Indian crypto traders have increasingly turned to futures trading to circumvent the country's 30% tax on cryptocurrency profits and a 1% Tax Deducted at Source (TDS) on each crypto transaction, a loophole that might not last. The surge in futures trading is attributed to the ability to bypass these taxes, coupled with the lure of leverage and rising crypto prices.
In 2022, India implemented a flat 30% tax (plus a 4% health and education cess) on profits arising from the transfer of Virtual Digital Assets (VDAs), including cryptocurrencies. Additionally, a 1% TDS applies to VDA transfers exceeding ₹10,000 (₹50,000 for specific categories) in a financial year. This tax regime made frequent spot trading expensive due to the cumulative effect of TDS deductions.
Futures contracts, however, offer a way around these immediate tax implications. Because futures trades do not involve the actual transfer of VDAs, they avoid both the 30% profit tax and the 1% TDS. In futures trading, profits or losses are determined by the underlying price movement, but the investor doesn't actually buy or sell the VDA itself. Some traders reportedly classify gains from futures as "income from other sources," and some even use family members' accounts in lower tax brackets.
The difference in tax treatment between spot and futures trading has led to a significant shift in the Indian crypto market. Futures trading volumes on local exchanges now surpass spot transactions by more than threefold. This trend is further fueled by the acceptance of Indian rupee margins on domestic platforms, which reduces the need for stablecoins. Several exchanges have rolled out perpetual futures and streamlined onboarding, attracting first-time derivatives users.
The rise of crypto futures in India presents both opportunities and challenges. On one hand, it demonstrates the adaptability of the Indian crypto market and its users. On the other hand, it raises concerns about investor protection, disclosure standards, and the potential systemic risks associated with high leverage. Futures trading allows investors to take positions worth 10 to 50 times their initial capital, and some overseas platforms even offer leverage up to 100 times. While leverage can amplify gains, it also magnifies losses, potentially leading to liquidations during periods of high volatility.
The Indian Income Tax Department is aware of the tax implications of crypto futures and is increasing its scrutiny of cryptocurrency transactions. The department is using data analytics, artificial intelligence, and machine learning to detect tax evasion on VDAs. They are also cross-referencing income tax returns with information provided by crypto exchanges to identify non-compliant taxpayers. The government has collected ₹437 crore in taxes from VDA-related income for FY 2022-23.
To enhance transparency and ensure full disclosure of crypto-related income, the government has introduced stricter tax norms and compliance requirements. The Union Budget 2025 has categorized VDAs as part of undisclosed income, meaning that improperly reported crypto holdings will attract a higher tax rate. The government has also expanded the definition of VDAs under Section 2(47A) of the Income-tax Act to include "crypto-assets that rely on cryptographic security and distributed ledger technology," ensuring broader regulatory coverage. Furthermore, crypto transactions are now subject to search and seizure procedures under tax laws.
The sustainability of using futures to avoid taxes remains uncertain. The regulatory landscape is constantly evolving, and the government may soon take steps to close this loophole. If regulators update frameworks to reflect how the market is actually trading, India could bring more activity onshore under transparent rules, improving data quality and tax compliance while preserving competitive access for traders. Without such clarity, the futures boom may continue to grow under the radar, leaving investors to navigate a complex landscape with uneven protections and uncertain outcomes.
