Cryptocurrency in India: Legality, AML Regulations, and Taxation (2024)

According to estimates, India is expected to have nearly 270 million crypto users in 2024, surpassing the combined total of the United States and Europe. However, crypto regulations in India remain unclear, with the country just recently beginning to implement the crypto Travel Rule.

Let’s explore what the crypto laws in India entail and how to ensure compliance.

Is cryptocurrency legal in India?

As of 2024, the status of cryptocurrency in India remains complex. 

While the Reserve Bank of India (RBI) imposed a banking ban on cryptocurrency transactions in 2018, the Supreme Court of India lifted this ban in March 2020, allowing banks to provide services to cryptocurrency exchanges. Like in most countries, cryptocurrencies, including Bitcoin and Ethereum, are not considered legal tender in India. There’s also no specific licensing regime for cryptocurrency operators in India.

Cryptocurrency regulations in India

The Indian government has cited concerns about consumer protection, financial stability, and the potential misuse of cryptocurrencies for illicit activities. The introduction of the “Cryptocurrency and Regulation of Official Digital Currency Bill” in 2021, signaled the government’s intent to regulate the sector. This bill proposed the creation of an official digital currency by the RBI while imposing restrictions on private cryptocurrencies. Although the bill has yet to pass, it reflects the government’s approach to balancing innovation with regulation.

Here’s a breakdown of all regulations concerning crypto in India:

1. Taxation of Cryptocurrency Gains:

• 30% tax on gains. The Indian government has imposed 30% tax and 4% cess on income generated from the transfer of cryptocurrencies. This tax applies to any gains from the sale or transfer of digital assets.
• 1% TDS (Tax Deducted at Source). 1% TDS is applied on transactions involving cryptocurrencies. This applies to transactions exceeding Rs 10,000 annually, or Rs 50,000 for specified persons.
• No deductions allowed. Taxpayers can’t claim deductions for expenses or losses incurred while trading cryptocurrencies, except for the cost of acquisition.

2. Crypto Travel Rule Implementation:

A Notification issued by the Indian Ministry of Finance on March 7, 2023, brought Virtual Digital Assets (VDAs), including cryptocurrency, under the purview of the Prevention of Money Laundering Act (PMLA). This encompasses activities such as VDA trading, transfer, storage, management, and related financial services. With this, India has begun implementing the Travel Rule, a global standard set by the Financial Action Task Force (FATF), as part of its broader effort to enhance anti-money laundering (AML) and counter-terrorism financing (CFT) measures. 

Following the above Notification, the Financial Intelligence Unit of India (FIU-IND) issued AML & CFT Guidelines for reporting entities providing VDA services. These guidelines mandate that Service Providers providing services relating to VDA(SPs) must include accurate originator and beneficiary information in wire transfers, as per Section 12(1)(a) of the PMLA. SPs are also required to monitor transfers for missing information and conduct screening. 

As per the guidelines, the originating SPs must obtain and hold required and accurate originator information and required beneficiary information on VDA transfers, submit the above information to the beneficiary SP or financial institution (if any) immediately and securely, and make it available on request to appropriate authorities. Beneficiary SPs must obtain and hold required originator information and accurate beneficiary information on VDA transfers and make it available on request to appropriate authorities. This applies regardless of whether the value of the VDA transfer is denominated in fiat currency or another VDA.

The required information which the beneficiary SP must obtain from the originator SP and hold, includes:

1. Originator’s Permanent Account Number (PAN) or National Identity Number 
2. Originator’s name (i.e., the sending person’s name). The beneficiary institution does not need to verify the originator’s name for accuracy, but should review it for the purpose of STR monitoring and sanction screening.
3. Originator’s account number used to process the transaction. In the VDA context, this could mean the “wallet address” of the originator.
4. Originator’s physical (geographical) address that uniquely identifies the originator to the ordering institution, or date and place of birth.
5. Beneficiary’s name (i.e., the name of the person who is identified by the originator as the receiver of the VDA transfer). The beneficiary institution must verify the beneficiary’s name for accuracy, if the name of their customer has not been previously verified. Thus, the beneficiary institution can confirm if the beneficiary’s name and account number they obtain from the ordering institution match with the beneficiary institution’s verified customer data. 
6. Beneficiary’s account number used to process the transaction. In the VDA context, this could mean the “wallet address” of the beneficiary.

Learn the details of the Travel Rule in India in Sumsub’s documentation.

3. AML and KYC Requirements:

• Anti-Money Laundering (AML) regulations. The primary legislation that outlines the framework for combating money laundering in India is the Prevention of Money Laundering Act, 2002 (“PMLA”). Crypto exchanges in India, as well as other service providers must comply with AML regulations, which include stringent Know Your Customer (KYC) norms to verify the identity of users. On March 7, 2023, the federal government published a gazette notice mandating intermediaries dealing with virtual digital assets (VDA) and crypto exchanges to undertake know your customer (KYC) checks on their customers and platform users.
• Reporting obligations. Exchanges are required to report suspicious transactions and maintain transaction records. Under section 12 of the PMLA, every Reporting Entity is mandated to maintain a record of all transactions and documents evidencing the identity of clients and furnish the same to the central government, including furnishing information and reporting suspicious transactions to the Financial Intelligence Unit, Government of India (“FIU-IND”). In addition, under Rule 5(2) of the Prevention of Money-laundering (Maintenance of Records) Rules, 2005, every Reporting Entity must develop an internal mechanism for maintaining such information.

Suggested read: How to Comply with KYC/AML Rules in India, a Global Fintech Hub (2024)

4. Crypto mining:

Currently, crypto mining in India can be considered a legal gray area. While there is no explicit nationwide ban on cryptocurrency mining, local rules in some states may restrict or discourage it, especially due to the high energy consumption associated with mining operations.

6. Proposed Cryptocurrency Bill:

Over the past few years, there have been discussions about introducing a cryptocurrency bill in Parliament, which could potentially ban or regulate private cryptocurrencies. However, as of 2024, no such bill has been passed.

India Cryptocurrency Bill

The India Cryptocurrency Bill, officially known as “The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” has been a focal point in the discourse surrounding digital assets in the country. Initially proposed in 2021, the bill sought to ban all private cryptocurrencies while introducing a framework for the creation of an official digital currency by the RBI. However, due to pushback from industry stakeholders and concerns about stifling innovation, the bill has faced several delays and revisions.

As of 2024, the latest iteration of the bill is still under discussion, with significant changes expected. The current draft reportedly focuses more on regulating the cryptocurrency sector rather than imposing an outright ban. It aims to establish clear guidelines for cryptocurrency exchanges, promote investor protection, and create a regulatory framework that allows for innovation while mitigating risks.

At the moment the bill is not available to the public. The bulletin is available here.

Why is crypto regulation important in India?

Crypto regulation is crucial in India for several reasons:

1. It provides a legal framework that can protect investors from fraud and ensure that the market operates transparently. Without regulation, the cryptocurrency market could be prone to manipulation, money laundering, and other illicit activities. Recent cases of money laundering through crypto include the:
   • Delhi Firm Investigation: A Delhi-based company was found to have sold cryptocurrencies worth over ₹1,858 crore (221K USD), triggering an ED investigation. The agency discovered that the accused had made illegal foreign remittances exceeding ₹3,500 crore (417K USD), linked to a hawala racket that transferred illicit money to offshore tax havens.
   • Bitconnect Coin Case: The ED provisionally attached assets worth ₹433 crore in connection with a money laundering case linked to Bitconnect Coin. The investigation revealed that the promoters had induced investments through fraudulent schemes, leading to significant financial losses for investors.
2. Regulation can help integrate cryptocurrencies into the broader financial system, allowing for their potential use in legitimate economic activities.

3. By regulating the sector, the Indian government can generate revenue through taxation and foster a controlled environment for the development of blockchain technology.

4. Clear regulations can provide much-needed clarity for businesses and investors, encouraging innovation and investment in the sector.

The future of cryptocurrency adoption in India

The future of cryptocurrency adoption in India appears promising but uncertain. On the one hand, the Indian market has shown significant interest in cryptocurrencies, with millions of users actively trading digital assets. This growing interest suggests that cryptocurrencies could play a more substantial role in India’s financial ecosystem. On the other hand, the regulatory environment will significantly influence the pace and extent of adoption. If the government introduces a balanced regulatory framework that fosters innovation while ensuring security, cryptocurrency adoption could accelerate. The introduction of an official digital currency by the RBI could also play a pivotal role in shaping the future of digital assets in India. The current implementation of the crypto Travel Rule in India is also a step forward in developing robust cryptocurrency rules in India, as well as wide adoption of cryptocurrency across the country.

Overall, while challenges remain, the potential for cryptocurrency adoption in India is vast, contingent on the evolving legal and regulatory landscape.

FAQ

• Is cryptocurrency legal in India?

  Cryptocurrency is not banned in India, but it’s not legal tender.

• Is Bitcoin legal in India?

  Yes, Bitcoin is legal in India, but it’s not recognized as legal tender for transactions. Bitcoin is also subject to taxation in India.

• Is cryptocurrency regulated in India?

  Crypto operators have to comply with local AML and tax regulations.