💡 How to Handle TDS on Crypto‑Backed Loan Platforms in India

An elegant guide for crypto borrowers and lenders navigating taxation

🌐 Introduction

Crypto loans—where borrowers pledge digital assets like Bitcoin or Ethereum as collateral—are becoming popular on platforms such as Nexo, Aave, and Uniswap. But does TDS apply when you borrow or repay such loans? This guide decodes TDS applicability, compliance steps, and tax scenarios so you stay safe and informed.

📌 Are Crypto Loans Taxable or TDS‑Applicable?

✅ Crypto-backed loans are not considered income or sale. You're merely borrowing against collateral, not transferring or selling any VDA.
✅ Hence, Section 194S TDS (1% on crypto transfers) does not apply because no VDA changes hands.
✅ Platforms like Aave and Compound explicitly confirm crypto loans are non‑taxable for principal transactions.

💡 Tax Implications When You Sell or Exchange Crypto

While loans themselves attract no tax, other crypto actions do:

• Selling crypto or swapping one crypto for another = 1% TDS under Section 194S, and 30% flat income tax on gains under Section 115BBH. 

• Crypto collateral liquidation by the borrower (if defaulting) is treated as transfer — thus TDS and tax apply at that point.

🧾 Practical Scenario: How It Works

Scenario: You pledge 1 ETH worth ₹100,000 as collateral and take a ₹50,000 loan in INR.

• No VDA transfer → No TDS.

• Loan foreclosure precipitates sale of ETH → that moment triggers 1% TDS and 30% crypto tax.

If you later retrieve your crypto and repay, no further TDS applies until another transfer/swapping occurs.

📜 TDS Responsibilities & Deposits

If crypto transfer occurs (e.g. via liquidation):

• Buyer or platform deducts 1% TDS at time of transfer. 

• Must deposit the TDS within 7 days from month-end (30 days for specified persons) using Form 26QE / 26QF.
  

• Deductor issues Form 16E certificate to seller within stipulated time. 

📉 Penalties for Non-Compliance

If TDS is mismanaged or not filed:

• Penalty up to 100% of TDS amount + interest under Section 271C.

• Interest of 1% per month for non-deduction and 1.5% for non‑deposit. 

• Imprisonment (3 months to 7 years) possible under Section 276B if TDS isn't remitted. 

📝 Accounting & ITR Compliance

If you incur crypto gains:

• Report under Schedule VDA in ITR‑2 or ITR‑3. 

• No deductions allowed except cost of acquisition; no loss offsetting permitted. 

• Claim credit for 1% TDS deducted in Form 26AS during ITR filing. 

✅ Summary Table

🔍 Final Tips

• Keep transaction records when crypto is liquidated.

• Do not ignore TDS or ITR filings—non-reporting is high-risk.

• Even in P2P or foreign platform trades, buyers must deduct TDS, remit and file forms.