Decentralized Finance (DeFi) has revolutionized how Indians earn passive income through yield farming, staking, and liquidity mining. But as returns accumulate, a critical question arises: How do you pay taxes on DeFi yield in India? With the Income Tax Department tightening crypto regulations, understanding your tax obligations is essential to avoid penalties. This comprehensive guide breaks down India’s DeFi tax landscape, calculation methods, and compliance strategies.
Understanding DeFi Yield Taxation in India
India’s 2022 Union Budget classified all virtual digital assets (VDAs)—including cryptocurrencies and DeFi tokens—as taxable assets. According to Section 115BBH of the Income Tax Act:
- DeFi rewards (e.g., staking income, liquidity mining yields) are treated as taxable income upon receipt
- Subsequent sales or swaps of these assets trigger capital gains tax
- No distinction exists between short-term and long-term holdings—all VDA gains face a flat 30% tax rate
How DeFi Yield is Taxed: Step-by-Step Breakdown
Tax treatment occurs in two distinct phases:
- Income Tax on Receipt (Section 115BBH):
When you earn yield (e.g., 1 ETH from staking), it’s taxed as “Income from Other Sources” at your applicable income slab rate in the year of receipt. Value is calculated using fair market value in INR at receipt time. - Capital Gains Tax on Disposal (Section 115BBH):
When selling/swapping earned tokens later, profit is taxed at 30% + 4% cess. Cost basis = Value at receipt date. Example:
Received 1 ETH (₹2,00,000) → Sold later for ₹3,00,000
Taxable gain: ₹1,00,000 × 30% = ₹30,000 + cess
Critical Compliance Requirements
- TDS Obligations: 1% TDS applies to all VDA transfers exceeding ₹10,000 per transaction (₹50,000/year for specified persons)
- Loss Set-off Ban: DeFi losses cannot offset other income—only carry forward against future crypto gains
- Record-Keeping: Maintain detailed logs of:
- Transaction dates/times
- INR value at receipt/sale
- Wallet addresses
- Blockchain transaction IDs
Calculating Your DeFi Tax Liability: Practical Example
Scenario: You provide ₹5,00,000 liquidity to a DeFi pool and earn 500 GOV tokens (value: ₹50,000) in 2023-24. Later, you sell them for ₹70,000.
- Income Tax Phase: ₹50,000 added to annual income, taxed at your slab rate (e.g., 30% = ₹15,000)
- Capital Gains Phase: Profit = ₹70,000 – ₹50,000 = ₹20,000. Tax: 30% of ₹20,000 + 4% cess = ₹6,240
- Total Tax: ₹15,000 + ₹6,240 = ₹21,240
Reporting DeFi Taxes in Your ITR
Disclose DeFi earnings in your Income Tax Return (ITR) under:
- Schedule OS: For yield value at receipt (as “Income from Other Sources”)
- Schedule CG: For capital gains from token sales
- Form 26AS: Verify TDS credits from exchanges
Frequently Asked Questions (FAQs)
Q1: Is yield from staking crypto taxable in India?
A: Yes. All staking rewards are taxable as income at receipt value under Section 115BBH.
Q2: What if I reinvest DeFi yields without cashing out?
A: Tax applies at receipt regardless of reinvestment. The INR value when earned is your income tax basis.
Q3: How is DeFi yield valued for tax purposes?
A: Use fair market value in INR at the time rewards hit your wallet. Track exchange rates using historical data from platforms like CoinMarketCap.
Q4: Are there penalties for non-compliance?
A: Yes. Failure to report may incur 50-200% penalties on tax due plus interest. Delayed filings attract ₹5,000-₹10,000 fines.
Q5: Can I deduct gas fees or platform charges?
A: No. The Income Tax Act currently prohibits expense deductions for VDA transactions, including network fees.
Q6: Do decentralized exchanges (DEXs) report to IT Department?
A: Unlikely, but centralized exchanges handling INR fiat transactions do. Always assume all transactions are traceable.
Q7: How should I handle airdropped tokens?
A: Treat them like staking rewards—taxable as income at market value when received.
