India: Crypto's Largest Untapped Market, Held Back by Tax and Regulatory Ambiguity

India has produced one of the world’s most sophisticated responses to cryptocurrency: it has done almost nothing legislatively, while doing quite a lot fiscally. The absence of a comprehensive regulatory framework is not a failure of policy design — it is the policy. A government that cannot achieve political consensus on whether to ban or legitimise crypto has instead imposed a tax regime that reduces the activity’s appeal without eliminating it, while simultaneously building a state-controlled alternative. The result is a market of over 100 million users operating in deliberate legal uncertainty, generating tax revenue through the transaction levy, and awaiting a legislative resolution that has been perpetually deferred.

The Regulatory Architecture

India’s crypto policy involves multiple agencies with overlapping and sometimes conflicting positions. The Reserve Bank of India (RBI) is the central bank and banking regulator, with explicit statutory responsibility for monetary stability and foreign exchange management. The Securities and Exchange Board of India (SEBI) is the securities regulator. The Finance Ministry sets tax policy and drafts legislation. The Ministry of Electronics and Information Technology (MeitY) has responsibility for broader digital economy policy.

Each approaches crypto differently. The RBI has maintained consistent institutional opposition to private cryptocurrency, viewing it as a threat to monetary sovereignty and financial stability. The RBI Governor’s public statements from 2019 through 2025 have ranged from cautious concern to explicit recommendation for a ban. SEBI has been more open to the possibility that crypto assets with securities characteristics should be regulated within its framework, issuing discussion papers on a principles-based approach. The Finance Ministry has taken the most pragmatic position of all: tax it.

The Deliberate Ambiguity Strategy

Understanding India’s approach requires understanding the political constraints. A comprehensive legislation — whether to ban crypto or to fully legalise and regulate it — would require parliamentary debate, stakeholder consultation, and political leadership committing to a position. The crypto question is genuinely contested within Indian government. The RBI wants a ban or severe restriction. SEBI sees a regulatory opportunity. Industry bodies representing the large domestic crypto exchange sector lobby for legitimisation. And the Finance Ministry has discovered that 1 percent TDS generates significant revenue without requiring any legislative risk.

The result is a policy of deliberate ambiguity. Crypto is not illegal in India — the Supreme Court struck down the RBI’s 2018 circular prohibiting banks from dealing with crypto entities in March 2020. But crypto is not fully legal either — there is no licensing framework, no regulated exchange status, no clear consumer protection regime. Firms operate in a grey space, technically unprohibited but explicitly unlicensed.

The 2022 Tax Framework

The Finance Act 2022 introduced two measures that dramatically changed India’s crypto market. The first was a flat 30 percent tax on income from crypto assets — the same rate applied to lottery winnings and gambling income, a classification choice that was itself a political signal about how the government viewed crypto. Unlike ordinary income, crypto gains could not be offset against losses from other crypto trades: a losing trade in Bitcoin could not reduce the tax payable on a winning trade in Ethereum.

The second measure was a 1 percent Tax Deducted at Source (TDS) on every crypto transaction above a minimal threshold. The TDS requirement falls on the exchange, which must withhold 1 percent of the transfer value and remit it to the government. For high-frequency traders, the cumulative TDS burden across multiple daily trades is substantial. For the government, TDS creates a transaction trail — every trade is visible to the Income Tax Department.

The impact was immediate and severe. Trading volumes on domestic Indian crypto exchanges fell by more than 80 percent in the months following the TDS implementation in July 2022. Much of this volume migrated to offshore exchanges — platforms not subject to Indian TDS obligations — where Indian users could trade without the withholding burden. The tax did not eliminate crypto use; it moved it offshore, reducing tax visibility rather than activity.

RBI Skepticism and the SEBI Alternative

The RBI’s position has remained the most doctrinally hostile within Indian government. In its annual reports and through Governor statements, the RBI has argued that crypto assets serve no legitimate macroeconomic purpose, that they facilitate capital flight under India’s foreign exchange controls, and that their volatility poses systemic risk if adoption reaches sufficient scale. The RBI has also argued that the 2020 Supreme Court decision did not preclude future regulatory restriction — it struck down the specific circular, not a legislative restriction.

SEBI’s position has evolved differently. In 2023, SEBI submitted a paper to an inter-ministerial group arguing that crypto tokens with investment characteristics should fall within its remit and that a SEBI-regulated framework for crypto exchanges was preferable to continued ambiguity. SEBI’s existing infrastructure — exchange registration, investor protection, surveillance — could be adapted. The inter-ministerial group has continued deliberating without reaching a final recommendation.

The Digital Rupee CBDC

Against this backdrop of private crypto ambiguity, the Reserve Bank of India launched its Digital Rupee — officially the e₹ — in pilot form in late 2022 and 2023. The Digital Rupee is India’s CBDC: a digital form of the sovereign rupee issued directly by the RBI. Two variants were piloted — a wholesale version (e₹-W) for interbank settlement, and a retail version (e₹-R) for consumer use.

The retail pilot launched in December 2022 with four banks and four cities, expanding subsequently. Users could hold Digital Rupee in a digital wallet issued by their bank, use it for person-to-person transfers and merchant payments, and receive it as salary or payment. The Digital Rupee is interest-free, unlike a bank deposit, positioning it as digital cash rather than an investment instrument.

Adoption has been modest. The RBI reported wallet numbers and transaction volumes, but penetration remained limited compared to India’s existing digital payment infrastructure. The Unified Payments Interface (UPI) — India’s successful real-time payment system linking bank accounts — handles billions of transactions monthly and is deeply embedded in Indian commerce and society. The Digital Rupee must demonstrate value that UPI does not already provide, a challenging proposition.

India’s G20 Presidency and Global Role

India held the G20 presidency in 2023 and used it to push for global coordination on crypto regulation — a position that might seem paradoxical from a country without its own framework. The logic was straightforward: India’s crypto problem is partly an offshore migration problem. If global standards required offshore exchanges to meet the same AML/KYC requirements as domestic platforms and to cooperate with Indian tax authorities, the regulatory arbitrage that the TDS regime created would diminish.

India commissioned the IMF and FSB to produce a synthesis paper on crypto policy — published in September 2023 — that became a foundational document for the G20 crypto roadmap. This paper argued against blanket bans (citing their ineffectiveness) and for comprehensive regulation aligned with FSB recommendations. India’s external advocacy for global regulation was more sophisticated than its domestic policy suggested.

The Political Economy

The Modi government’s relationship with the crypto question reflects broader tensions in Indian economic policy. On one hand, India’s ambition for technology-sector leadership — a country that produces global technology talent at scale — creates pressure to avoid policies that push crypto entrepreneurs offshore. On the other hand, the government’s preoccupation with capital controls (India maintains significant foreign exchange restrictions), monetary sovereignty, and financial stability creates institutional resistance to an asset class seen as facilitating capital flight.

The outcome — high tax, no ban, no framework, CBDC development — is a political equilibrium rather than a considered regulatory design. It satisfies no constituency fully but avoids the political cost of either a ban (which the Supreme Court has complicated) or full legitimisation (which the RBI opposes). India’s 100 million crypto users are the most important unregulated market in the world, and the framework that eventually governs them will matter enormously for global crypto markets. That framework remains, as of early 2026, still pending.