Section 393 / 194S TDS Compliance — VDA Transfers

By CA V. Viswanathan — FCA, ACS, CFE, IBBI Registered Valuer (IBBI/RV/03/2019/12333). Updated for AY 2027-28 (FY 2026-27), reflecting the Income-tax Act, 2025 (effective 1 April 2026) as amended by the Finance Act, 2026.

Section 393 of the Income-tax Act, 2025 (erstwhile Section 194S of the 1961 Act), introduced by the Finance Act 2022 and effective from 1 July 2022, requires every buyer of a Virtual Digital Asset (VDA) to deduct 1% TDS on the consideration paid. The provision creates a compliance burden in non-obvious places — peer-to-peer transactions, foreign-exchange purchases, payments in kind (token-for-token swaps), and corporate treasuries holding crypto. Failure attracts disallowance, interest, penalty, and in severe cases prosecution. This guide covers the full compliance architecture.

Who Must Deduct — Buyer's Perspective

The deductor is the 'buyer' — the person responsible for paying or crediting the consideration. For exchange-mediated trades, CBDT Circular 13/2022 deems the exchange to be the buyer (and therefore the deductor). For peer-to-peer (P2P) transfers including those done over WhatsApp, Telegram, or directly between wallets, the actual buyer must deduct. For token-for-token swaps (e.g., trading ETH for SOL on a DEX), both parties are deemed buyers in the swap legs and must deduct on each side — a major operational complexity for DeFi users. For corporate treasury purchases (a company buying USDC for working capital), the company must deduct.

Threshold and Rate

Threshold: ₹50,000 per year for 'specified persons' (individuals/HUFs whose business turnover does not exceed ₹1 crore or professional gross receipts do not exceed ₹50 lakh in the preceding FY); ₹10,000 per year for everyone else. Rate: 1% of consideration at the time of credit or payment, whichever is earlier. If PAN of the seller is not furnished, rate increases to 5%. The threshold applies aggregate-per-buyer-per-seller across all transactions in the financial year, not per transaction.

Form 26QE and Quarterly Reporting

TDS deducted under Section 393 of the Income-tax Act, 2025 (erstwhile Section 194S of the 1961 Act) is deposited via challan ITNS-281 (using Section code 194S) by the 7th of the following month. The deductor must furnish a quarterly statement in Form 26QE within 30 days from the end of the quarter (e.g., Q1 ending 30 June — return by 30 July). The deductee receives Form 16E (similar to Form 16A) which is the certificate of TDS. PAN of both parties is mandatory; absence triggers 5% rate and disallowance.

The Foreign Exchange Compliance Trap

Indian residents transacting on foreign exchanges (Binance, Bybit, KuCoin, etc.) face a critical compliance gap — these exchanges do not deduct Indian TDS. The buyer (Indian resident) must self-deduct, deposit, and file 26QE. CBDT has clarified that the obligation persists irrespective of the exchange's location. We routinely encounter penalty notices issued under Section 476 (erstwhile Section 271C of the 1961 Act) for failure to deduct, with interest under Section 397 (erstwhile Section 201 of the 1961 Act) from the date of the transaction. Compliance is also required under FEMA — LRS reporting if the foreign-exchange transaction crosses USD 250,000 in the year.

In-Kind and Token-Swap Treatment

When VDAs are exchanged for other VDAs (token-for-token), Section 393 of the Income-tax Act, 2025 (erstwhile Section 194S of the 1961 Act) applies to both legs. The 'consideration' is the FMV of the asset paid, denominated in INR using a specified rate (CBDT prescribes use of the highest of opening or last available price on a recognised Indian exchange). Each party is the buyer in their leg of the trade. This effectively requires bilateral TDS deduction and creates significant operational complexity for active traders. For payments in VDA (e.g., paying a freelancer in USDT), the payer is the buyer — Section 393 of the Income-tax Act, 2025 (erstwhile Section 194S of the 1961 Act) applies in addition to Section 194J (professional services TDS).

Penalties and Interest

Failure to deduct: interest under Section 397(1A) of the Income-tax Act, 2025 (erstwhile Section 201(1A) of the 1961 Act) at 1% per month from the date the deduction was due to the date it was actually made. Failure to deposit deducted TDS: interest at 1.5% per month and penalty equal to the amount of TDS under Section 476 (erstwhile Section 271C of the 1961 Act). Failure to file Form 26QE: late fee under Section 423 (erstwhile Section 234E of the 1961 Act) at ₹200 per day. Disallowance under Section 35 of the Income-tax Act, 2025 (erstwhile Section 40(a)(ia) of the 1961 Act): if the buyer is a business, the consideration becomes non-deductible expense, creating cascading tax liability. For evasion exceeding ₹25 lakhs, prosecution under Section 480 (erstwhile Section 276B of the 1961 Act) with imprisonment up to 7 years.

How Virtual Auditor Delivers This

Virtual Auditor's CA-CS-IBBI Valuer team handles section 393 / 194s tds compliance — vda transfers as an integrated engagement — no hand-offs between firms, single point of accountability, fixed-fee transparency. CA V. Viswanathan (FCA, ACS, CFE, IBBI RV) personally reviews every engagement deliverable. Offices in Chennai, Bangalore, and Mumbai serve clients across India. Free 30-minute scoping consultation available — no obligation.

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