Author: Kashika Verma, Institute of Law, Nirma University
To the point
India’s stance on regulating cryptocurrency indicates a complicated and developing legal story. Although technological advancements have led to a remarkable increase in crypto adoption in India, the legal system has faced challenges in establishing a suitable framework for these digital assets. Historically, Indian policymakers have approached cryptocurrencies with doubt, mainly because of worries regarding monetary sovereignty, consumer safety, systemic stability, and the potential for aiding money laundering and terrorist financing. While cryptocurrencies are not officially prohibited, they lack recognition as legal currency in the Indian economy. Rather, they are categorized as virtual digital assets (VDAs) according to the Income Tax Act, which permits trading and ownership while prohibiting their use as a means of exchange for goods and services. This differentiation embodies India’s careful yet flexible stance on crypto: promoting innovation while safeguarding the monetary and financial system. Throughout the years, India’s regulators and legislators have considered various legislative options, from complete prohibitions to regulatory sandbox frameworks, but uncertainty continues to remain. Recent changes and the proposal of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 suggest a move towards substituting unregulated private cryptocurrencies with a government-supported central bank digital currency (CBDC), known as the Digital Rupee. India’s policy direction can be characterized as a careful balancing act, aware of technological advancements while cautious about the disruptive risks that unregulated crypto-assets may present to its monetary policy, investor protection, and law enforcement systems.
Use of Legal Jargon
The regulatory framework for cryptocurrency in India has incorporated various specific legal terms that influence its governance discussions. Virtual Digital Asset (VDA), according to the Income Tax Act, includes cryptocurrencies viewed as intangible assets possessing value. The phrase legal tender as defined in section 26 of the Reserve Bank of India Act, 1934, signifies a requirement that a currency be accepted for debt payment, which cryptocurrencies fail to meet. Terms like capital gains tax, tax deducted at source (TDS), and suspicious transaction reports (STRs) are also commonly found in Indian regulations. Regulatory frameworks identify Customer Due Diligence (CDD) and Know Your Customer (KYC) as essential components of anti-money laundering adherence, consistent with the Prevention of Money Laundering Act (PMLA). The phrase wallet providers refers to intermediaries that hold crypto accounts for their clients. The Financial Intelligence Unit–India (FIU-IND), appointed under the PMLA, is responsible for supervising anti-money laundering reporting and compliance for exchanges. Additionally, legislative drafting in India defines “private cryptocurrency” as decentralized assets not issued by any government, contrasting with a “Central Bank Digital Currency” (CBDC), which is a government-backed digital rupee. Inter-ministerial committee (IMC), regulatory sandbox, monetary sovereignty, and monetary stability are additional phrases frequently found in the legal discourse concerning India’s careful approach to this innovative financial tool.
The Proof
A detailed examination of India’s crypto regulatory journey reveals a patchwork of governmental interventions, judicial pronouncements, and policy documents. Initially, the Reserve Bank of India (RBI) through its 2018 circular imposed banking restrictions on crypto exchanges, effectively isolating them from the formal financial system. However, the SC of India, in Internet and Mobile Association of India v. RBI (2020), struck down this circular, reaffirming the constitutional rights of crypto businesses to carry on their trade under Article 19(1)(g). Following the Supreme Court’s ruling, trading activities resumed but continued under legal ambiguity, since the government had yet to clarify the status of crypto as currency or asset. Subsequently, the Inter-Ministerial Committee (IMC) Report of 2019 proposed an outright ban on private cryptocurrencies while simultaneously encouraging a state-backed digital currency. The government also tabled the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, whose text has yet to be finalized and enacted, but which is widely reported to propose prohibiting private cryptocurrencies while supporting the RBI’s CBDC initiatives. Meanwhile, Parliament amended the Income Tax Act to recognize crypto as a virtual digital asset, subjecting it to a flat 30% capital gains tax and a 1% TDS on transactions exceeding INR 50,000, with no set-off of losses permitted. The underlying rationale of these measures is to preserve monetary sovereignty, deter financial crime, and maintain systemic stability while cautiously allowing innovation to flourish under regulatory oversight.
Abstract
Cryptocurrency has surfaced as a revolutionary advancement in worldwide finance, questioning conventional systems of monetary exchange with its decentralized and cryptographically protected framework. The Indian government, recognizing the technological progress and economic prospects of cryptocurrencies, has voiced significant concerns about their ability to disrupt monetary sovereignty, enable illegal financial transactions, and compromise consumer protection. This abstract examines India’s careful but changing legal stance, where cryptocurrencies are acknowledged as Virtual Digital Assets (VDAs) liable for taxation, yet are explicitly rejected as legal tender according to the RBI Act, 1934.
The paper contends that India’s legal approach demonstrates a careful equilibrium between promoting innovation and ensuring systemic stability. Although the existing framework taxes and oversees cryptocurrency assets, the absence of a cohesive legislative measure creates considerable interpretative voids and regulatory fragmentation, increasing compliance risks for investors and entrepreneurs. This abstract indicates that the Indian legal framework is advancing towards a model of regulated integration via robust supervision and a preference for state-backed digital currencies, while allowing for innovation in a safe and properly regulated setting.
Case Laws
The legal framework regarding cryptocurrency in India is fundamentally based on the landmark ruling Internet and Mobile Association of India v. Reserve Bank of India (2020), where the Supreme Court overturned the RBI’s 2018 directive prohibiting financial institutions from providing services to crypto exchanges. The Court determined that these limitations excessively violated the right to engage in any trade or business under Article 19(1)(g) of the Indian Constitution and were unjustifiable based on the principle of proportionality. The ruling emphasized that although the RBI has regulatory authority, it cannot completely eliminate a legitimate business without adequate legal justification. Conversely, the judiciary has not given a clear interpretation of cryptocurrency as either currency or commodity, thus keeping the classification unresolved. Additional pertinent references are the IMC Report (2019), which suggested a prohibition while recognizing technological possibilities, and the Supreme Court’s instructions to Parliament to provide clarity via legislation. The regulatory framework is additionally shaped by references to FEMA, which strictly defines currency to encompass only government-issued modes of exchange, thus omitting crypto from the currency definition. This implies that although cryptocurrency can be considered property, it cannot be legally utilized to fulfill financial obligations under Indian law.
Conclusion
In summary, India’s regulatory position on cryptocurrency reflects a practical but careful approach. Recognizing the increasing interest in digital assets, the Indian government has chosen a regulatory approach that neither fully supports nor entirely prohibits cryptocurrency. This measured strategy aims to reconcile the necessity of preserving monetary sovereignty, ensuring systemic stability, and protecting consumers while preventing the suppression of innovation. The implementation of a 30% capital gains tax, a 1% TDS on transactions, and the expansion of anti-money laundering regulations via the PMLA signify India’s initiative to progressively incorporate cryptocurrencies into its compliance framework. Simultaneously, Parliament’s suggested legislation to prohibit private cryptocurrencies in support of an official Digital Rupee indicates a distinct inclination towards state-backed innovation. As the Indian legal system progresses, understanding will probably arise from a mix of legislative action and judicial interpretation. Investors and stakeholders in the crypto ecosystem should stay informed about legislative changes and actively participate in strict compliance to minimize exposure to enforcement risks. In the end, the regulatory trend appears to favor a framework of support within a closely supervised, government-supported digital finance system, rather than a hands-off or entirely restrictive approach.
FAQS
Is cryptocurrency legal in India as of 2025?
Yes, it is legally allowed to purchase, trade, and possess cryptocurrency in India. It is categorized as a “Virtual Digital Asset” according to the Income Tax Act, indicating it is acknowledged as an asset category. Nonetheless, cryptocurrency is not acknowledged as legal tender and, as such, cannot be utilized to pay debts or buy goods and services in India. Being a tradable asset does not grant it the benefits of currency as per the Reserve Bank of India Act, 1934.
Can cryptocurrencies be used for payments in India?
Negative. Although Indian law allows the ownership or trading of cryptocurrencies, their use for paying for goods or services is expressly forbidden. The Reserve Bank of India has stated that cryptocurrencies do not have the designation of legal tender and cannot replace the Indian Rupee in business dealings. Instead, the RBI is promoting the Digital Rupee (a Central Bank Digital Currency) to function as an officially acknowledged digital payment method.
How are cryptocurrency profits taxed in India?
Gains from cryptocurrency transactions are taxed at a flat rate of 30% under capital gains regulations on the total profit. Moreover, a 1% Tax Deducted at Source is applied to crypto asset transfers that exceed INR 50,000 within a financial year. Importantly, Indian legislation prohibits offsetting losses from cryptocurrency transactions against other profits and does not allow carrying over losses to future years. This rigorous taxation system was established to bolster revenue collection and improve reporting of cryptocurrency-related activities.
Who is responsible for regulating cryptocurrency in India?
In India, the regulation of cryptocurrency involves multiple agencies working together. The Reserve Bank of India manages monetary stability and bans the use of cryptocurrency for payments; the Securities and Exchange Board of India (SEBI) might intervene if crypto tokens are similar to securities; the Financial Intelligence Unit–India (FIU-IND) monitors anti-money laundering and KYC regulations; and the Ministry of Finance formulates overarching policy directives. Moreover, the Income Tax Department guarantees the collection of taxes on cryptocurrency transactions.
What is the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021?
This is a suggested law that seeks to prohibit private cryptocurrencies while permitting the creation of an official Digital Rupee issued by the RBI. It suggests severe punishments for mining, trading, possessing, or engaging with private cryptocurrencies following a sunset period and aims to establish a framework for launching India’s own Central Bank Digital Currency. Nonetheless, the Bill has not been enacted yet and is still under legislative review as of 2025.
