Cryptocurrency Legislation in India: A Comprehensive Overview on its Validity and Regulatory Framework

In the dynamic world of digital currencies, India's regulatory landscape presents a unique blend of progress and uncertainty.

The Indian government took a significant step in 2021 with the introduction of the "Cryptocurrency and Regulation of Official Digital Currency Bill, 2021." This bill aims to establish a framework for the Reserve Bank of India (RBI) to issue an official digital currency while prohibiting private cryptocurrencies. However, the legal status of cryptocurrencies in India remains somewhat complicated.

The Supreme Court of India lifted the RBI's 2018 ban on cryptocurrency transactions in March 2020, making cryptocurrency trading legal in India. Yet, as of 2024, regulations governing the buying and selling of Bitcoin and other cryptocurrencies are still being formulated, leading to uncertainty and decreased investor confidence.

Profits from trading Bitcoin and other cryptocurrencies are taxed as capital gains at a flat rate of 30% plus a 4% cess. Any income derived from Bitcoin mining is taxed similarly. Additionally, a 1% Tax Deducted at Source (TDS) is applied to financial transactions exceeding INR 50,000 annually, and a circular issued in June 2022 implemented Section 194S in the Income Tax Act, mandating a 1% TDS on transactions exceeding specific thresholds.

In March 2023, the Ministry of Finance issued a notification bringing cryptocurrency transactions under the ambit of the Prevention of Money-Laundering Act (PMLA) 2002. This move aims to strengthen the regulatory oversight of cryptocurrency activities in India.

The Indian government established the Inter-Ministerial Committee (IMC) in 2017 to study virtual currencies and propose regulatory actions. However, the current stance of the Indian government is to avoid creating comprehensive legislation to regulate cryptocurrency custody. Instead, the government maintains partial oversight due to concerns about systemic risks integrating digital assets into the formal financial system could pose.

Globally, the legal status of cryptocurrencies varies significantly. Some nations, like Japan, Switzerland, Singapore, Malta, Portugal, Estonia, El Salvador, Germany, the United Arab Emirates (Dubai), Georgia, and several others, have implemented favorable tax regimes and supportive regulatory environments for cryptocurrencies, attracting international crypto businesses.

In contrast, other countries impose severe restrictions or bans on cryptocurrencies. The legal status of cryptocurrencies in India is thus part of a larger global conversation about the future of digital currencies and their integration into the formal financial system.

In an interview, Jayant Sinha, Chair of the Standing Committee on Finance in India's Parliament, mentioned that global standards for cryptocurrencies are still evolving. Significant regulatory advancements might be delayed due to the 2024 election year in many key countries, suggesting a period of continued uncertainty for the cryptocurrency market.