Indian Crypto Industry Braces for Budget 2026 Showdown
As India heads toward the Union Budget 2026, the country’s crypto ecosystem is locked in a critical debate with policymakers over the controversial 1% Tax Deducted at Source (TDS) on crypto transactions. What began as a compliance-focused move has now become one of the most debated policy decisions in India’s digital asset economy. Exchanges, traders, and Web3 startups argue the rule has caused a severe liquidity crunch, shrinking domestic trading volumes and pushing users to offshore platforms.
How the 1% TDS Created a Liquidity Drain
Introduced to improve traceability of virtual digital asset (VDA) transactions, the 1% TDS is applied to every crypto trade, regardless of profit or loss. Unlike capital gains tax, which applies only on realized income, TDS locks capital at every transaction level.
Industry data shows that within months of the TDS rollout, Indian exchange trading volumes dropped by over 70%. Prior to the tax, daily spot volumes across major Indian platforms averaged between $200-300 million. Post TDS, that figure fell below $50 million, signaling a massive liquidity exodus.
For high-frequency traders and market makers, the math simply doesn’t work. A trader executing 100 trades a day effectively loses 1% liquidity on each transaction, making active strategies unsustainable.
Capital Flight to Offshore Exchanges
One of the most visible consequences of the current crypto tax structure is capital migration. Analysts estimate that more than 60% of active Indian crypto traders now use offshore exchanges or decentralized platforms to avoid TDS-related friction.
This shift has reduced India’s visibility into crypto activity, ironically undermining the very traceability goal the TDS aimed to achieve. Wallet-level analysis suggests billions of dollars in cumulative Indian-origin crypto volume now flow through overseas platforms annually.
Domestic exchanges, meanwhile, face thinning order books, wider spreads, and reduced price discovery efficiency.
Revenue vs Market Efficiency: What the Numbers Say
From a revenue standpoint, crypto TDS has delivered measurable returns. Government data indicates over ₹1,000 crore has been collected via crypto-related TDS since its introduction. However, analysts point out that this figure could have been significantly higher if trading volumes had remained onshore.
A comparative model run by tax experts suggests that reducing TDS to 0.01% while increasing compliance could boost total tax revenue by 25-30% over three years due to higher participation and volume recovery.
In short, lower friction could mean broader compliance and higher net collections.
Industry Proposals Gaining Momentum
Ahead of Budget 2026, industry stakeholders are pushing three data-backed reforms:
Reduce TDS from 1% to 0.01% to restore liquidity without compromising traceability.
Increase the TDS threshold to ₹5 lakh annually, protecting small retail traders.
Allow loss set-off and carry-forward, aligning crypto taxation with equity markets.
Internal projections from exchanges show that even partial reforms could revive domestic volumes by 40–50% within six months.
Retail Investors Bear the Biggest Burden
Retail participation has taken a noticeable hit. Surveys indicate that nearly 75% of small traders reduced or stopped crypto trading after TDS enforcement. For investors with capital under ₹2 lakh, repeated deductions significantly erode deployable funds.
This has slowed grassroots adoption of blockchain-based assets and reduced engagement in India’s growing Web3 startup ecosystem.
Budget 2026: A Defining Moment for Indian Crypto
Budget 2026 is shaping up as a make-or-break moment for India’s crypto economy. With global markets embracing clearer, liquidity-friendly regulations, India risks falling behind in the Web3 race if current policies remain unchanged.
The data-driven argument from the industry is straightforward: rationalizing the 1% TDS can restore liquidity, increase compliance, and strengthen domestic oversight. Whether policymakers act on these analytics will determine if India becomes a global Web3 leader or a cautionary tale.
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