The Indian government has identified the virtual digital assets (VDA) ecosystem as a high-risk area due to increasing illicit activities, including drug trafficking, human trafficking, and money laundering. During a briefing to the Parliamentary Standing Committee on Finance, officials reported that while 6.45 lakh individuals were subjected to tax deduction at source (TDS) on crypto transactions in FY23, only 1.39 lakh disclosed such income in their tax returns, indicating significant non-compliance. The Financial Intelligence Unit-India (FIU-IND) has intensified its surveillance efforts, increasing the dissemination of operational reports and identifying key illicit activities related to cryptocurrencies. In response to these challenges, the FIU-IND has initiated 52 compliance proceedings under the Prevention of Money Laundering Act (PMLA) against offshore entities. Authorities have also imposed penalties totaling ₹29 crore on four major offshore VDA service providers. To enhance regulatory oversight, new rules effective January 1, 2026, will require reporting entities to disclose crypto transactions, and officials have proposed linking crypto ownership with Permanent Account Numbers (PAN). The rising investments in VDAs, which often move offshore, have raised concerns among officials, emphasizing the need for tighter regulation and taxation.