How Do Banks in India React When You Withdraw Crypto to Fiat?

• DATE: 14 11 25
• BY: Stellan Marwick

When you try to withdraw cryptocurrency to fiat currency in India, you’re not just making a simple bank transfer. You’re walking into a legal gray zone where the law says one thing, but the banks act like another. Even though owning and trading crypto is legal in India, banks still treat crypto-to-fiat withdrawals like risky, borderline activities. Why? Because the Reserve Bank of India (RBI) hasn’t given them a green light - and they’re scared of the consequences.

Legal? Yes. Bank-Friendly? Not Even Close

The Supreme Court of India overturned the RBI’s 2018 ban on crypto banking services in 2020. That meant banks could legally open accounts for crypto exchanges again. But that didn’t mean they started welcoming crypto customers with open arms. Most banks still avoid it. They don’t outright refuse - they just make it hard. You’ll get delayed transfers, extra paperwork, or worse: your account flagged for “suspicious activity.”

Here’s the reality: if you’re trying to move Bitcoin or Ethereum into your bank account as rupees, the bank doesn’t see a simple sale. They see a transaction with no clear paper trail. Unlike selling stocks or forex, crypto transactions don’t come with a broker statement or exchange receipt that banks recognize. So when your account receives ₹50,000 from an unknown source labeled “crypto withdrawal,” the bank’s fraud system kicks in. And they don’t ask questions - they freeze.

Why Banks Are So Nervous

The RBI has never changed its mind about crypto. Former Governor Shaktikanta Das called it a threat to financial stability. Current Governor Sanjay Malhotra says India should focus on its own digital rupee - the CBDC - not private cryptocurrencies. That’s the official line. And banks listen. They don’t want to be the ones fined or investigated for helping crypto users.

It’s not just about fear. It’s about rules. Since March 2023, every crypto platform in India - even foreign ones serving Indian users - must register with the Financial Intelligence Unit (FIU-IND) under the Prevention of Money Laundering Act. That means exchanges have to collect your ID, proof of address, source of funds, and even your tax details. If they don’t, they get blocked. In 2024, the government forced 25 major crypto exchanges like BingX and LBank to pull their apps from Indian app stores because they skipped registration.

So when you withdraw crypto to fiat, the exchange you’re using must have passed FIU-IND checks. If they haven’t, your withdrawal won’t go through - not because the bank says no, but because the exchange is blocked from sending money to Indian banks at all.

What You Need to Withdraw Crypto to Fiat

If you want to successfully turn crypto into rupees, you need more than just a wallet. You need a full compliance package:

1. Use a registered exchange: Only platforms like WazirX, CoinDCX, or ZebPay that are registered with FIU-IND can legally process fiat withdrawals. Avoid offshore platforms that don’t comply - they’ll block your withdrawal or vanish with your funds.
2. Complete full KYC: This isn’t just uploading your Aadhaar. You need to verify your identity, phone, bank account, and sometimes even your employment or income source. Some exchanges ask for six months of bank statements to prove your crypto came from legal earnings.
3. Track your taxes: India taxes crypto gains at 30% plus 4% cess. If you don’t report your crypto-to-fiat profits in your income tax return, the Income Tax Department can freeze your bank account. The government cross-checks crypto exchange data with bank transactions. Don’t assume they don’t know - they do.
4. Use the right bank: Some banks are more lenient than others. Public sector banks like SBI and PNB tend to be stricter. Private banks like Kotak Mahindra or HDFC are more likely to process crypto withdrawals if the source is clearly documented. But even they’ll ask for explanations.

What Happens If You Get Flagged?

It’s not rare. If your bank sees a large crypto deposit - say ₹2 lakh or more - they’ll call you. They might ask: “Where did this money come from?” “Do you have proof of sale?” “Can you show the transaction ID from the exchange?”

If you can’t answer, your account could be frozen for up to 90 days while they investigate. You’ll need to submit:

• A screenshot of your trade history from the exchange
• A tax filing receipt showing you paid 30% on the gain
• A letter from the exchange confirming the withdrawal was processed under KYC

Without these, you might lose access to your account. And if the bank reports you to FIU-IND for “suspicious transaction,” you could face a formal inquiry - even if you did nothing illegal.

The Bigger Picture: Why This Isn’t Going Away

India isn’t banning crypto. It’s controlling it. The government wants to tax it, track it, and tie it to the formal financial system - not let it run wild. That’s why they’re pushing for new legislation that would put crypto under SEBI’s control, treating it like securities. If passed, this would make exchanges register like stock brokers, and withdrawals would look more like selling shares.

Until then, you’re stuck in the middle. The law says you can own crypto. The banks say they’ll process your withdrawal - but only if you jump through every hoop. The RBI says crypto is dangerous. And the FIU-IND is watching every transaction.

What Works Right Now

Here’s what real users in India are doing in 2025 to get their crypto cash without trouble:

• They withdraw small amounts - under ₹1 lakh - to avoid triggering alerts.
• They wait 2-3 days between withdrawals to avoid patterns that look like money laundering.
• They keep all records: trade receipts, tax filings, exchange confirmations - in one folder, backed up online.
• They avoid using peer-to-peer (P2P) platforms for cashouts. Those are the most likely to get flagged.
• They use only exchanges that display the FIU-IND registration number on their website.

There’s no magic trick. No loophole. Just paperwork, patience, and proof.

What Doesn’t Work

Don’t try these - they’ll get you in trouble:

• Using fake IDs or borrowed bank accounts to withdraw crypto.
• Splitting large withdrawals into smaller ones to dodge detection (this is called “structuring” and is illegal under PMLA).
• Using unregistered offshore exchanges like Binance or KuCoin to send rupees to your account.
• Ignoring tax reporting - the IT department already has your crypto data.

The government isn’t going after small-time users. But they’re going after anyone who tries to hide the trail. If you’re honest, you’re fine. If you’re sneaky, you’re already on their radar.

Final Reality Check

India’s system isn’t broken - it’s intentional. The government wants crypto to exist, but only under strict control. Banks are just following orders. Your job isn’t to fight the system. It’s to navigate it.

If you’re withdrawing crypto to fiat in India, treat it like filing a tax return: be prepared, be accurate, be transparent. The money is yours. But the rules are not.