It sits on your fees, not your gains.

• NFTs: taxed exactly like crypto, with the same 30% rate, same TDS, same no-set-off rule, and same Section 2(109) definition.

How Digital Tokens Compare to Other Asset Classes

Want to see this gap for yourself? Run the equity side through Toolisky's capital gains tax calculator and compare it against a token sale of the same size. The difference is bigger than most people expect.

Examples With Full Working

Example 1: the common case, FY 2025-26, old Act numbering

Suresh, a salaried IT employee, bought a token worth ₹90,000 in January 2025 and sold it in November 2025 for ₹1,45,000.

• Gain: ₹1,45,000 minus ₹90,000, which is ₹55,000

• Tax under Section 115BBH: 30% of ₹55,000, which is ₹16,500

• Cess: 4% of ₹16,500, which is ₹660

• Total tax payable: ₹17,160

• TDS under Section 194S: 1% of ₹1,45,000, which is ₹1,450

Suresh claims that ₹1,450 as TDS credit and pays the remaining ₹15,710 through self-assessment tax.

Example 2: the edge case most guides skip, Tax Year 2026-27, new Act numbering

Farida, a freelance designer, received an NFT worth ₹60,000 as payment for a client project in May 2026. She held it and sold it in September 2026 for ₹95,000. In the same period, she also lost ₹20,000 on a separate token trade.

• At receipt: ₹60,000 taxed as business income at her slab rate, since this was payment for services, not a VDA gain

• Cost of acquisition for the NFT now stands at ₹60,000, the value already taxed once

• Gain on sale: ₹95,000 minus ₹60,000, which is ₹35,000

• Tax under Section 194(1): 30% of ₹35,000, which is ₹10,500. Add 4% cess of ₹420. Total: ₹10,920

• The separate ₹20,000 token loss cannot reduce this bill. Section 194(1) blocks set-off, exactly the way Section 115BBH always did

• TDS under Section 393(1), Table Sl. No. 8(vi): 1% of ₹95,000, which is ₹950

Would splitting the NFT payment and its sale across two different clients change anything? No. Every transfer stands on its own, and the no-set-off rule follows it regardless.

How to Calculate Your Digital Token Tax

1. List every transfer separately: each sale, swap, or spend. The ITR portal computes gains transaction by transaction, not as one combined figure.

2. For each one: sale value minus cost of acquisition equals your taxable gain. Ignore any loss; it cannot reduce anything.

3. Add up only the positive entries. Multiply that total by 30%, then add 4% cess, and surcharge if your total income crosses ₹50 lakh.

4. Subtract the TDS already deducted, visible in your Form 26AS, to find your balance tax due.

5. Report everything in Schedule VDA on ITR-2 for capital gains, or ITR-3 for business income. For the full portal walkthrough, Toolisky's VDA tax and Schedule VDA filing guide covers every field step by step.

What If Something Goes Wrong?

TDS was deducted but is missing from Form 26AS. This usually means the exchange quoted the wrong PAN or the wrong section code. Raise a grievance through TRACES and ask the deductor to file a correction statement.

You forgot that a token swap counts as a transfer. Swapping one token for another, not just selling for rupees, is still a taxable transfer under Section 2(109). If you missed reporting one, file ITR-U for that year, declare the gain, and pay the tax along with interest.

You claimed a loss set-off by mistake in an earlier return. File a revised return under Section 139(8A) before your assessment is finalised, and correct Schedule VDA. Fixing it yourself, before automated matching catches it, keeps the penalty smaller.

Documents You Will Need

Penalties for Not Reporting Digital Tokens

• Under-reporting income under Section 270A draws a 50% penalty on the tax underpaid.

• Misreporting, such as faking your cost of acquisition, draws a 200% penalty.

• Reporting-entity penalty, new from Budget 2026: Section 446 imposes ₹200 a day on an exchange or platform that fails to file the Section 509(1) crypto-transaction statement, plus ₹50,000 for inaccurate data left uncorrected. This targets exchanges, not individual traders, but it means the trail behind your own trades is now harder to hide.

• TDS default on a peer-to-peer deal: the buyer becomes liable for the TDS amount, 1.5% monthly interest, and a matching penalty.

• Undisclosed tokens held abroad, over ₹20 lakh: Black Money Act penalties apply on top of the usual Section 270A exposure.

None of this is theoretical. The Finance Ministry told Parliament in late 2025 that the department had already issued more than 44,000 notices tied to VDA mismatches, after finding over ₹888 crore in undisclosed digital token income by matching exchange TDS data against ITR filings.

Frequently Asked Questions

Is trading digital tokens legal in India?

Yes. The Supreme Court struck down RBI's 2018 banking ban on crypto exchanges in 2020, and the government chose to tax the activity rather than ban it. Legal does not mean tax-free.

Does "Tax Year" under the new Act mean the calendar year, January to December?

No. This mix-up is floating around online. "Tax Year" under the 2025 Act still runs 1 April to 31 March, exactly like the old "Previous Year." Nothing about the reporting cycle changed for tokens.

What is the tax rate on digital tokens under the Income Tax Act 2025?

Still 30% flat, plus 4% cess, now under Section 194(1), Table Sl. No. 4, the direct successor to Section 115BBH. Budget 2026 tightened reporting but left the rate untouched.

Can I set off digital token losses against my salary?

No. Losses cannot offset any other income, including a gain from a different token, and cannot be carried forward. This restriction survived the renumbering unchanged.

Is an NFT taxed differently from cryptocurrency?

No. Both count as Virtual Digital Assets under the same definition, taxed at the same flat 30%, with the same TDS and the same no-loss-set-off rule.

What is Section 509 crypto reporting under the Income Tax Act 2025?

It requires reporting entities, mainly exchanges, custodians, and wallet platforms, to send transaction-level statements to the department from 1 April 2026. Individual traders are not required to file this themselves.

How do I report digital tokens in my ITR for 2026?

Use Schedule VDA inside ITR-2 for capital gains, or ITR-3 for business income. Enter each transfer's acquisition date, transfer date, cost, and sale value as a separate line.

What is the penalty if I do not report my digital token income at all?

Under-reporting draws a 50% penalty on the tax due, under Section 270A. Deliberate misreporting draws 200%. A mismatch against your exchange's own data is now far more likely to surface on its own.

Is GST charged on my digital token profits?

No. The 18% GST applies only to the service fees your exchange charges, not to your trading gains themselves.

Do I need to report tokens held on a foreign platform?

Yes, in Schedule FA, once their total value crosses ₹20 lakh. This sits separately from your regular VDA reporting and brings Black Money Act exposure if skipped.

I made a mistake in my AY 2024-25 return. What should I do now?

File ITR-U, correct the figures, and pay the shortfall with interest. Far cheaper than waiting for a notice once an exchange-data mismatch gets flagged.

What to Do Right Now

Pull your exchange statements, match them against Form 26AS, and work out each transfer on its own, not as one net number. Check the transfer date against 1 April 2026 before you quote a section number anywhere. For the full picture of what changed across the wider Act, see Toolisky's Income Tax Act 2025 vs 1961 comparison, and for the official Schedule VDA rules, the Income Tax Department's own page is the final word.

For educational purposes only. Verify all figures at official sources before acting. Toolisky is not affiliated with any government body. Consult a qualified CA or legal professional before making compliance decisions. See toolisky.com/accuracy-and-limitations.