Crypto Regulation in India: 2026 Update

Crypto regulation in India is one of the most actively evolving legal frameworks in the Asia-Pacific region. India has not banned cryptocurrency, but it has imposed a strict tax regime, mandatory anti-money laundering compliance, and is working toward comprehensive legislation. Businesses and investors operating in the Indian digital asset space face a layered set of obligations that carry real financial and legal consequences if ignored. This guide covers the current regulatory structure, tax treatment, AML requirements, the status of pending legislation, and what foreign founders should know before entering the Indian market.

Cryptocurrency in India occupies a legally ambiguous but operationally active position. The Supreme Court of India, in its landmark ruling in Internet and Mobile Association of India v. Reserve Bank of India, struck down the Reserve Bank of India';s earlier circular that had effectively banned banks from servicing crypto businesses. That ruling restored banking access for the sector and remains a foundational reference point for the industry.

India has not enacted a dedicated cryptocurrency or digital assets law as of the current period. However, digital assets are regulated indirectly through several existing frameworks. The Finance Act introduced a specific tax regime for virtual digital assets. The Prevention of Money Laundering Act, as amended, brought virtual asset service providers within its scope. The Foreign Exchange Management Act governs cross-border crypto transactions and remains a source of ongoing compliance uncertainty for international operators.

The Reserve Bank of India continues to express caution about private cryptocurrencies while actively developing its own central bank digital currency, the Digital Rupee. The Securities and Exchange Board of India and the Insurance Regulatory and Development Authority have both signalled interest in regulating specific crypto-adjacent products, creating a multi-regulator environment that adds complexity for businesses.

In practice, crypto businesses in India operate under a patchwork of rules rather than a single unified statute. This means that compliance obligations depend heavily on the nature of the activity - whether the entity is an exchange, a wallet provider, a DeFi protocol, or a token issuer.

The tax framework for virtual digital assets is one of the most consequential aspects of crypto regulation in India. The Finance Act introduced a flat 30 percent tax rate on income from the transfer of virtual digital assets, with no deduction permitted for expenses other than the cost of acquisition. Losses from one virtual digital asset cannot be set off against gains from another, and losses cannot be carried forward to subsequent years. This is significantly more restrictive than the treatment of other capital assets under Indian tax law.

A one percent tax deducted at source applies to payments made on the transfer of virtual digital assets above specified thresholds. This TDS mechanism was designed to create a transaction trail and improve tax compliance across the sector. For exchanges and peer-to-peer platforms, the obligation to deduct and remit this tax adds an operational layer that requires robust technical infrastructure.

Gifts of virtual digital assets are taxable in the hands of the recipient. Mining income is treated as income from other sources and taxed at the applicable slab rate. Non-resident individuals and foreign entities receiving income from virtual digital assets sourced in India are also subject to Indian tax, though the precise treatment depends on applicable tax treaties.

A common mistake among foreign founders is assuming that structuring transactions through an offshore entity eliminates Indian tax exposure. In practice, if the underlying activity involves Indian users or Indian-sourced income, Indian tax authorities may assert jurisdiction. Businesses should seek specific tax advice before structuring their India operations.

India brought virtual asset service providers within the scope of the Prevention of Money Laundering Act through a notification issued by the Ministry of Finance. This was a significant regulatory step that aligned India with the Financial Action Task Force recommendations on virtual assets and virtual asset service providers.

Under this framework, entities that qualify as virtual asset service providers - including exchanges, wallet providers, and certain token transfer services - must register with the Financial Intelligence Unit India. Registration is mandatory before commencing operations. The Financial Intelligence Unit India is the nodal agency responsible for receiving, processing, and disseminating financial intelligence related to money laundering and related offences.

Registered VASPs must implement a full anti-money laundering and counter-financing of terrorism programme. Key obligations include:

• Customer due diligence and know-your-customer procedures for all users
• Enhanced due diligence for high-risk customers and politically exposed persons
• Ongoing transaction monitoring and suspicious transaction reporting
• Record-keeping for a minimum period as specified under the PMLA rules
• Appointment of a principal officer responsible for PMLA compliance

Many underestimate the operational cost of building a compliant KYC and transaction monitoring system. For a startup exchange, this can represent a significant share of early-stage expenditure. Outsourcing to a licensed compliance technology provider is common but does not transfer legal responsibility.

Foreign entities providing services to Indian users from offshore are not automatically exempt. If the VASP';s activities are directed at Indian residents, Indian AML obligations may apply. This is an area where de jure requirements and de facto enforcement are still developing, but the trend is clearly toward broader jurisdictional reach.

If you are assessing your entity';s obligations under the PMLA or planning a VASP registration, contact info@vlolawfirm.com. We can help structure the setup correctly the first time.

India has been working on a comprehensive cryptocurrency and digital assets bill for several years. The Cryptocurrency and Regulation of Official Digital Currency Bill, which appeared on the Lok Sabha';s legislative agenda, proposed to prohibit all private cryptocurrencies while creating a framework for the Digital Rupee. However, the bill has not been tabled for debate and its current status remains uncertain.

The government';s more recent signals suggest a shift toward a regulatory rather than prohibitory approach. India';s G20 presidency produced significant international engagement on crypto regulation, and Indian officials participated actively in developing the IMF-FSB synthesis paper on crypto asset regulation. This international engagement has influenced domestic thinking toward a framework that addresses risks without eliminating the sector.

The Reserve Bank of India has continued to advocate for strong restrictions on private cryptocurrencies, citing macroeconomic and financial stability concerns. SEBI, by contrast, has shown more openness to regulating crypto assets as securities or investment products within its existing framework. This inter-regulator tension is a defining feature of the current environment and creates uncertainty for businesses planning long-term India strategies.

In practice, founders should consider that the regulatory landscape may change materially within a short period. Businesses that build compliance infrastructure aligned with FATF standards and existing PMLA obligations are better positioned to adapt to new legislation, whatever form it takes. Investing in compliance now reduces the risk of costly retrofitting later.

A non-obvious requirement is that even entities not yet subject to formal licensing may need to demonstrate AML-readiness to banking partners. Indian banks, following RBI guidance, conduct enhanced due diligence on crypto-related accounts and may require evidence of PMLA compliance before opening or maintaining accounts.

The Foreign Exchange Management Act governs all cross-border transactions in India, and its application to crypto assets is a significant source of legal uncertainty. FEMA classifies transactions as either current account or capital account transactions, with different rules applying to each. The treatment of crypto asset transfers under FEMA has not been formally clarified by the Reserve Bank of India.

Remitting funds abroad in connection with crypto transactions, or receiving foreign investment into a crypto business, raises FEMA questions that require careful analysis. Foreign direct investment into Indian crypto exchanges and related businesses is generally permitted under the automatic route, subject to sector-specific conditions, but the regulatory environment means that investors and founders should obtain specific legal advice before structuring cross-border flows.

Consider two practical scenarios. In the first, a Singapore-based exchange seeks to onboard Indian retail users and accept INR deposits. This structure raises questions under FEMA regarding the receipt of funds, under the PMLA regarding VASP registration, and under the Income Tax Act regarding TDS obligations. Each regulatory layer requires separate analysis and potentially separate compliance infrastructure.

In the second scenario, an Indian startup issues a utility token to international investors. The token sale may constitute a foreign currency transaction under FEMA, a securities offering under SEBI';s framework if the token has investment characteristics, and a taxable event under the virtual digital asset provisions of the Finance Act. Navigating all three simultaneously requires coordinated legal and tax advice.

The Enforcement Directorate, which enforces FEMA and investigates money laundering, has taken enforcement action against crypto businesses and individuals in recent years. This underscores that FEMA compliance is not a theoretical concern but an active enforcement priority.

Building a compliant crypto business in India requires addressing multiple regulatory layers in sequence. The following areas represent the core compliance obligations for most operators:

• VASP registration with the Financial Intelligence Unit India before commencing operations
• Implementation of a PMLA-compliant AML and KYC programme with a designated principal officer
• TDS infrastructure to deduct and remit one percent on qualifying virtual digital asset transfers
• Tax registration and filing obligations under the Income Tax Act, including reporting of virtual digital asset income
• FEMA analysis for any cross-border fund flows, foreign investment, or token issuances

Beyond formal registration, businesses should maintain detailed transaction records, conduct periodic AML audits, and train staff on compliance obligations. The Financial Intelligence Unit India has the authority to inspect registered VASPs and impose penalties for non-compliance.

Banking relationships remain a practical challenge. Despite the Supreme Court ruling restoring banking access, individual banks retain discretion over which crypto businesses they serve. Demonstrating robust compliance infrastructure is often the deciding factor in securing and maintaining a banking relationship.

Businesses planning to offer staking, lending, or yield products face additional uncertainty, as these activities may attract scrutiny from SEBI or the RBI depending on their structure. The regulatory perimeter for these products has not been formally defined, and conservative structuring is advisable until clearer guidance emerges.

For assistance with VASP registration, PMLA compliance programmes, or cross-border structuring for your India operations, contact info@vlolawfirm.com. We can assist with documents and filings.

Is cryptocurrency legal in India?

Cryptocurrency is not banned in India. The Supreme Court restored banking access for crypto businesses after the RBI';s earlier restrictive circular was struck down. However, there is no comprehensive legislation specifically governing digital assets, and the sector operates under a combination of tax rules, AML obligations, and general financial law. The government has signalled an intent to legislate but has not yet enacted a dedicated crypto law. Businesses can operate legally provided they comply with existing PMLA, tax, and FEMA requirements.

How long does VASP registration with the Financial Intelligence Unit India take, and what does it cost?

The registration process with the Financial Intelligence Unit India involves submitting an application with details of the business, its ownership structure, and its AML compliance programme. Processing times vary and can range from several weeks to a few months depending on the completeness of the application and the volume of applications being processed. The registration itself does not carry a high direct fee, but the cost of building the required AML infrastructure - including KYC systems, transaction monitoring tools, and compliance personnel - can run into the low to mid hundreds of thousands of rupees for a basic setup, and significantly more for larger operations.

Should a crypto business incorporate in India or use an offshore structure?

The answer depends on the target market, the nature of the product, and the founders'; risk appetite. An Indian entity is required if the business intends to serve Indian retail users at scale, accept INR deposits, or seek Indian banking relationships. An offshore structure may be appropriate for businesses primarily serving non-Indian users, but it does not eliminate Indian regulatory exposure if the service is directed at Indian residents. Many businesses use a hybrid structure with an offshore holding company and an Indian operating entity, but this requires careful FEMA and tax analysis to avoid unintended consequences.

Crypto regulation in India is complex, multi-layered, and actively evolving. The combination of a strict tax regime, mandatory VASP registration, FEMA uncertainty, and pending legislation creates a demanding compliance environment. Businesses that invest in proper legal and compliance infrastructure from the outset are significantly better positioned than those that treat compliance as an afterthought.

VLO Law Firms advises international clients on crypto regulation in India. We can assist with VASP registration, PMLA compliance programme design, tax structuring, FEMA analysis, and cross-border entity structuring. To request a consultation, contact: info@vlolawfirm.com