India Union Budget 2022: Cryptocurrencies under the tax scanner

India’s Finance Minister, Nirmala Sitharaman, laid out a detailed tax structure on transactions on digital assets, which is likely to impact the cryptocurrency ecosystem in the country that is growing at an exponential pace. The Indian government and the Reserve Bank of India have been discussing ways to put a check on the booming trade in cryptocurrencies for some time now.

In the Union Budget for 2022-23, Sitharaman has proposed that income from transfer of any virtual digital asset will now be taxed at 30 per cent with no deductions allowed for expenditure while computing such income, except the cost of acquisition. Also, any loss registered from transfer of virtual digital assets cannot be set off against any other income while a 1 per cent tax deducted at source (TDS) will be levied on payment above a specified limit for transfer of digital assets. Digital assets received as gifts will also be taxed at the hands of the recipient.

In the recent past, both the government and the central bank have expressed concerns over the unhindered growth of cryptocurrency transactions in the country on the back of fears of possible money laundering and terror financing through such transactions. Also, crypto trading, which often is highly speculative in nature, brings in the possibility of huge losses for investors. The government also proposed to bring about a bill to enact a regulatory framework for cryptocurrencies.

In a parallel move, Sitharaman has announced that RBI will soon issue India’s own Central Bank Digital Currency (CBDC) – the Digital Rupee.

Sitharaman did not tinker with the personal income tax structure but has tried to bring in more trust among the taxpayer and the revenue department by announcing a two-year window to the taxpayer to correct past mistakes in tax filing. Sitharaman pointed out individuals often make errors or omissions in their tax filing due to the large volume of financial transactions they undertake. Hence a new provision is to be added to the tax laws permitting an assessee to file an updated return on payment of additional tax within two years from the end of the relevant assessment year. This will come as a relief for taxpayers as it will cut down on disputes that often lead to adjudication proceedings or extended litigation.

Employees of the various state governments in India have been provided with a tax relief on their contribution to the National Pension System (NPS) to bring them on par with the employees of the central government. The Finance Minister has proposed to increase the tax deduction limit to 14 per cent from the earlier 10 per cent on contribution to the NPS account of state government employees. The move will result in a social security net for all government employees.

Welcoming the move, Sumit Shukla, CEO, HDFC Pension Fund, said that besides strengthening the social security net it will result in larger flow into the NPS. "Around 15 states, including Assam, Bihar, Punjab, Uttar Pradesh and Uttarakhand, have already increased the employees’ contribution to NPS to 14 per cent to bring it at par with the central government employees’ contribution. The move will help strengthen the social security net since all state governments will have to consider raising the employees’ contribution to NPS to 14 per cent now. It is also beneficial for the pension fund managers (PFMs) like us as it will increase our AUM,” he said.

In another move, Sitharaman has also proposed to allow the payment of annuity and lump-sum to the differently-abled dependents for whom their parents or guardian have taken an insurance policy during the lifetime of parents/guardians after they attain 60 years of age.

As per present provisions, deductions to the parent or guardian were permitted only if the lump sum payment or annuity is available to the differently-abled person on the death of the subscriber i.e. parent or guardian. Sitharaman pointed out there could be circumstances where differently-abled dependents may need payment of annuity or lump sum amount even during the lifetime of their parents/guardians. "The move is aimed at giving assurance to the policyholders that the purpose of their investment in insurance will be fulfilled without worry,” said Naval Goel, CEO, PolicyX.com.