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 As the Reserve Bank of India (RBI) further tightens its stand on cryptocurrencies, the 1 per cent tax deducted at source (TDS) on virtual digital assets (VDAs) and cryptocurrencies came into effect from Friday.

The 1 per cent TDS will be levied on payments towards virtual digital assets or cryptocurrencies beyond Rs 10,000 in a year, according to the Section 194S in the I-T Act (as per the Finance Act, 2022).

The Central Board of Direct Taxes (CBDT) on June 21 notified certain amendments in I-T Rules with respect to furnishing TDS returns in Form 26QE and Form 16E.

The new section mandates a person, who is responsible for paying to any resident any sum by way of consideration for transfer of a virtual digital asset (VDA), to deduct an amount equal to 1 per cent of such sum as income tax thereon.

The tax deduction is required to be made at the time of credit of such sum to the account of the resident or at the time of payment, whichever is earlier.

The TDS on virtual coins come as the Reserve Bank of India (RBI) Governor Shaktikanta Das said on Thursday that cryptocurrencies are a clear danger to the financial systems, adding that we must be mindful of the emerging risks on the horizon.

CBDT has notified that the TDS collected under Section 194S should be deposited within 30 days from the end of the month in which the deduction has been made.

According to Rajagopal Menon, Vice President at leading crypto-exchange WazirX, they are complying with the government's directive on 1 per cent TDS and "the updates on our exchange and P2P (peer-to-peer) platforms went live yesterday".

"The new update will ensure that tax deductions are transparent to keep users informed of taxation throughout the crypto buying experience," Menon told IANS.

The TDS collected needs to be paid to the Income Tax Department in Indian currency. For this, any TDS collected in the form of Crypto has to be converted to Indian currency.

Menon said that at present, it is still premature to predict the ramifications of TDS.

"We will be in a better position to understand this by the second week of July," he said.

"There has been a fall in trading across the industry as investors shift to hold and there may be another dip as traders see their capital getting locked while trading on KYC-compliant Indian exchanges," he added.

CBDT has clarified that if the buyer has deducted tax under Section 194S of the Income Tax Act, the seller will not be required to deduct it on the same transaction.

To facilitate the proper implementation, the seller may take an undertaking from the buyer regarding the deduction of tax.

The Indian government levies a flat 30 per cent tax on income from all virtual digital assets, including cryptocurrencies and NFTs