Crypto & Blockchain Industry in India
Blockchain technology and cryptocurrency businesses operate in a complex and rapidly evolving regulatory environment in India. While cryptocurrencies are not illegal, they face strict regulations including high taxation, PMLA compliance obligations, and FEMA restrictions on cross-border transactions. Meanwhile, blockchain technology itself is actively supported by the government through various initiatives.
This comprehensive guide helps you navigate the regulatory landscape for establishing crypto exchanges, blockchain development companies, Web3 startups, and DeFi platforms in India. Understanding compliance requirements is critical to avoid penalties and ensure sustainable operations.
Legal Status of Cryptocurrency in India
Current Regulatory Position
Cryptocurrency is not illegal in India, but operates in a regulated environment with the following key aspects:
What is Permitted
- • Buying and selling cryptocurrencies as investments
- • Operating crypto exchanges (with compliance)
- • Holding crypto assets in self-custody wallets
- • Blockchain development and services
- • Crypto consulting and education
What is Restricted/Prohibited
- • Using crypto for payments (not legal tender)
- • Cross-border remittances using crypto (FEMA violation)
- • Banks directly dealing with crypto businesses
- • Using crypto for imports/exports settlement
- • Advertising crypto products to minors
RBI and Supreme Court Position
The RBI's 2018 circular prohibiting banks from dealing with crypto was overturned by the Supreme Court in March 2020. However, banks continue to exercise caution. The RBI has repeatedly expressed concerns about crypto risks while actively working on Central Bank Digital Currency (CBDC) - the Digital Rupee.
Taxation of Cryptocurrency in India
Current Tax Framework (Finance Act 2022)
30% Flat Tax on Crypto Income
- • Applies to profits from VDA (Virtual Digital Asset) transfers
- • No deduction allowed except cost of acquisition
- • No set-off of losses against other income
- • No carry forward of crypto losses
- • Applies to all taxpayers (individuals, companies)
1% TDS on VDA Transfers
- • Applicable when aggregate transfers exceed ₹50,000/year
- • Threshold is ₹10,000 for specified persons
- • Deductor: Buyer or exchange (if facilitated)
- • Must be deposited with IT Department
- • TDS certificate to be issued
GST Implications
- • Crypto exchange/platform fees: 18% GST
- • Crypto-to-crypto trading: Complex classification
- • Mining services: Taxable at 18%
- • Consulting services: 18% GST
Gifting of Cryptocurrency
Gifts of VDAs are taxable in the hands of the recipient (except specific exempted categories). The value is determined as per prescribed valuation rules.
PMLA Compliance for Crypto Businesses
VDA Entities as Reporting Entities
Under Prevention of Money Laundering Act (PMLA) 2002, Virtual Digital Asset exchanges and custodians are classified as "Reporting Entities" with obligations similar to banks and financial institutions.
Key PMLA Obligations
- • Registration with FIU-IND: Mandatory registration with Financial Intelligence Unit
- • KYC Verification: Customer identification and verification procedures
- • Transaction Monitoring: Continuous monitoring of transactions for suspicious patterns
- • Record Maintenance: Maintain records for 5 years from transaction date
- • Suspicious Transaction Reports (STR): Report suspicious transactions to FIU-IND
- • Cash Transaction Reports (CTR): Report cash transactions above ₹10 lakh
- • Compliance Officer: Appoint designated compliance officer
- • Employee Training: Regular AML training for employees
KYC Requirements
- • PAN verification mandatory
- • Aadhaar-based eKYC
- • Proof of address verification
- • PEP (Politically Exposed Person) screening
- • Sanctions list screening
- • Ongoing due diligence
Transaction Monitoring
- • Large transaction alerts
- • Structuring/smurfing detection
- • Rapid movement patterns
- • Cross-border transfer monitoring
- • Unusual customer behavior
- • Integration with dark web databases
FEMA Compliance for Cross-Border Crypto
FEMA Restrictions on Crypto Transactions
Foreign Exchange Management Act (FEMA) restrictions apply to cross-border cryptocurrency transactions. Key restrictions include:
- • Indian companies cannot use cryptocurrency for imports/exports settlement
- • Remittances for purchasing crypto assets abroad are restricted
- • Foreign investments in Indian crypto companies require RBI approval
- • Crypto assets held abroad by Indian residents must be declared
- • Liberalized Remittance Scheme (LRS) cannot be used for crypto investments
Cross-border Compliance Framework
| Transaction Type | Status | Requirements |
|---|---|---|
| Crypto payments for imports | Prohibited | Use regular banking channels |
| Foreign investment in Indian crypto co. | Restricted | RBI approval required |
| Indian investment in foreign crypto | Prohibited | LRS doesn't cover crypto |
| Crypto held abroad by residents | Reportable | Disclose in tax returns |
Company Registration for Crypto/Blockchain Businesses
Business Structure
Private Limited Company strongly recommended for credibility, fundraising, and compliance. Choose business activity codes carefully - consider "software development," "IT consulting," or "data processing" rather than explicit crypto terms for smoother bank onboarding.
Company Incorporation
File SPICe+ on MCA portal. Obtain DSC and DIN. Select appropriate NIC codes (e.g., 62012 for software consulting). Timeline: 10-15 days.
GST Registration
Register for GST under appropriate HSN codes. Platform services attract 18% GST. Get professional advice on classification of crypto-to-crypto transactions.
TAN Application
Mandatory for TDS compliance on VDA transfers. Required even for blockchain service companies if paying contractors above threshold.
FIU-IND Registration
Mandatory for VDA exchanges and custodians under PMLA. File application with required documentation. Timeline: 30-60 days.
Compliance Setup
Implement comprehensive KYC/AML procedures. Set up transaction monitoring systems. Appoint compliance officer. Establish record-keeping systems.
Banking Challenges and Solutions
Banking Access for Crypto Businesses
Despite the Supreme Court verdict, many banks remain cautious about dealing with crypto businesses. Strategies include:
What Works
- • Presenting as "blockchain technology company"
- • Small private banks and neo-banks
- • Foreign banks with India presence
- • Clear documentation of business model
- • Strong compliance framework
- • PMLA registration proof
Common Challenges
- • Account opening rejections
- • Account freezes without notice
- • Difficulty obtaining payment gateways
- • High-risk classification
- • Enhanced due diligence requirements
- • UPI integration restrictions
Blockchain Technology (Non-Crypto) Businesses
Government Support for Blockchain
While crypto faces restrictions, blockchain technology itself receives active government support:
- • MeitY Initiatives: Blockchain frameworks and sandbox programs
- • National Blockchain Strategy: Framework for government adoption
- • STPI Support: Software Technology Parks of India benefits for blockchain development
- • Research Funding: Support for academic blockchain research
- • Startup India: Benefits for blockchain startups (not dealing in crypto)
Supply Chain
Traceability, provenance tracking, anti-counterfeiting solutions using blockchain.
Identity Management
Digital identity, KYC solutions, credential verification systems.
Document Verification
Certificates, degrees, land records, legal documents on blockchain.
Future Outlook and Expected Regulations
Expected Regulatory Developments
- • Comprehensive Crypto Bill: Draft legislation expected to provide regulatory clarity
- • SEBI Regulation: Potential framework for crypto assets as securities
- • RBI CBDC: Digital Rupee rollout and integration
- • VDA Exchange Licensing: Specific licensing framework for exchanges
- • International Cooperation: Framework for cross-border crypto coordination
Compliance Recommendations
- • Maintain strict PMLA compliance
- • Keep comprehensive transaction records
- • Stay updated on regulatory changes
- • Consult FEMA experts for cross-border transactions
- • Maintain clear tax documentation
- • Build relationships with regulators
Key Takeaways for Crypto/Blockchain Businesses
Opportunities
- ✓ Large, tech-savvy market
- ✓ Strong IT talent pool
- ✓ Growing institutional interest
- ✓ Government support for blockchain
- ✓ Active startup ecosystem
Challenges
- ✗ High tax rates (30% + 1% TDS)
- ✗ Banking access difficulties
- ✗ Complex FEMA compliance
- ✗ Evolving regulatory landscape
- ✗ Compliance costs
The regulatory environment continues to evolve. Businesses should maintain flexibility, prioritize compliance, and stay engaged with industry bodies for policy updates.