Legality and Taxation of Digital Currency in India – Fin Tech

“Right now Bitcoin looks like the internet before the browser”

The Minister of Finance of India in her Budget Speech 2022 dated 01.02.2022 announced a 30% tax on income from virtual digital assets and a TDS on the payment made in relation to the transfer of assets virtual digital at 1% above a monetary threshold. While Indian crypto investors have welcomed the government’s move to tax profits from digital asset transactions even though the tax rate is 30%, underscoring hopes that the pending crypto bill will regulate the market rather than banning private coins altogether. While the government and a few members of the central RBI board have sought a more nuanced view of digital assets, keeping technological developments in mind, the RBI is still in favor of a complete ban on cryptocurrencies. He has made this explicit in repeated messages highlighting concerns over the macroeconomic and financial stability of virtual currencies, the challenge of exchange management, oversight and regulation of these assets.

The Minister of Finance explained that a currency can be defined if it is issued by the central bank saying “I said the Reserve Bank will issue a digital currency a currency is only a currency when it is issued by the central bank even if it is a crypto. But anything outside of that we all refer to as cryptocurrency but it is not currencies”,1she said when asked about cryptocurrencies. She clarified that what the RBI will release in the next financial year will be digital currency and everything else apart from that are digital assets created by individuals and the government will tax the profit made from transactions of these assets at 30%. . The term “virtual digital assets” was first introduced by way of an amendment to section 2 by adding clause (47) in the Income Tax Act 19612.

In the memorandum explaining the provisions of the finance bill, the government said that “virtual digital assets have gained enormous popularity in recent times and the trading volumes of these digital assets have increased significantly. In addition, a market emerges where payment for the transfer of a virtual digital asset can be made through another such asset.As a result, a new regime providing for the taxation of such virtual digital assets has been proposed in the Bill .”3

In simpler terms, a central bank digital currency (CBDC) is legal tender issued by a central bank in digital form. It is similar to fiat currency issued on paper and similarly interchangeable with any other fiat currency. Although there are always concerns regarding the source, regulation, money laundering, financing of terrorism, tax evasion and security of the nation on digital assets or cryptocurrency, the objective CBDC’s ultimate goal is to provide users with the convenience and security of digital along with the Reserve Bank-regulated and backed circulation of the traditional banking system.

India planned to go public with its crypto bill twice last year and both times the legislation never made it to parliament for discussion, even though the finance minister clarified that the bill The long-awaited Crypto Bill is most certainly different from the 2019 proposal, which took a very tough stance against any type of crypto activity, from crypto mining to trading.

From 2013 to 2017, the RBI issued various circulars warning the public against the use of virtual currencies regarding the potential financial, operational, legal, customer protection and security risks they face. But as banks continued to allow transactions on cryptocurrency exchanges, on 01.02.2017, RBI issued another circular reiterating its concerns about virtual coins. At the same time, two PILs were filed in the Supreme Court of India, one seeking a ban on the buying and selling of cryptocurrencies in India and the other seeking their regulation. This caused cryptocurrency prices to plummet, trading to freeze, and withdrawals to stop once the order was placed. But still, there was no ban on digital assets or cryptocurrencies.

Meanwhile, in March 2020, an important development took place. The Honorable Supreme Court of India in the case of Internet and Mobile Association of India v Reserve Bank of India4, the court quashed the RBI notification of 06.04.2018 on the grounds of proportionality. The judgment of the supreme court concerned the future of cryptocurrency in India, as the court pointed out that “in case the said promulgation (2019) had been passed, there would have been an official digital currency, for the creation and circulation of which RBI/Central Government would have had a monopoly.”5

With around 100 million Indians owning cryptocurrencies, according to a recent study by BrokerChoose, India’s crypto user base is larger than any other country in the world. As investors jump into crypto with such enthusiasm, the big question to ask is: is cryptocurrency legal in India? The answer to this question currently depends on whether we are talking about owning cryptocurrencies or hoping to use them as legal tender. The lack of legislation currently covering cryptocurrencies in India does not make them illegal. This simply means that without a strong legislative framework, crypto owners will not necessarily be able to enjoy the same level of protection as owners of other asset classes.

But saying this, even if the government recognizes cryptocurrency as an asset, it is unlikely that they will accept it as legal tender in view of the comments and statements made by various senior officials of the Ministry of Finance and the Reserve Bank of India. Virtual currencies, unlike traditional investments, have no cap on fluctuations. They can be influenced by the slightest things and are very volatile. Yet, it has not failed to attract investors from all over the world and offer a significant return on investment.

Countries around the world fear it could be another hoax that would cost citizens a huge chunk of their finances. Countries are constantly trying to regulate the sphere so that the market can be stabilized and there are proper indicators of market movement. Cryptocurrency was introduced with the aim of having a decentralized monetary system that is not controlled by banks, financial institutions or governments, but if countries around the world decide to regulate this monetary system, it could negatively impact the very purpose of introducing virtual currency. currencies.


1. (last visited 21.02.2022)

2. (last visited 21.02.2022)

3. (last visited 21.02.2022)

4. MANU/SC/0264/2020

5. Internet and Mobile Association of India v. Reserve Bank of India (MANU/SC/0264/2020), para 6.171

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Sylvia B. Polson