Proposed Changes to Taxation of Virtual Digital Assets in India
In an effort to further rein in the misuse of cryptocurrency, the Indian government has proposed to include virtual digital assets (VDAs) in the definition of undisclosed income for the block assessment scheme. This means that non-disclosure of income related to VDAs could lead to a hefty tax of 60 percent, in addition to severe penalties.
Once the Finance Bill 2025 is enacted, this provision is set to take effect from February 1, 2025. The block assessment scheme is a procedure established for assessing undisclosed income discovered during searches or requisitions. Revised in the July 2024 budget, the scheme aims to streamline tax administration, reduce prolonged litigation, and improve the efficiency of handling search cases.
Section 158B(b) of the Income Tax Act provides an inclusive definition of ‘undisclosed income’ for the block assessment scheme. It specifies that various assets fall under the category of undisclosed income if they represent, wholly or partially, income or property that has not been—or would not have been—disclosed in the income tax return. Currently, assets that qualify include money, bullion, jewelry, and other valuable articles, alongside income based on entries in books of account, documents, and transactions.
With the proposed changes in the Finance Bill 2025, VDAs will also be classified as undisclosed income. This implies that if an individual fails to disclose earnings from or transactions in VDAs in their income tax return, and such information comes to light during a search or seizure, the block assessment scheme will be triggered. The ‘block period’ refers to the previous years relevant to the six assessment years preceding the prior year when the search was initiated under the Income Tax Act.
According to the Finance Act 2024, there will be a consolidated assessment for the block period. Until the block assessment is complete, no further assessment or reassessment proceedings will take place concerning the covered period. The Assessing Officer will assess the ‘total income’ of the assessee, incorporating any undisclosed income that has not been or would not have been disclosed, alongside any expenses, deductions, or allowances claimed under this Income Tax Act found to be incorrect. Taxes will be charged at 60 percent for the block period, in addition to penalties at the rate of 50 percent.
Furthermore, two significant changes concerning cryptocurrency are included in the Finance Bill 2025. The first change pertains to the requirement for reporting entities to furnish information about transactions involving crypto assets, with the amendment effective from April 1, 2026. The second change involves updating the definition of crypto assets, which will now encompass any digital representation of value relying on a cryptographically secured distributed ledger or similar technology for validating and securing transactions within the scope of a ‘virtual digital asset.’ This change will apply to the assessment year 2026-27.
Initially announced in the Union Budget 2022, as it stands, VDAs encompass any information, code, number, or token that is neither Indian nor foreign currency and is generated through cryptographic means or otherwise. In simpler terms, this classification includes all types of crypto assets, such as NFTs, tokens, and cryptocurrencies, while expressly excluding gift cards or vouchers.
These proposed measures signify a robust approach by the Indian government to regulate the crypto space and ensure transparency in tax reporting, with implications for all individuals and entities involved in virtual digital assets.