You lend some Ethereum on a DeFi protocol and start earning a yield. Or perhaps you lock up Bitcoin as collateral to borrow stablecoins without selling your holdings. Both feel like smart financial moves, and they are. What many investors do not realise, however, is that each of these actions carries a distinct tax consequence under Indian law.
India does not have a dedicated tax provision for crypto lending or borrowing. The Income Tax Department taxes Virtual Digital Assets under Section 115BBH for these activities based on their economic substance. Knowing which events are taxable, which are not, and how to report each one correctly is what this guide is here to help you with.
Key Takeaways
- Crypto lending and borrowing are taxed under existing VDA rules, as there is no dedicated provision for these activities in India.
- Interest earned from lending crypto is treated as income and taxed at your applicable slab rate under Income from Other Sources.
- Selling or swapping earned interest triggers a second tax event at a flat 30% under Section 115BBH, plus 4% cess.
- Borrowing crypto using collateral is not taxable, as no transfer of ownership or income generation occurs at the time of borrowing.
- Interest paid on borrowed crypto cannot be claimed as a deduction. Only the cost of acquisition is permitted under current VDA rules.
- Collateral liquidation is treated as a VDA transfer, attracting 30% tax plus 4% cess on any gains, along with 1% TDS.
- Losses from crypto lending or borrowing cannot offset gains from other VDA transactions, nor can they be carried forward.
- All taxable events must be reported under Schedule VDA in ITR-2 or ITR-3, with interest income declared separately under Income from Other Sources.
How Does ITD Tax Crypto Lending and Borrowing in India?
The Income Tax Department does not treat crypto lending and borrowing as a single category. Instead, it looks at each individual activity and applies tax based on what actually happened, whether income was earned, an asset was transferred, or a collateral position was closed.
Crypto Lending Tax in India
When you lend cryptocurrency and earn rewards in return, two separate tax events can arise:
Interest Earned From Lending Crypto
Under Section 56(2) of the Income Tax Act, interest or yield earned from lending cryptocurrency is classified as Income from Other Sources and taxed at your applicable slab rate. Key points to note:
- The Fair Market Value (FMV) of the tokens received on the date of receipt is your taxable income.
- This applies equally to centralised lending platforms (CeFi) and decentralised protocols (DeFi).
- Even if you do not convert the earned tokens to INR, the tax obligation arises at the point of receipt.
- The FMV must be recorded in INR at the time of each reward distribution.
Sale of Earned Interest
Once you have paid income tax on your lending rewards at receipt, a second tax event arises the moment you sell, swap, or spend those tokens. Under Section 115BBH, the profit from this disposal is taxed at a flat 30%, with an additional 4% health and education cess. Moreover, a 1% TDS applies on the transfer of the crypto under Section 194S, if the value of the crypto is more than INR 10,000 or (INR 50,000 in some cases).
Some of the key points to keep in mind are:
- The cost of acquisition for this calculation is the FMV at which income tax was originally paid.
- Only the acquisition cost is deductible. Platform fees and gas charges cannot be included.
- This double taxation, once at receipt and once at disposal, is a defining feature of crypto lending tax in India.
- 1% TDS applies on transfers above INR 10,000 or INR 50,000 (Individual/HUFs with income less INR 50,00,000 in profession or INR 1,00,00,000 in business)
Crypto Borrowing Tax in India
Borrowing against your crypto holdings is one of the few areas in India’s VDA framework where a tax obligation does not immediately arise. However, two specific events out of three, within the borrowing lifecycle, can still trigger significant tax consequences.
Borrowing Crypto Using Collateral
When you lock cryptocurrency as collateral to borrow funds, no transfer of ownership takes place. The asset remains yours; you have simply pledged it. Since no income is generated and no VDA is disposed of, borrowing itself is not a taxable event under Indian law. Key points:
- Locking collateral on a CeFi or DeFi platform does not trigger capital gains.
- No TDS obligation arises at the point of pledging collateral.
- The tax position changes only if the collateral is liquidated or the borrowed amount generates taxable income.
Interest Paid on Borrowed Crypto
If you pay interest on borrowed cryptocurrency, you might expect to claim it as a deduction against your taxable income. Under current Indian VDA rules, that is not permitted. Section 115BBH(2)(b) allows only the cost of acquisition as a deduction, and interest paid on a loan does not qualify.
- No relief is available for interest payments on crypto-backed loans.
- This applies regardless of whether the loan is from a CeFi platform or a DeFi protocol.
- The restriction makes crypto borrowing more expensive from a tax efficiency standpoint compared to traditional loans.
Liquidation of Collateral
If your collateral is liquidated, either because the loan is not repaid or the asset value falls below the platform’s threshold, the Income Tax Department treats it as a transfer of a VDA. This triggers capital gains tax on any profit between the original acquisition cost and the liquidation value.
It is important to note that 1% TDS applies on all crypto transfers, including liquidation events. This extends to peer-to-peer arrangements and transactions on international platforms. In such cases, the buyer or the initiating party is responsible for deducting and depositing the TDS with the government. Failure to do so attracts penalties under the Income Tax Act.
How To Calculate Taxes on Crypto Lending and Borrowing in India?
Since lending and borrowing involve multiple types of tax events, your calculation must address each one separately. The income tax on lending rewards, the capital gains on disposal, and the tax on liquidation are all computed differently and reported under different heads.
Calculating Tax on Crypto Lending
Step 1: Calculate Income Tax on Lending Interest
When tokens are received as lending rewards, their FMV on the date of receipt determines your taxable income under Income from Other Sources.
Taxable Income = Number of Tokens Received × FMV on Date of Receipt
Step 2: Calculate Capital Gains on Sale of Earned Interest
When you later sell the earned tokens, the gain is the difference between the sale value and the FMV at which you originally paid income tax.
Capital Gain = Sale Value of Tokens – FMV at Receipt
Capital Gains Tax = 30% × Capital Gain
Cess = 4% × Capital Gains Tax
Total Tax on Disposal = Capital Gains Tax + Cess
Step 3: Calculate TDS
TDS applies on the total value of crypto that was transferred.
TDS = 1% × Total Transaction Value
Calculating Tax on Crypto Borrowing
Step 1: Calculate Capital Gains on Collateral Liquidation
When collateral is liquidated, the gain is calculated as the difference between the liquidation value and the original cost of acquiring the pledged asset.
Capital Gain = Sale Value of Tokens – FMV at Receipt
Capital Gains Tax = 30% × Capital Gain
Cess = 4% × Capital Gains Tax
Total Tax on Disposal = Capital Gains Tax + Cess
Step 2: Account for TDS
TDS under Section 194S applies on the total value of the transfer, whether it is a sale of earned tokens or a collateral liquidation, once the applicable threshold is crossed.
TDS = 1% × Total Transaction Value
Example
Sneha holds 2 Ethereum and decides to lend it to Vikram through a CeFi platform on 1st August 2024. Vikram, on the other hand, needs liquidity but does not want to sell his Bitcoin. He pledges 1 BTC as collateral to borrow Sneha’s ETH. His original cost of acquiring the Bitcoin was INR 30,00,000.
Sneha's Tax Events (Lender)
Here’s what Sneha owes in taxes to the Income Tax Department:
Tax Event 1: Interest Earned From Lending
By 31st January 2025, Sneha earned 0.1 ETH as interest from lending. On that date, 1 ETH was valued at INR 2,00,000.
Taxable Income = 0.1 × INR 2,00,000 = INR 20,000
This INR 20,000 is added to Sneha’s total income and taxed at her applicable slab rate under Section 56(2) as Income from Other Sources.
Tax Event 2: Sale of Earned Interest
On 15th March 2025, Sneha sold the 0.1 ETH she earned as interest, when ETH was valued at INR 2,50,000 per token.
- Sale Value = 0.1 × INR 2,50,000 = INR 25,000
- Cost of Acquisition (FMV at Receipt) = INR 20,000
Capital Gain = INR 25,000 – INR 20,000 = INR 5,000
Capital Gains Tax = 30% of INR 5,000 = INR 1,500
Cess = 4% of INR 1,500 = INR 60
Total Tax on Disposal = INR 1,500 + INR 60 = INR 1,560
Tax Event 3: TDS on Sale of Earned Interest
Since the transaction value of INR 25,000 exceeds the INR 10,000 threshold, 1% TDS applies under Section 194S.
TDS = 1% × INR 25,000 = INR 250
Sneha pays income tax on INR 20,000 at her slab rate and INR 1,560 as capital gains tax on disposal. The INR 250 deducted as TDS is adjustable against her final liability when filing her ITR.
Vikram's Tax Events (Borrower)
Here’s what Vikram owes in taxes to the Income Tax Department:
Tax Event 1: Pledging Bitcoin as Collateral
Vikram locks 1 BTC as collateral on 1st August 2025. No transfer of ownership occurs. No income is generated. This is not a taxable event.
Tax Event 2: Interest Paid on Borrowed ETH
Throughout the loan period, Vikram pays interest on the borrowed ETH. Under current VDA rules, this interest cannot be claimed as a deduction. No tax relief is available here.
Tax Event 3: Collateral Liquidation
Till 20th February 2026, Vikram was unable to repay the loan. The platform liquidates his Bitcoin collateral at a market value of INR 38,00,000.
Capital Gain = INR 38,00,000 – INR 30,00,000 = INR 8,00,000
Capital Gains Tax = 30% of INR 8,00,000 = INR 2,40,000
Cess = 4% of INR 2,40,000 = INR 9,600
Total Tax on Liquidation = INR 2,40,000 + INR 9,600 = INR 2,49,600
Tax Event 4: TDS on Collateral Liquidation
Since the liquidation value of INR 38,00,000 far exceeds the threshold, 1% TDS applies under Section 194S.
TDS = 1% × INR 38,00,000 = INR 38,000
Vikram owes INR 2,49,600 in capital gains tax on the liquidation. The INR 38,000 deducted as TDS is adjustable against his final liability when filing his ITR.
How To Report Crypto Lending and Borrowing Taxes in India?
Reporting crypto lending and borrowing correctly requires you to separate two distinct income streams: interest income reported under Income from Other Sources, and capital gains reported under Schedule VDA. Combining them incorrectly is one of the most common filing errors among crypto investors.
Step 1: Gather All Transaction Records
Before you open the ITR filing portal, compile a complete record of every lending and borrowing event from the financial year. You will need:
- Date and INR value of every lending reward received
- Details of all borrowing transactions, including collateral pledged
- Liquidation records, if applicable, with the liquidation value in INR
- Sale records for any earned tokens disposed of during the year
- Exchange statements and transaction hashes for verification
Step 2: Categorise Income Correctly
Not all crypto lending income is reported in the same place. Correct categorisation is essential:
- Lending interest received → Income from Other Sources
- Sale or swap of earned interest tokens → Schedule VDA
- Collateral liquidation gains → Schedule VDA
- Borrowing itself → No reporting required, as it is not a taxable event
Step 3: Choose the Correct ITR Form
The right form depends on how you approach your lending activity:
Step 4: Fill Schedule VDA and Income from Other Sources
Within your chosen ITR form, complete both relevant sections:
- Under Income from Other Sources, enter the FMV of all lending rewards received during the year.
- Under Schedule VDA, enter each disposal event, sale of earned tokens, and collateral liquidations, with the date of acquisition, date of transfer, cost of acquisition, and resulting gain.
Step 5: Verify TDS Credits
Cross-check all TDS deducted across your lending and liquidation transactions against your Form 26AS and Annual Information Statement (AIS). Any discrepancy must be resolved with your exchange or platform before filing.
Step 6: Pay Remaining Tax and File
After adjusting for TDS credits, pay any outstanding liability as self-assessment tax before submitting your return. Late filing attracts penalties under the Income Tax Act, and unreported crypto gains from FY 2025-26 onwards may be treated as undisclosed income and taxed at 60% under the block assessment provisions.
Crypto lending and borrowing create multiple tax threads that need to be tied together before you file. Managing this across platforms, wallets, and reward cycles manually is where errors happen. KoinX is built to handle exactly this, and here is how it can help.
Why Choose KoinX For Crypto Lending and Borrowing Taxes in India?
Crypto lending and borrowing generate multiple overlapping tax obligations, income tax on rewards, capital gains on disposals, and TDS on transfers. Tracking all of these across CeFi and DeFi platforms manually leaves significant room for error. KoinX is purpose-built to handle this complexity for Indian investors.
Automatic Detection of Lending Rewards and Their INR Value at Receipt
KoinX automatically identifies lending reward distributions across 800+ wallets and platforms. For each reward received, it fetches the FMV in INR at the time of receipt, ensuring your income tax liability is calculated accurately from the very first token earned.
Correct Classification of Income vs Capital Gains
One of the most common filing errors in crypto lending is reporting everything under one income head. KoinX automatically separates lending interest, classified under Income from Other Sources, from disposal gains, which are reported under Schedule VDA. This ensures your ITR reflects the correct tax treatment for each event.
Income Tax Department Compliant Tax Reports
KoinX generates comprehensive tax reports that separate lending income and disposal gains into the correct ITR sections. Whether you have a handful of transactions or hundreds of reward distributions, the report is structured and ready to use when filing your ITR-2 or ITR-3.
Crypto lending and borrowing create tax obligations that span two income heads and multiple transaction types. KoinX does the heavy lifting for you, tracking every reward, disposal, and liquidation event with precision. Get started today and head into tax season with every lending and borrowing position accurately reported and every liability clearly accounted for.
Conclusion
Crypto lending and borrowing in India are not tax-neutral activities. Interest earned is taxed as income, disposals are taxed as capital gains, and collateral liquidation carries the same weight as any other VDA transfer. The absence of a dedicated law does not reduce the obligation, it simply means existing rules apply with full force.
Staying compliant requires separating your income heads, tracking every reward in INR, and filing under both Schedule VDA and Income from Other Sources. KoinX makes this manageable, so why wait? Sign up on KoinX today and take control of your crypto lending tax obligations.
Frequently Asked Questions
Can I Offset Losses From Crypto Lending Against Other Gains?
No. Under Section 70 and Section 74 of the Income Tax Act, losses from crypto lending or borrowing cannot be set off against gains from any other VDA or any other income head. A loss on a bad lending position cannot reduce your tax on a profitable liquidation or any other crypto gain. These losses cannot be carried forward to future financial years either.
Is There Any Specific Law In India That Directly Covers Crypto Lending?
No dedicated tax provision exists for crypto lending or borrowing in India. The Income Tax Department applies broader VDA taxation rules to these activities based on their economic substance. This creates ambiguity in some scenarios and requires careful case-by-case classification, ideally with guidance from a qualified crypto tax professional.
How Is DeFi Lending Treated Differently From Centralised Lending Platforms?
There is no formal distinction in Indian tax law between DeFi and CeFi lending. However, DeFi transactions attract greater scrutiny because they are peer-to-peer, and TDS is not automatically deducted by a platform. In such cases, the taxpayer bears full responsibility for correct reporting and TDS compliance.
What Happens If You Reinvest Your Lending Rewards Instead Of Selling Them?
Reinvesting lending rewards does not defer or eliminate the tax obligation. The moment rewards are received, they are taxed as income at your slab rate based on their FMV. When the reinvested tokens are eventually disposed of, a second tax event arises at 30% on any gains made since receipt.
How Are Self-Repaying or Yield-Based Loans Taxed in India?
In yield-based loan models where collateral generates returns to repay the loan, the yield may be treated as taxable income even if it is not directly received in your wallet. The Income Tax Department focuses on the economic substance of the transaction, meaning any generated yield is likely taxable at the applicable slab rate upon accrual or receipt.
