Virtual Digital Assets in India: PMLA Classification, VDA Taxation, and the Global Regulatory Framework

The regulation of virtual digital assets (VDAs) – a statutory category introduced by the Finance Act, 2022 to encompass cryptocurrencies, non-fungible tokens (NFTs), and other digital representations of value – occupies a contested and rapidly evolving position in Indian law. India has not enacted comprehensive VDA legislation, and the regulatory framework that has emerged is the product of fiscal measures, anti-money laundering classification, and a Reserve Bank of India monetary policy posture that has historically been sceptical of private digital currencies. The result is a patchwork regime that imposes significant tax and compliance obligations on VDA market participants while deferring the foundational questions of legal status, consumer protection, and exchange oversight to a legislative process that remains incomplete as of June 2026. This blog examines the current Indian VDA regulatory framework across its principal dimensions – taxation, anti-money laundering classification, and RBI monetary policy – and situates the Indian approach within the comparative context of the EU's Markets in Crypto-Assets Regulation (MiCA), the UK's financial services approach to cryptoassets, and Singapore's Payment Services Act framework. This blog contends that the absence of a comprehensive VDA regulatory statute creates material legal and compliance uncertainty for VDA businesses operating in India and that the introduction of a principle-based VDA Act modelled on the MiCA framework would represent a superior regulatory architecture.

The Finance Act, 2022: Statutory Definition and Taxation Architecture

The Finance Act, 2022 inserted Section 2(47A) into the Income Tax Act, 1961, defining "virtual digital asset" as any information, code, number, or token (not being Indian currency or foreign currency) generated through cryptographic means or otherwise, providing a digital representation of value, and capable of being exchanged for or with value, or functioning as a store of value or unit of account, including any application or usage thereof with a financial function.¹ NFTs and other digital tokens, to the extent they satisfy this definition, are expressly included. The RBI's Central Bank Digital Currency (CBDC) – the Digital Rupee – is explicitly excluded from the definition.

The Finance Act, 2022 simultaneously introduced Section 115BBH into the Income Tax Act, imposing a flat rate of thirty per cent tax on income from the transfer of VDAs, without the benefit of set-off of losses from one VDA against gains from another, and without the benefit of basic exemption limits or deduction of expenses other than the cost of acquisition. Capital gains treatment is categorically unavailable: VDA income is taxed as ordinary income of a special class at the highest marginal rate, regardless of the holding period. Section 194S, inserted by the same Finance Act, imposes a one per cent tax deducted at source (TDS) obligation on persons making payment in respect of a VDA transfer, applicable to all transactions above a de minimis threshold.

The taxation architecture has been criticised by market participants for its structural asymmetry – the prohibition on cross-VDA loss set-off means that a taxpayer who realises a gain on one digital asset and a loss on another in the same tax year cannot offset them, resulting in a tax liability on the gross gain despite a net zero or negative economic outcome. This asymmetry, combined with the thirty per cent flat rate, has driven material trading volume from Indian-registered exchanges to offshore platforms where reporting is absent or delayed – an effect the TDS mechanism was designed to address but has been only partially effective in achieving.

The PMLA Classification: Anti-Money Laundering Obligations for VDA Service Providers

The most significant compliance development for VDA businesses in India since 2022 is the amendment to the Prevention of Money Laundering Act, 2002 (PMLA) to bring VDA service providers (VASPs) within its scope as "reporting entities." The Finance Ministry's notification dated 7 March 2023, issued under Section 2(1)(sa) of the PMLA, amended Schedule I-III of the Act to include VDA-related services – including exchange between VDAs and fiat currencies, exchange between forms of VDAs, transfer of VDAs, safekeeping or administration of VDAs, and participation in VDA issuances – within the definition of activities conducted by reporting entities.²

As reporting entities under the PMLA, VASPs in India are subject to a comprehensive set of anti-money laundering and counter-terrorist financing (AML/CFT) obligations. These include customer due diligence (CDD) and know-your-customer (KYC) obligations at prescribed thresholds, transaction monitoring and suspicious transaction reporting (STR) to the Financial Intelligence Unit-India (FIU-IND), record-keeping of customer and transaction data, and the appointment of a designated reporting officer.

The PMLA classification aligned India with the Financial Action Task Force (FATF) Recommendation 15, which requires that VASPs be regulated for AML/CFT purposes and subject to supervision by a competent authority. The FIU-IND has been designated as the supervision authority for VASPs under the PMLA framework, and several offshore VDA exchanges operating in the Indian market – including those of Binance, Kraken, and KuCoin – received show-cause notices from the FIU-IND in late 2023 for operating services accessible to Indian users without PMLA registration.³ The regulatory action against offshore platforms represents a significant assertion of jurisdictional reach by the Indian anti-money laundering regulator and signals an enforcement posture that VDA businesses must take seriously.

The RBI's Position: Monetary Policy Concerns and the CBDC Programme

The Reserve Bank of India has maintained a consistent institutional position of scepticism toward private cryptocurrencies as potential monetary policy risks. The RBI's April 2018 circular prohibiting regulated entities from providing banking services to VDA businesses was struck down by the Supreme Court of India in Internet and Mobile Association of India v Reserve Bank of India (2020) 10 SCC 274, on the ground that the prohibition was disproportionate absent a legal prohibition on VDA ownership.⁴ The RBI's concerns were characterised by the Court as insufficiently grounded in demonstrated harm to compel the degree of restriction imposed.

The RBI has continued, after the Supreme Court judgment, to advocate for a broad prohibition on private cryptocurrencies in its periodic reports on currency and payment systems, on the ground that the unbacked, algorithmically-governed nature of private digital currencies creates systemic risks to monetary sovereignty. These concerns are reflected in the RBI Annual Report 2023-24 and the RBI Financial Stability Report, June 2024, both of which reiterate the RBI's view that private cryptocurrencies pose risks of currency substitution, capital flight, and undermining of monetary transmission.

The Digital Rupee – India's CBDC – is the RBI's preferred digital currency architecture. The Digital Rupee (Wholesale Segment) pilot was launched on 1 December 2022, and the Digital Rupee (Retail Segment) pilot began on 1 December 2022, with subsequent expansion to multiple cities and financial institutions. The CBDC operates under the RBI's existing monetary management framework and is not subject to the VDA taxation and PMLA classification applicable to private digital assets.

Global Comparisons: MiCA, UK Cryptoassets Regulation, and Singapore's PS Act

The European Union's Markets in Crypto-Assets Regulation (MiCA), Regulation (EU) 2023/1114, entered into force on 29 June 2023 and became fully applicable from 30 December 2024, constituting the world's most comprehensive statutory framework for cryptoasset regulation to date.⁵ MiCA establishes a licensing regime for cryptoasset service providers (CASPs), imposes issuance requirements for asset-referenced tokens and e-money tokens, and creates a single European passport for licensed CASPs – enabling a crypto business licensed in one EU member state to provide services across the Union. MiCA's taxonomy – utility tokens, asset-referenced tokens, and e-money tokens – maps onto the functional characteristics of the asset rather than its technical implementation, providing regulatory certainty that the Indian VDA framework does not.

The United Kingdom's approach has been to bring cryptoassets progressively within the Financial Services and Markets Act 2000 framework. The Financial Services and Markets Act 2023 granted the Treasury broad powers to regulate cryptoassets as a new category of specified investment, and the Financial Conduct Authority has consulted on a comprehensive regime for cryptoasset admissions, disclosures, and exchange operating standards expected to be finalised in 2025-2026.

Singapore's Payment Services Act 2019 (PS Act), as amended by the Payment Services (Amendment) Act 2021, requires digital payment token service providers – VASPs, effectively – to obtain a licence from the Monetary Authority of Singapore and comply with AML/CFT, technology risk, and business conduct requirements. Singapore's approach has been credited with positioning the jurisdiction as a regulated jurisdiction of choice for VDA businesses, combining institutional legitimacy with clear licensing standards.

Conclusion

India's VDA regulatory framework – built on a fiscal classification, an anti-money laundering notification, and a central bank adverse opinion – provides a structurally incomplete basis for a mature and internationally competitive VDA market. This blog has argued that the thirty per cent flat tax with no cross-VDA loss set-off has exacerbated offshore migration of trading activity, that the PMLA classification was a necessary and FATF-compliant step but requires a comprehensive supervisory framework around it, and that the RBI's CBDC programme and its opposition to private cryptocurrencies represent a monetary policy position that will shape – though not resolve – the legislative debate. The introduction of a principle-based VDA Act – providing licensing standards, consumer protection, market integrity requirements, and cross-border equivalence recognition modelled on MiCA – would represent a significant improvement over the current patchwork and would position India as a credible jurisdiction for VDA innovation and market development.

Endnotes

¹ Income Tax Act 1961 (India), s 2(47A) (inserted by Finance Act 2022).

² Ministry of Finance (India), Notification SO 1072(E), 7 March 2023 (classification of virtual digital asset service providers as reporting entities under PMLA 2002).

³ Financial Intelligence Unit-India, 'Show Cause Notices to Offshore VDA Exchanges' (Financial Intelligence Unit Press Release, December 2023).

⁴ Internet and Mobile Association of India v Reserve Bank of India (2020) 10 SCC 274 (Supreme Court of India).

⁵ Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets (MiCA) [2023] OJ L150/40.

⁶ Income Tax Act 1961 (India), s 115BBH (tax on VDA transfers at 30%); s 194S (TDS on VDA transactions).

⁷ Prevention of Money Laundering Act 2002 (India), s 2(1)(sa) (definition of reporting entity, as amended).

⁸ Payment Services Act 2019 (Singapore), as amended by Payment Services (Amendment) Act 2021.

⁹ Financial Services and Markets Act 2023 (UK), s 21 (powers to regulate cryptoassets).

¹⁰ Reserve Bank of India, 'Financial Stability Report' (June 2024), ch 4 (risks posed by private cryptocurrencies).