India Tightens Crypto KYC Rules as High Taxes Push Traders Offshore

India’s Financial Intelligence Unit (FIU) has rolled out stringent compliance rules for cryptocurrency exchanges, significantly raising the bar for identity verification. The new regulations aim to curb fraud, deepfakes, and anonymous transactions, but come amid concerns that heavy taxation is pushing domestic traders toward offshore platforms.

Under the updated framework, crypto exchanges must verify users with live selfie authentication, requiring dynamic movements like blinking or head turns to confirm presence. Platforms must also collect geolocation data, timestamps, and IP addresses at onboarding, making it harder for fraudsters to use static photos or AI-generated deepfakes.

The FIU further requires users to submit a secondary ID—passport, Aadhaar, or voter ID—in addition to the Permanent Account Number (PAN). Email addresses and mobile numbers must pass OTP verification, while a penny-drop method confirms ownership of linked bank accounts.

High-risk users, such as politically exposed persons (PEPs) or those with links to tax havens, face enhanced monitoring, with KYC checks every six months instead of annually. Exchanges must also apply enhanced due diligence to these individuals.

The FIU has also restricted anonymity-enhancing tools like mixers and tumblers that hide transaction trails. Additionally, Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs) are strongly discouraged, citing “heightened and complex” risks of money laundering and terrorism financing.

While compliance measures tighten oversight, India’s flat 30% crypto tax combined with a 1% TDS on transactions is discouraging domestic trading. Analysts report that between October 2024 and October 2025, Indian users conducted nearly ₹4.88 lakh crore (~$54.1B) in crypto trades offshore, an 85% increase year-over-year.

Currently, 91.5% of Indian crypto trading occurs on offshore platforms, leaving only 8.5% on registered domestic exchanges. The uncollected TDS since October 2024 is estimated at ₹4,877 crore, with cumulative potential revenue loss reaching ₹36,000 crore since the tax’s introduction.

India’s approach highlights the tension between stringent regulation for transparency and tax policies that discourage domestic participation. While the FIU’s enhanced KYC standards aim to prevent crime and fraud, the exodus of traders abroad raises questions about the effectiveness of regulation in supporting a healthy domestic crypto market.

The industry now faces a critical balancing act: maintaining strong oversight while encouraging domestic trading, or risk losing both liquidity and tax revenue to foreign platforms.