India's Encryption Regulation Tightens: New Tax Rules in 2025 Raise Concerns in the Industry

The Indian government's recently launched 2025 fiscal budget has taken stricter measures regarding cryptocurrency regulation. This new policy introduces stricter reporting requirements and enhanced regulatory mechanisms on top of the 30% tax implemented in 2022. The Income Tax Act's Section 115BBH formally incorporated virtual digital assets (VDA) into the tax system for the first time in 2022, but it does not allow traders to offset losses against other income. The newly added Section 285BAA in the 2025 fiscal budget further expands the regulatory scope, requiring specific institutions to report cryptocurrency transactions within a specified timeframe. At the same time, the government has broadened the definition of VDA to include all cryptocurrency assets based on distributed ledger technology to accommodate industry development.

In recent years, countries around the world are gradually shifting their regulatory attitudes towards cryptocurrencies from panic and excessive regulation to a more flexible, prudent, and adaptive approach. However, as one of the most active countries in global cryptocurrency trading, India still maintains strict regulations and harsh tax policies, lagging far behind the friendly regulatory trends for crypto assets in the international market.

India's cryptocurrency tax system is considered one of the strictest in the world, which not only undermines investor confidence but also severely hinders the innovation and application development of blockchain technology. Despite repeated calls from various sectors of the market to relax tax policies, the Indian government's position has remained unchanged. In the 2025 budget proposal and revisions to the Income Tax Act, the Indian government made certain adjustments to the current tax system, but overall, it has still not changed the limited status of cryptocurrency trading.

Currently, India imposes a tax rate of 30% on the earnings from cryptocurrency assets, which is at an extreme level globally. Furthermore, this tax system does not allow investors to deduct losses or operating costs, leading many cryptocurrency businesses and investors to migrate to more friendly jurisdictions. The 2025 fiscal budget proposal also further expands the definition of "cryptocurrency assets" (VDA), bringing all blockchain-based cryptocurrency assets into the tax scope. However, this definition still does not classify different types of cryptocurrency assets and does not distinguish their technological usage and economic attributes, leading to increased uncertainty in regulatory compliance.

The Income Tax Act imposes stricter penalties on undeclared VDAs, classifying them as "undeclared income" and imposing fines of up to 70%, without providing any exemptions or relief policies. This level of punishment reflects the Indian government's high-pressure stance on encryption assets, and more critically, the government's overly broad definition of encryption assets results in a heavy tax burden for Indian crypto users.

In such a harsh tax environment, the large-scale relocation of domestic encryption companies in India has become a trend, while the continuous growth of trading volume in the encryption market reflects the huge divergence between regulatory policies and market realities. Although the government attempts to curb the encryption market through high tax policies, the younger generation of investors in India still sees encryption assets as a primary or supplementary source of income.

India's stringent tax policies undoubtedly increase the difficulty for encryption companies to operate in the local market. Although the encryption industry in India remains relatively vibrant, more friendly regulatory environments in other regions are attracting companies to relocate. Research predicts that by 2035, the size of India's encryption market is expected to grow from the current $2.5 billion to $15 billion. However, overly stringent regulations may drive capital from India's encryption industry to other countries, resulting in reduced tax revenue for the Indian government, limited market innovation, and affecting India's competitiveness in the global digital finance ecosystem.

Another major challenge in the Indian encryption market is the complexity of compliance and legal uncertainty. Although the Indian government proposed the establishment of a comprehensive encryption regulatory framework as early as 2021, the bill is more inclined to prohibit Bitcoin and altcoins and promote central bank digital currency (CBDC), ultimately leading to the bill's prolonged failure to be implemented. In this regulatory environment, market participants face policy upheavals and compliance risks, hindering long-term investments. Businesses and investors are concerned about the potential for government crackdowns or additional tax burdens in the future, which could affect business decisions and market vitality.

In conclusion, despite the Indian government strengthening regulations under the pretext of financial stability, the strict tax system and vague regulatory framework are severely restricting the innovation capacity of the Indian encryption market and affecting India's global competitiveness. The Indian government needs to find a balance between investor protection and market development, reduce tax rates, clarify asset classification, and decrease legal uncertainty to enhance market confidence and attract more capital. If India continues to maintain its current regulatory stance, it may miss out on economic opportunities in the blockchain and digital finance sectors; conversely, India still has the potential to become a significant player in the global encryption market.