Budget 2022 Highlights: Crypto Tax Is Here

The Finance Minister presented the Union Budget 2022 on February 1 2022. I share a few important proposals from the Budget announcements. There were no fireworks on the retail taxation front with no change in income tax slabs or Section 80C investment limit. However, there is a good and bad news for crypto investors.

#1 No Change in Income Tax Slabs

The tax slabs remain unchanged from the previous years.

#2 No Hike in Section 80C Limit

There was clamour for increase in Section 80C investment limit from Rs 1.5 lacs to at least Rs 2 lacs. The Government has resisted the urge and kept the Section 80C unchanged at Rs 1.5 lacs per financial year.

#3 Parity in Government Contribution to NPS Accounts of Central and State Government Employees

Govt. contribution to NPS Tier 1 account of Central Government employees was exempt up to 14% of the Basic salary (includes Dearness allowance too). This change was made a couple of years back. However, the tax exemption for State Government employees was still capped at 10%. Unfair, isn’t it?

In this budget, the Finance Minister has proposed to hike the tax exemption for State Government employees from 10% to 14%. This also paves the way for state governments to increase contribution to their employee account. Hence, good news for State Government employees.

The tax exemption for employer contribution to NPS account for non-government employees remains capped at 10% under Section 80CCD(2).

#4 Cypto Tax Is Here

Flat 30% tax on gains made on sale of crypto assets (referred to as virtual digital assets). The tax rate is irrespective of your income tax slab rate. No concept of short term or long-term capital gains tax. All gains taxed at 30%. For the calculation of capital gains, no expenditure other than the cost of acquisition of assets is allowed.

There shall be tax deduction at source (TDS) of 1% on all the sale transactions. As I understand, the TDS is applicable on the sale consideration (and not on the gain amount). So, you invest Rs 1.5 lacs in Bitcoin. After a few months, the value of your investment drops to Rs 1 lac. Even though you are sitting on a loss of Rs 50,000, if you sell your Bitcoin investment, there will be a TDS of Rs 1,000 (1% of Rs 1 lac). This is not good news for high frequency crypto traders. Perhaps, this will reduce speculation by Indian crypto investors.

As per the Budget memo, the TDS is applicable only if the sale consideration by the payer is less than Rs 50,000 during the financial year. Since we are talking about the financial year, expect TDS on all transactions. As I understand, even lending and staking will be subject to TDS.

We will have to see how this TDS plan gets implemented because many times you exchange one digital asset for another. For instance, you exchange Bitcoin for Ethereum. Essentially, you sell Bitcoin and buy Ethereum. The counterparty sells Ethereum and buys Bitcoin. So, both have to be subject to TDS.

The news gets worse from here.

No set-off of loss/gains made in crypto assets permitted against any other source of income, including capital gains. Therefore, you will not be able to set off a loss of Rs 2 lacs in crypto assets against a capital gain of Rs 2 lacs in stocks, gold, real estate or mutual funds. Or if you booked a gain of Rs 3 lacs in crypto trading and a loss of Rs 3 lacs in stocks, you can’t use the loss in stocks to set off gains in crypto assets.

Additionally, you are allowed to carry forward losses in crypto assets forward. Ouch! This must hurt. In other assets, if you book losses, you can at least seek solace that this loss will perhaps help reduce tax liability at some point in time. With crypto assets, you can set off losses against crypto gains only in the same financial years.

If you gift a crypto asset to a relative, the recipient of the gift (crypto asset) shall pay 30% tax on the gift amount. This applies to even close relatives.

Where is the good news? Well, since the Government has specified taxation of cryptos, the chances of cryptos being banned outright goes down sharply. Moreover, the collection of TDS also ensures better tax compliance. There was also confusion surrounding how gains made on crypto assets must be taxed. I believe this brings much needed clarity to the sector and crypto investors and traders.

#5 Flexibility in Correcting Income Tax Returns

If you have made an error in filing your income tax returns, you can make a change to your income tax return within 2 years by paying the extra tax, if any.

Author’s Disclaimer: I do not yet have complete clarity about how crypto assets will be taxed. Please consult a chartered accountant before taking any action.

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