India's financial regulators are tightening their grip on the crypto ecosystem, and the latest target is unauthorized cross-border remittances. In a significant move, India's Directorate of Enforcement (ED) recently conducted searches at multiple Bengaluru-based firms, uncovering an alleged network facilitating over ₹2,500 crore in unregulated money transfers using Virtual Digital Assets (VDAs). This crackdown highlights not only regulatory violations but also significant hidden tax risks for the users of these services.

ED Crackdown: What Happened in Bengaluru?

In mid-2026, the ED's Bengaluru office executed searches at six locations connected to several entities allegedly operating unauthorized crypto "on-ramp" and "off-ramp" services. According to press releases and reports from sources like The Economic Times and NDTV, the investigation focuses on large-scale violations of the Foreign Exchange Management Act, 1999 (FEMA).

The probe alleges that these firms enabled cross-border transfers exceeding ₹2,500 crore (approximately $300 million) by converting Indian Rupees (INR) into VDAs, moving them across borders, and then converting them back into fiat currency. The ED stated these operations bypassed the formal banking system entirely.

During the searches, the agency froze bank accounts containing around ₹6 crore. The companies reportedly under investigation reportedly include Transak Technology India, Carretx Technologies, and Mokshagna Technologies, among others, according to media reports. The ED's action sends a clear signal: regulatory bodies are actively monitoring the use of crypto for activities that fall within the purview of traditional finance, and non-compliance will have serious consequences.

How Unregulated On-Ramps and Off-Ramps Bypassed Indian Law

The modus operandi described by the ED involves a clever, albeit illegal, circumvention of India's stringent foreign exchange laws. To understand the mechanism, it's crucial to define the key terms:

On-Ramp: A service that allows users to convert traditional fiat currency (like INR or USD) into cryptocurrency.
Off-Ramp: A service that allows users to convert cryptocurrency back into fiat currency, which is then deposited into a bank account.

According to the ED's findings, these platforms advertised instant and seamless international money transfers. A user in India wanting to send money abroad, or vice-versa, would follow a process like this:

Deposit Fiat: The user deposits INR into a bank account controlled by the on-ramp company in India.
Convert to VDA: The company uses these funds to purchase VDAs, typically stablecoins like USDT, on an Indian crypto exchange.
Transfer VDA: The VDAs are then transferred to a wallet controlled by an affiliated entity or the recipient in another country.
Off-Ramp to Fiat: The recipient uses an off-ramp service to sell the VDAs for their local currency (e.g., USD, EUR), which is then credited to their bank account.

This process effectively bypasses the regulatory framework established by the Reserve Bank of India (RBI) for remittances. Compliant international transfers require adherence to FEMA guidelines, including the submission of forms detailing the transaction's purpose (purpose codes) and, for inward remittances, the issuance of a Foreign Inward Remittance Certificate (FIRC). The ED alleges these crypto-based services ignored all such requirements.

Feature	Regulated Banking Channel (e.g., LRS)	Unregulated Crypto Remittance Service
Regulatory Oversight	Reserve Bank of India (RBI)	None; operates outside the regulated framework
Governing Law	Foreign Exchange Management Act, 1999 (FEMA)	Allegedly violates FEMA
Documentation	Mandatory (e.g., A2 Form, Purpose Codes, FIRC)	Bypassed; no official documentation generated
Transparency	High; clear transaction trail via banking system	Low; obscured trail across multiple crypto wallets
Legality	Fully legal and compliant	Under investigation for unauthorized operation

Beyond FEMA: The Hidden Tax & Compliance Risks for Users

While the ED's investigation focuses on FEMA violations by the companies, the individuals who used these services now face substantial tax and compliance risks. The Indian Income Tax Department will likely scrutinize users whose funds have passed through these flagged platforms.

Here are the primary tax risks involved:

1. Mischaracterization of Income

When you receive money from family abroad through a bank, it's typically a gift or personal remittance and not taxable income. However, when the funds arrive via a multi-leg crypto transaction, the tax characterization becomes dangerously ambiguous.

Tax authorities could argue that you received a Virtual Digital Asset and then sold it for INR. Under Section 115BBH of the Income-tax Act, 1961, which has been in effect since April 1, 2022, any income from the transfer of VDAs is taxed at a flat rate of 30% (plus applicable cess and surcharge). The burden of proof to demonstrate that the transaction was a non-taxable remittance, and not a VDA trade, falls squarely on the taxpayer.

2. The 1% TDS Quagmire

Section 194S of the Income-tax Act (effective July 1, 2022) mandates a 1% Tax Deducted at Source (TDS) on the transfer of VDAs if the aggregate value exceeds ₹50,000 (for individuals) in a financial year.

The ED reports noted that in some cases, recipients were even able to claim TDS benefits. This raises critical questions:

Who was deducting the TDS?
Was it deposited with the government correctly?
Was Form 16A (the TDS certificate) issued?

If you used an unregulated off-ramp service that processed the final leg of the transaction through an Indian exchange, TDS may have been deducted. However, if the platform itself is deemed non-compliant, your TDS claim could be challenged during an audit, potentially leading to tax demands and penalties.

3. Inability to Prove Cost Basis

To calculate the tax on a VDA transfer, you must subtract the acquisition cost (cost basis) from the sale price. In a complex remittance chain, what is your cost basis?

Is it the INR amount the sender started with?
Is it the value of the VDA when it landed in your wallet?
How do you account for fluctuating exchange rates and transaction fees across multiple platforms?

Without a clear and documented paper trail, it is nearly impossible to establish a legitimate cost basis. In such scenarios, tax authorities may assess the acquisition cost as zero, leading to the entire sale amount being taxed at 30%. Tools like dTax can help reconstruct transaction histories from compliant exchanges, but data from unregulated platforms may be incomplete or inaccessible, making this task extremely difficult.

4. Severe Restrictions on Loss Offsets

India's VDA tax regime is notoriously strict. Section 115BBH explicitly states:

No loss from the transfer of a VDA can be set off against income from any other source.
No loss from one VDA can be set off against the gain from another VDA.

If your remittance transaction inadvertently resulted in a capital loss (e.g., the crypto's value dropped between receipt and sale), that loss is useless for tax purposes. It cannot reduce your tax liability from other crypto gains or your salary income.

Best Practices for Compliant Crypto Transactions in India

The ED's crackdown is a stark reminder that perceived convenience cannot come at the expense of legal and tax compliance. To protect yourself, follow these best practices:

Use Regulated Platforms: For all crypto trading, use established Indian exchanges that are compliant with KYC (Know Your Customer) and AML (Anti-Money Laundering) norms. These platforms provide proper transaction statements required for tax filing.
Separate Remittances and Investments: Do not mix personal remittances with crypto trading activities. For receiving money from abroad, use RBI-approved banking channels. It is the safest and most transparent method.
Maintain Meticulous Records: For every crypto transaction you conduct, record the date, time, type of asset, quantity, value in INR at the time of the transaction, and any fees paid. This data is essential for accurate tax calculations.
Understand Your Tax Obligations: Familiarize yourself with Section 115BBH (30% tax) and Section 194S (1% TDS). Ensure you pay advance tax on your crypto gains on the prescribed due dates (June 15, Sept 15, Dec 15, March 15) to avoid interest penalties.
Automate Your Tax Reporting: The complexity of tracking cost basis and calculating gains across hundreds of transactions makes manual reporting prone to errors. Using a dedicated crypto tax software can automate this process. For instance, dTax integrates with major Indian exchanges to automatically categorize transactions and generate compliant tax reports, significantly reducing the risk of errors and saving hours of manual work.

This content is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional for your specific situation.

Staying on the right side of the law is paramount. The recent enforcement actions show that Indian authorities are closing in on non-compliant channels. By adopting compliant practices, you can navigate the world of digital assets without running afoul of regulators. Start automating your crypto taxes with dTax.

Frequently Asked Questions

What is the main difference between a compliant crypto exchange and an unregulated remittance service?

A compliant Indian crypto exchange is a domestic entity registered in India that adheres to KYC/AML regulations and facilitates the buying and selling of VDAs. They are required to deduct 1% TDS under Section 194S and provide you with transaction records. An unregulated remittance service, as described in the ED probe, uses crypto as a backend rail to move money across borders, bypassing RBI and FEMA regulations entirely. They are not authorized to conduct remittance activities and create significant tax and legal risks for users.

I think I may have used one of these unregulated services. What should I do?

First, stop using the service immediately. Second, attempt to gather all possible records of your transactions, including bank statements showing deposits, and any transaction confirmations or wallet addresses involved. Third, it is highly advisable to consult with a qualified tax professional or chartered accountant in India. They can help you assess your potential liability, understand your disclosure obligations, and determine the best course of action to become compliant, which may include filing updated tax returns if necessary.

Are all cross-border crypto transactions illegal in India?

No, not necessarily, but the regulatory landscape is complex and fraught with risk. While holding crypto is not illegal, using it for purposes that circumvent existing laws, like FEMA for remittances, is. Sending crypto from an Indian exchange wallet to a private wallet or a foreign exchange wallet for personal holding is a VDA transfer, creating a taxable event. The primary issue highlighted by the ED is the use of crypto specifically to operate an unauthorized money transfer business, which is a violation of RBI and FEMA rules.