India’s Evolving Crypto Regulatory Framework and Its Impact on Institutional Investment

India’s Virtual Digital Assets (VDA) market has emerged as a focal point for global investors, driven by a surge in retail adoption and technological innovation. However, the path to institutional participation has been shaped by a rapidly evolving regulatory landscape. As of 2025, India’s VDA framework is transitioning from ambiguity to structured oversight, with tax policies, enforcement mechanisms, and cross-jurisdictional collaborations defining the contours of institutional entry. This article examines how regulatory clarity—and its gaps—are reshaping investment strategies in India’s booming VDA sector.

Regulatory Framework: Taxation and Compliance Challenges

The cornerstone of India’s VDA regulation is the 30% flat tax on gains from transactions involving cryptocurrencies, NFTs, and other digital assets, introduced under the Income Tax Act, 1961 [1]. This rate, combined with a 1% Tax Deducted at Source (TDS) on transactions exceeding ₹50,000 for individuals and ₹10,000 for others, has created a dual-edged sword. While it formalizes the sector and generates revenue, it has also driven significant trading volumes offshore. According to a report by The Economic Times, trading volumes on Indian exchanges dropped by 97% post-2022, with 81% of active users migrating to platforms in Dubai and Singapore [5].

The Central Board of Direct Taxes (CBDT) is now seeking stakeholder input to refine these policies. Key concerns include the lack of loss-offsetting mechanisms, the impact of high tax rates on liquidity, and the need for a centralized regulatory body to oversee VDAs [4]. The absence of a formal legal framework—despite the proposed Virtual Digital Assets Act—has left institutions navigating a patchwork of tax rules and anti-money laundering (AML) guidelines under the Prevention of Money Laundering Act (PMLA) [2].

Institutional Strategies: Compliance, Innovation, and Risk Mitigation

Institutional investors entering India’s VDA market in 2025 are adopting a hybrid approach to navigate regulatory uncertainty. Compliance-first strategies dominate, with firms prioritizing adherence to TDS and tax reporting requirements. For instance, exchanges like WazirX and CoinDCX have integrated TDS mechanisms into their platforms, ensuring real-time compliance with CBDT thresholds [6]. Additionally, Virtual Asset Service Providers (VASPs) are aligning with Financial Intelligence Unit-India (FIU-IND) mandates to meet AML standards, a move that enhances credibility but increases operational costs [3].

Innovation-driven strategies are also emerging. Firms are exploring stablecoin derivatives and tokenized assets to mitigate the impact of high tax rates. For example, the stablecoin industry in India has grown by 40% in 2025, with use cases in cross-border remittances and portfolio hedging [5]. However, the lack of clarity on stablecoin regulation under the Foreign Exchange Management Act (FEMA) remains a hurdle.

Global Benchmarks and India’s Regulatory Trajectory

India’s regulatory approach is increasingly influenced by global frameworks. The G20’s 2024 Synthesis Paper on VDA governance, which emphasizes cross-jurisdictional collaboration, has prompted Indian policymakers to consider harmonizing tax and compliance standards with international peers [4]. Similarly, the U.S. CLARITY Act of 2025—designed to resolve crypto regulatory ambiguities—has created a ripple effect, pushing Indian institutions to align with U.S. custody and classification norms to facilitate cross-border partnerships [3].

The Reserve Bank of India (RBI) is also advancing its Central Bank Digital Currency (CBDC) initiative, positioning the digital rupee as a state-backed alternative to decentralized cryptocurrencies. While this underscores the RBI’s caution, it also signals a strategic pivot toward controlled innovation. As stated by the Economic Times, the CBDC could coexist with VDAs if regulators adopt a multi-jurisdictional framework involving SEBI, RBI, and the Ministry of Electronics and Information Technology (MeitY) [5].

Challenges and Opportunities for Institutional Investors

Despite progress, challenges persist. The absence of loss-settlement mechanisms and the inability to carry forward losses under the current tax regime deter long-term investment [2]. Additionally, the lack of a unified regulatory body—such as a dedicated VDA authority—creates compliance fragmentation. For example, SEBI’s proposed multi-regulator framework for tokenized assets remains unimplemented, leaving gaps in oversight [1].

However, opportunities abound. India’s Web3 developer community, ranked first globally by Chainalysis, and its 107.3 million active VDA users in 2025 [3], present a fertile ground for institutional expansion. Firms that invest in investor education and transparency—such as Binance’s India-focused compliance initiatives—are gaining traction. Moreover, the projected market size of USD 6.4 billion by 2025 [3] offers a compelling case for early-stage institutional entry.

Strategic Entry: Navigating the 2025 Landscape

For institutions considering India’s VDA market, the following strategies are critical:
1. Leverage Tax Compliance Tools: Partner with local exchanges to automate TDS and reporting under Schedule VDA of the Income Tax Return (ITR).
2. Diversify into Stablecoins and Tokenized Assets: Mitigate volatility risks while complying with RBI’s CBDC roadmap.
3. Engage in Policy Dialogue: Participate in CBDT consultations to shape future regulations, particularly around loss-offsetting and multi-regulator frameworks.
4. Adopt Global Standards: Align with U.S. CLARITY Act and G20 guidelines to facilitate cross-border operations and investor trust.

Conclusion

India’s VDA market is at a crossroads. While regulatory clarity remains incomplete, the interplay of taxation, global benchmarks, and domestic innovation is creating a structured environment for institutional participation. For investors, the key lies in balancing compliance with strategic foresight—capitalizing on India’s digital asset potential while navigating its regulatory maze. As the CBDT and RBI refine their approaches, the next 12–18 months will likely determine whether India emerges as a global VDA leader or cedes ground to more agile jurisdictions.

Source:
[1] Virtual Currency Regulation Review 2025 [https://www.azbpartners.com/bank/virtual-currency-regulation-review-2025/]
[2] Virtual Digital Assets in India: Booming Market, Heavy Taxes and the Uncertain Future [https://www.irccl.in/post/virtual-digital-assets-in-india-booming-market-heavy-taxes-and-the-uncertain-future]
[3] India's opportunity to lead the way in VDA governance [https://m.economictimes.com/markets/cryptocurrency/crypto-news/from-global-agreements-to-local-action-indias-opportunity-to-lead-the-way-in-vda-governance/articleshow/123073532.cms]
[4] CBDT asks stakeholders on regulation, compliance; VDA oversight tax compliance in focus [https://timesofindia.indiatimes.com/business/cryptocurrency/crypto-law-in-india-cbdt-asks-stakeholders-on-regulation-compliance-vda-oversight-tax-compliance-in-focus/articleshow/123380841.cms]
[5] The impact of India's 1% TDS on Virtual Digital Assets [https://m.economictimes.com/markets/cryptocurrency/the-impact-of-indias-1-tds-on-virtual-digital-assets-a-call-for-reform/articleshow/111599629.cms]
[6] Crypto Reporting in ITR: Rules and Filing Tips [https://www.caclubindia.com/articles/crypto-reporting-in-itr-rules-and-filing-tips--54015.asp]