How to Legally Navigate Crypto Regulations in India

• DATE: 26 07 25
• BY: Stellan Marwick

India doesn’t ban cryptocurrency. That’s the first thing you need to understand. There’s no law saying you can’t own Bitcoin, Ethereum, or any other digital asset. What you can’t do is ignore the rules. The government doesn’t want to stop you from trading - it wants to track you, tax you, and make sure no one’s laundering money through crypto.

So if you’re asking how to avoid crypto restrictions in India, the real answer is: you don’t. You don’t avoid them. You follow them. The only way to keep trading safely is to play by the rules - and those rules are clear, strict, and enforced.

What’s Actually Restricted in India?

There are no outright bans on buying, selling, or holding crypto. You can’t use it as legal tender - you can’t pay for your chai with Bitcoin. But you can buy it, sell it, hold it, and even earn interest on it through regulated platforms.

The real restrictions aren’t about ownership. They’re about how you do it. The government has shut down 25 crypto platforms since 2023 for failing to register with the Financial Intelligence Unit India (FIU-IND). These were exchanges that didn’t collect KYC data, didn’t report suspicious transactions, and didn’t deduct taxes at source.

Platforms like BingX and LBank got blocked. Binance? They came back in August 2024 - after hiring Indian compliance teams, setting up local data storage, and starting to deduct 1% TDS on every trade. The message is simple: comply or get cut off.

The Two Big Rules You Can’t Ignore

There are two non-negotiable compliance requirements for anyone trading crypto in India:

1. 30% tax on all profits - Whether you made $100 or $100,000 from selling Bitcoin, swapping Ethereum for Solana, or earning staking rewards, you pay 30% in income tax. No deductions. No offsets. No losses can be carried forward. This is the highest flat crypto tax rate in the world.
2. 1% TDS on every transaction - Every time you buy or sell crypto on a registered exchange, they automatically take 1% of the transaction value as tax. That’s not a fee - it’s a government tax deduction. If you buy $1,000 worth of Bitcoin, $10 gets withheld. If you sell $500 of Ethereum, $5 gets taken. This happens even if you’re breaking even or losing money.

These aren’t suggestions. They’re enforced by law under the Income Tax (No. 2) Bill, 2025, which replaced the old Income Tax Act. The tax department can pull your bank records, your exchange history, and your wallet addresses. If your income doesn’t match your spending, you’ll get a notice.

Use Only FIU-IND Registered Exchanges

Here’s where most people get it wrong. They try to use offshore exchanges - Binance.com, Kraken, KuCoin - thinking they can avoid TDS or hide their trades. That’s dangerous.

Indian exchanges like WazirX, CoinDCX, and Zebpay are registered with FIU-IND. That means they:

• Collect your ID, address, and PAN card
• Report all your trades to the tax department
• Deduct 1% TDS automatically
• Provide annual tax reports (Form 16A or similar)

Offshore exchanges? They don’t report to India. But here’s the catch: if you transfer crypto from an offshore wallet to an Indian exchange, the Indian platform will flag it as an incoming deposit. If you later sell it, the tax department will see the purchase price was $0 - and tax you on the full sale amount. That’s how they catch people trying to hide trades.

Even if you never use an Indian exchange, if you cash out to your Indian bank account, the bank will report large deposits to FIU-IND. And if your crypto gains don’t match your declared income, you’re on the radar.

Keep Perfect Records - Even If You’re Not a Business

You don’t need to be a trader to be audited. The tax department doesn’t care if you bought Bitcoin as a hobby. If you sold it for profit, you owe tax.

Start a simple spreadsheet. Track:

• Date of each transaction
• Type (buy, sell, swap, receive, send)
• Amount and currency
• Value in INR at the time
• Exchange used
• Transaction ID

Why? Because calculating gains on crypto-to-crypto trades is messy. If you bought 0.1 BTC for ₹300,000 in January, then swapped it for 5 ETH in June when ETH was ₹60,000 each, you just made a ₹300,000 profit - even if you didn’t touch INR. That’s taxable.

Use tools like Koinly or CoinTracker (they work in India) to auto-import transactions from exchanges and generate tax reports. Save everything for at least six years. Indian tax law requires you to keep records that long.

What Happens If You Don’t Comply?

People think they’ll get away with it. They don’t. Here’s what happens when you ignore the rules:

• Penalties up to 200% of tax due - If you underreport income, you could pay double what you owe.
• Legal notices from the Income Tax Department - You’ll get a notice demanding proof of source of funds. No proof? You’re in trouble.
• Bank account freezes - If FIU-IND flags your account for suspicious activity, your bank can freeze it while they investigate.
• Criminal investigation - If they suspect money laundering or fraud, the Enforcement Directorate can step in. That’s not a tax issue anymore - that’s a criminal case.

There are real cases. In 2024, a trader in Hyderabad was fined ₹1.8 crore for undeclared crypto gains over three years. He didn’t use an Indian exchange. He thought he was safe. He wasn’t.

What About Peer-to-Peer (P2P) Trading?

P2P platforms like LocalBitcoins or Paxful are popular in India because they let you trade directly with other people. But here’s the truth: if you’re buying crypto via P2P and then selling it on an Indian exchange, the exchange still sees the deposit and reports it. The tax department connects the dots.

If you’re selling crypto via P2P and receiving INR directly into your bank account - that’s a red flag. Banks report large cash deposits. If your salary is ₹6 lakh a year and you suddenly deposit ₹15 lakh from P2P crypto sales, you’ll get questioned.

There’s no magic workaround. P2P doesn’t make you invisible. It just makes it harder to track your gains - which makes the tax department more suspicious.

How to Stay Legal - Step by Step

Here’s how real Indian crypto traders stay out of trouble:

1. Use only FIU-IND registered exchanges (WazirX, CoinDCX, Zebpay, Bitbns)
2. Complete full KYC - no shortcuts
3. Let the exchange deduct 1% TDS - don’t try to bypass it
4. Track every single transaction in a spreadsheet or crypto tax tool
5. Calculate your gains quarterly - don’t wait until March
6. File your ITR with Schedule VDA (Virtual Digital Asset) included
7. Consult a crypto-savvy CA if you’re doing frequent trades or complex swaps

It takes about 2-3 months to get comfortable with this system. After that, it’s routine. Most traders say the stress isn’t from the tax - it’s from the fear of getting caught. Once you’re compliant, the fear disappears.

The Future: More Rules, Not Fewer

India isn’t backing down. In fact, it’s getting stricter. The government is working with the G20 and the Financial Stability Board to adopt the Crypto-Asset Reporting Framework (CARF), which will force exchanges worldwide to share Indian user data automatically.

That means even if you use a U.S.-based exchange, they’ll soon be required to report your trades to India. Hiding your crypto activity won’t work much longer.

What’s coming next? Possibly a licensing system for crypto exchanges, stricter wallet tracking, and mandatory reporting of DeFi transactions. The goal isn’t to ban crypto - it’s to bring it fully into the financial system.

So the real question isn’t how to avoid restrictions. It’s: how do you adapt to them?

The answer is simple: don’t fight the system. Work within it. Keep records. Pay your tax. Use compliant platforms. That’s not avoidance - that’s how you keep trading safely in India.