Budget 2026: Why India's VDA tax framework needs a strategic recalibration
India Today
As policymakers consider Budget 2026, it is timely to assess whether the current tax design continues to align with the framework's original objectives, given global market and regulatory developments.
India’s approach to Virtual Digital Assets (VDA) has been cautious by design. Given the technology’s early-stage nature and volatility, this was a prudent choice. Since 2022, measures such as taxation and the inclusion of VDA under the purview of the Prevention of Anti-Money Laundering Act (AML) and the recently released Financial Intelligence Unit (FIU) guidelines this month on enhanced Know Your Customer (KYC) requirements for legacy accounts and stricter sanctions screening to eliminate bad actors together have anchored the framework around stability and risk mitigation. What began as an interim regulatory framework has since developed into a functioning and credible oversight architecture.
As policymakers consider Budget 2026, it is timely to assess whether the current tax design continues to align with the framework’s original objectives considering global market and regulatory developments.
The intent behind the current taxation framework was to contain risk, discourage excessive speculation and to establish transaction-level traceability. However, market behaviour over the past few years suggests that the existing tax design may be influencing how and where transactions are conducted. A section of user activity appears to have shifted towards offshore platforms, which operate outside India’s direct supervisory perimeter.
If left unaddressed, this trend could gradually reduce onshore participation and limit the visibility and data access that a regulated domestic ecosystem enables for regulators. By keeping the current framework unchanged, we risk pushing activity into "grey" areas beyond our regulatory reach, ultimately diminishing the data visibility and capital formation that a healthy domestic market would provide.
To address these challenges and align the fiscal regime with the current state of regulatory maturity, several key recalibrations in the upcoming budget can be considered. Foremost is the adjustment of the TDS regime.
A calibrated adjustment of the Tax Deducted at Source (TDS) mechanism could be considered, particularly given the strengthening of KYC and transaction reporting obligations under the AML. A lower TDS rate, combined with existing reporting systems, may help reduce friction for compliant users while continuing to support transaction-level visibility for regulators.
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