How to Report DeFi Yield in India: Complete Tax Compliance Guide

As decentralized finance (DeFi) gains traction in India, investors face growing confusion about tax obligations. With the Finance Act 2022 imposing a 30% tax on crypto income, reporting DeFi yield correctly is critical to avoid penalties. This comprehensive guide breaks down India’s tax framework for DeFi earnings, providing actionable steps to maintain compliance while navigating this evolving landscape.

Understanding DeFi Yield Taxation in India

Under Section 2(47A) of the Income Tax Act, DeFi tokens qualify as Virtual Digital Assets (VDAs). The Central Board of Direct Taxes (CBDT) mandates:

• All DeFi yield (staking rewards, liquidity mining, lending interest) is taxable as “Income from Other Sources”
• A flat 30% tax applies to net gains after accounting for acquisition costs
• 1% TDS deduction on transactions exceeding ₹10,000 per transaction (₹50,000 annually for specified individuals)
• No deduction allowed for expenses except direct acquisition costs

Tax liability arises when you receive yield tokens, not when converting to fiat. For example, receiving 0.5 ETH as staking reward triggers tax based on its INR value at receipt.

Step-by-Step Guide to Reporting DeFi Yield

1. Track All Yield Events
   • Record date, token type, quantity, and platform for every yield transaction
   • Use blockchain explorers like Etherscan to verify on-chain data
2. Convert to INR Value
   • Calculate fair market value using exchange rates at time of receipt
   • Refer to WazirX, CoinDCX, or CoinMarketCap historical data
3. Calculate Taxable Income
   • Sum all yield values in INR for the financial year
   • Deduct only direct acquisition costs (gas fees, platform charges)
4. File Appropriate ITR Form
   • Use ITR-2 if yield is only crypto income
   • Switch to ITR-3 if combined with business income
   • Report under “Income from Other Sources” (Schedule OS)
5. Maintain Documentation
   • Preserve wallet addresses, transaction IDs, and exchange statements
   • Retain records for 6 years under Section 149

Essential Tools for Compliance

Simplify reporting with these resources:

• Tax Software: Koinly, Catax, and CoinTracker auto-calculate Indian tax liabilities
• Portfolio Trackers: Delta or CoinStats monitor yield across protocols
• Government Portals: Income Tax e-Filing portal for TDS credits (Form 26AS)
• CBDT Circulars: Regularly check circulars for updated VDA guidelines

Critical Mistakes to Avoid

• Ignoring Small Yields: Even micro-transactions (₹10+) are taxable
• Using Wrong Valuation: Never use conversion-to-fiat value instead of receipt value
• Missing TDS Credits: Verify 1% TDS reflects in Form 26AS before filing
• Omitting Cross-Platform Yields: Consolidate earnings from all DeFi protocols

FAQs: DeFi Yield Reporting in India

1. Is DeFi yield taxed differently than crypto trading profits?

No. Both fall under the 30% VDA tax regime. However, yield is taxed as ordinary income, while trading profits may qualify as capital gains if held long-term.

2. How do I report yield from foreign DeFi platforms?

The same rules apply. Convert yield to INR using RBI reference rates or exchange rates at transaction time. Maintain records of foreign wallet addresses.

3. Can I offset DeFi losses against other income?

No. VDA losses cannot offset other income types. They can only be carried forward for 8 years to set against future crypto gains.

4. Do I pay tax if I reinvest DeFi yield?

Yes. Tax applies upon receipt regardless of reinvestment. The reinvestment becomes a new asset with its own cost basis.

5. How does TDS work for DeFi transactions?

Exchanges deduct 1% TDS when you transfer tokens to private wallets. For direct protocol interactions, users must self-calculate and deposit TDS via Challan 26QE quarterly.

6. Are airdrops and forks taxable like yield?

Yes. These are treated as income at fair market value when received. Report under the same VDA tax rules.

As India’s crypto tax framework evolves, consult a chartered accountant specializing in VDAs. Proactive compliance protects you from 50-200% penalty risks under Section 270A while ensuring you harness DeFi’s full potential responsibly.