By Adv. K J Muhammed Aslam · Advocate, Ernakulam (Bar Council of Kerala)
A UPI credit from a crypto P2P buyer — typically a USDT sale on an exchange — has landed in your bank account, and the account is now under a debit freeze citing a cyber cell requisition. The trade itself is not banned, but two regulatory overlays intersect on the same rupee: PMLA reporting as a virtual digital asset (VDA) service and Section 106 BNSS seizure where the rupee is already flagged as suspected stolen property in a prior fraud’s money trail. The first explains why the exchange enforces KYC and files STRs; the second explains why your bank was instructed to hold the amount. Treat them together and the de-freeze path becomes clear.
How is crypto regulated in India today — and what does FIU-IND have to do with it?
| Year / instrument | What it did | Where to verify |
|---|---|---|
| Finance Act, 2022 — Sections 115BBH & 194S Income-tax Act | VDA income taxed at 30% + surcharge/cess from 01 Apr 2022; 1% TDS under Sec 194S on VDA transfer from 01 Jul 2022 | Income-tax Act, 2025 — e-Gazette (from 1 April 2026: Section 194(1), Table Sl. No. 4 and Section 393(1), Table Sl. No. 8(vi)) |
| 07 Mar 2023 — PMLA Gazette notification (Ministry of Finance) | VDA service providers (exchange between VDA and fiat, VDA-to-VDA, transfer, safekeeping, issuance participation) declared reporting entities under PMLA Sec 2(1)(wa) | PMLA Gazette 07 Mar 2023 — S.O. 1072(E) |
| PMLA Sec 12, 12A + Maintenance of Records Rules, 2005 | Registered VDA providers must KYC clients, maintain records and file STRs/ CTRs/ CCRs with FIU-IND | PMLA Sec 12 |
| Dec 2023 – Jan 2024 — FIU-IND offshore action | FIU issued compliance show-cause to offshore VDA exchanges serving Indian users without registration; several URLs blocked via MeitY blocking orders under Sec 69A IT Act until registration; later phased compliance/penalties | FIU-IND press releases Dec 2023–Jan 2024 |
| RBI position | No ban on holding or trading VDAs, but regulated entities (banks) must do enhanced due diligence; repeated RBI Financial Stability messaging warns on VDA risks | RBI Financial Stability Reports 2022–2024 |
A Kerala trader therefore faces no “crypto is illegal” charge, but faces a fully documented KYC → STR → requisition pipeline: the exchange’s KYC and transaction monitoring flags the INR leg, the fraud victim’s 1930 report in another state’s case flags the same UPI amount, and the cyber cell’s CFCFRMS follow-the-money reaches the P2P seller’s bank as layer 2 or 3.
Why does a P2P sale freeze more often than an exchange spot trade?
Because the INR leg is peer-to-peer, not exchange-pooled. On an exchange spot trade, the buyer pays the exchange and the exchange pays you — one regulated ledger. On P2P, the buyer sends UPI directly to your bank account against the USDT release — your bank sees an inbound UPI from an individual who may be a mule, carrying whatever taint that person’s own account carries. Layering frauds exploit exactly this: the mule’s tainted balance is “cleaned” by buying USDT via P2P, leaving the seller’s bank as the next CFCFRMS hop.
The freeze amount is usually the specific UPI credit, but older bank practice blocked the entire account. The Kerala High Court’s Dr. Sajeer v. RBI line (WP(C) No. 12960 of 2023, and the orders following it) now pushes practice to a lien limited to the disputed credit, with the balance operational — the same relief sought in the bank-freeze guide.
What should you do in the first week — the file that gets acted on?
Prepare five packets, because five different forums will ask for the same material:
- Freeze identification. Bank’s written freeze note — requisition reference, NCRP acknowledgment, cyber cell name and crime number, date and lien amount — and the bank statement highlighting the disputed UPI credit.
- Exchange P2P packet. Order ID, ad/posting ID, counterparty UID and verification level, quantity and price, timestamp, full chat export, and — for on-chain legs — the blockchain transaction hash and explorer link. Export as PDF with metadata; preserve the original device for Section 63 BSA hash.
- KYC/AML posture. Exchange KYC level (CKYC/PAN/Aadhaar), FIU-registered exchange confirmation, and bank KYC. This shows reporting-entity compliance, not intent to launder.
- Tax posture — but no false comfort. Filed ITR showing 115BBH computation and 194S TDS deposit evidence (Form 26QE / exchange TDS statement). Tax compliance supports bona fides but does not sanitise a tainted counterparty’s funds — be candid about that.
- Narrative + undertaking. Three to four sentences: who the buyer was (as known from the P2P ad), why the trade occurred, how the price was set, when the UPI arrived relative to the USDT release; plus a written undertaking to keep the disputed amount available and to cooperate.
Send packet 1-5 to the investigating officer (email and registered post) with a copy to your bank’s nodal officer and FIU cell, seeking a lien limited to the disputed amount and release of the balance. Give the representation 2-4 weeks; then escalate per the three remedies escalator in the bank-freeze guide: Section 503 BNSS before the jurisdictional Magistrate (where the FIR is registered) and Article 226 writ before the Kerala High Court where the freeze is disproportionate — both already charted step-by-step there and not repeated here.
How does tax interact with the freeze — does paying 30% protect you?
No. Tax and crime-trail are separate legal tracks under the Finance Act, 2022 vs PMLA/BNS:
- Tax track: 30% flat tax (115BBH), no loss set-off, no expense deduction beyond acquisition cost, plus 1% TDS (194S) and reporting. Advance tax applies where Annual VDA gains warrant it.
- Crime-trail track: If the rupees you received are the subject matter of a fraud complaint in the CFCFRMS, the amount is suspect property under Section 106 BNSS regardless of tax payment. The investigating cell does not adjudicate tax; it follows the money.
The Court’s de-freeze order therefore typically preserves a lien on the disputed amount rather than returning it immediately — tax compliance supports your bona fides for the non-disputed balance, not for release of the tainted credit itself.
What reduces recurring risk if you continue P2P?
- Screen the buyer inside the exchange before release: High completion rate, verified KYC level, account age, price near market — not a premium that prices in taint.
- Invoice each trade. A UPI credit you can match to a P2P order ID within minutes is a credit you can get released; anonymous “UPI collect” style receipts are the hardest to defend.
- Segregate accounts. Keep P2P collections in a dedicated current account, distinct from salary and working-capital accounts — a freeze then stops one stream, not the business.
- Sweep balances daily and maintain the five-year transaction records Section 12 of the PMLA requires your exchange to keep — your own mirror records should match.
- Know the GST boundary: Under current CBIC guidance, crypto is not currency; GST treatment of platform fees and VDA activities has been separately clarified — do not conflate VDA tax with GST on exchange fees, and keep fee invoices.
Primary sources
- PMLA, 2002 — Sections 2(1)(wa), 12, 12A; PMLA (Maintenance of Records) Rules, 2005
- Finance Act, 2022 amending the Income-tax Act, 1961 — Sections 115BBH, 194S (CBDT Circulars on 194S TDS on VDAs); successor provisions in the Income-tax Act, 2025 from 1 April 2026
- Gazette notification 07 Mar 2023 — VDA services as PMLA reporting entities; FIU-IND press releases Dec 2023–Mar 2024 on offshore VDA compliance
- IT Act, 2000 — Section 69A blocking
- BNSS, 2023 — Sections 35, 94, 106, 503, 528; Article 226
- BSA, 2023 — Section 63
- Dr. Sajeer v. RBI (Kerala High Court, WP(C) No. 12960 of 2023) and the orders following it on lien-limited de-freeze — cross-referenced in bank-freeze guide
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