Is Crypto Currency Legal in India?
Team SoOLEGAL 13 Jul 2023

Is Crypto Currency Legal in India?


Cryptocurrency, a digital currency utilizing encryption techniques for secure transactions, operates independently from centralized financial institutions. It enables direct and secure interaction among users, presenting potential opportunities for businesses to enhance profitability and streamline operations. Notably, crypto currencies leverage blockchain technology, a decentralized system offering unprecedented data storage, transaction management, and security. This technology's immutability and transparency have revolutionized various sectors, including banking, finance, healthcare, and supply chain. With innovative cryptography and smart contracts, blockchain ensures the authenticity and safety of digital transactions involving crypto currencies and NFTs, providing a unique and secure platform.


Legality of Crypto currencies in India

In India, however, the legality and regulatory framework surrounding crypto currencies have been a topic of debate and uncertainty.

The tussle between the government and crypto currencies started off when the Reserve Bank of India (RBI), India's central banking institution, expressed concerns about cryptocurrencies. In 2018, the RBI issued circular directing regulated entities to cease providing services to individuals or businesses dealing in virtual currencies. This circular was subsequently challenged in the Hon’ble Supreme Court of India. The same was struck down by the Hon’ble Supreme Court of India in Internet and Mobile Association of India v. Reserve Bank of India2020 SCC online SC 275 wherein the Hon’ble Apex court held that the above-mentioned circular was unconstitutional.

In the Union Budget 2022-23, the Indian finance minister announced that a 30% tax rate would be applied to income generated from the transfer of virtual digital assets. Additionally, a 1% tax deduction at source was proposed for cryptocurrency transactions. It is important to note that the taxation of virtual digital assets does not imply the legal recognition of cryptocurrencies, as stated by the minister. Under the Income Tax Act, all types of income, whether obtained legally or illegally, can be taxed by the Income Tax department. However, if the government is aware that income has been derived from illegal sources, it has a legal obligation to initiate punitive actions under relevant laws such as the Indian Penal Code, 1860 and Benami Transactions Act 1988 etc. Currently, the government has not initiated criminal investigations against individuals involved in cryptocurrency investments, trading, or services. This suggests that the government tacitly recognizes income earned from cryptocurrencies as legal income from legitimate sources. Should the government decide to pursue legal action against cryptocurrency users, it would open up a complex situation with potentially far-reaching consequences.

Cyber Security Directions dated 28.04.2022 issued under subsection (6) of Section 70B of the Information Technology Act, 2000 states that virtual asset service providers, virtual asset exchange providers, and custodian wallet providers are required to maintain complete records of customer information obtained through Know Your Customer (KYC) procedures. These entities are also mandated to keep financial transaction records for a period of five years. This measure aims to enhance cybersecurity in the realm of payments and financial markets while safeguarding citizens' data, fundamental rights, and economic freedom, considering the increasing prominence of virtual assets. The requirement for companies in the cryptocurrency sector to maintain data for five years indicates the government's stance on permitting the existence of cryptocurrencies and their associated service providers. This requirement implies that such companies are expected to operate for at least five more years, reflecting the government's de-facto acknowledgment and acceptance of the cryptocurrency industry.

The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced in Parliament which seeks to “o create a facilitative framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seeks to prohibit all private cryptocurrencies in India; however, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses”. However, this bill is yet to see the light of the day in order to become an act.


Is crypto currency considered as a legal tender in India?

Legal tender refers to a recognized medium of exchange that can be used to settle debts and is supported by the government. In the context of cryptocurrencies in India, it is important to note that they do not possess legal tender status. While traders in India engage in virtual transfers and utilize cryptocurrencies for transactions and investments, cryptocurrencies like Bitcoin do not have the legal recognition to be used for debt settlement in exchange for goods or services.


What are the apprehensions of the Government pertaining to Crypto currencies?

The Indian government has expressed concerns about potential risks associated with cryptocurrencies, including money laundering, terrorist financing, and consumer protection. Additionally, the volatility of cryptocurrencies and their potential impact on the stability of the financial system remain areas of concern.

The decentralized nature of cryptocurrencies renders them independent of government or financial authorities. The absence of regulations in cryptocurrency transactions poses challenges for governmental oversight. Moreover, decentralization implies that in case of any issues or disputes arising from cryptocurrency transactions, there is no central authority to approach for resolution.


What is the future of Crypto Currencies in India?

The future of cryptocurrencies in India remains uncertain, as the government aims to strike a balance between embracing the potential benefits of blockchain technology and protecting the interests of investors and the financial system. Clarity in regulations, investor protection measures, and fostering innovation are key considerations for the government going forward.

The Indian government's cautious approach in regulating cryptocurrencies aims to strike a balance between innovation and protection. It is crucial for policymakers to carefully evaluate the potential risks and benefits associated with cryptocurrencies to develop a robust regulatory framework that fosters responsible innovation and safeguards the interests of all stakeholders involved. 

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