Digital payments made through UPI apps and e-wallets are becoming more popular than cash transactions in India. According to the National Payments Corporation of India (NPCI), the number of UPI transactions increased by 223% from February 2023 to February 2024, reaching 29 billion transactions worth Rs 54.31 lakh crore. This is mainly due to the convenience and ease of use of UPI platforms and e-wallets, which allow users to link multiple bank accounts and transfer funds without sharing their account details. However, UPI transactions and the income received through UPI platforms and e-wallets are not exempt from tax. Depending on the nature and amount of the transactions, they may be treated as income from other sources, gifts, or business income and taxed accordingly. This guide explains the tax implications of UPI transactions and how to calculate them.
What are UPI Transactions?
UPI stands for Unified Payments Interface. UPI is the first major step taken by India to achieve a cashless economy. This new development helps you use your smartphone as a virtual debit card. In other words, you don’t need any cash or card to carry out transactions. You can simply use your smartphone as a debit card and send and receive money through it.
Unified Payments System is an interface that allows you to link more than one bank account in one smartphone app and transfer funds without having to share your account number or IFSC code.
UPI was introduced in the year 2016 by then former RBI Governor, Mr. Raghuram Rajan. This interface acts as an intermediary between the customer and the bank.
Benefits of UPI Transactions
Given below are the benefits of using UPI transactions -
Quick and Convenient The transactions through e-wallets and integrated payment portals have seen a rise in recent years and are continuing to rise. People are rapidly switching to e-wallets due to the various restrictions, limitations, and withdrawal fees in bank accounts. These digital wallets and UPI transactions are very quick and also save you from the hassle of carrying cash or a card. And it can be linked to multiple bank accounts. It is convenient even for those who are not very comfortable with technology.
Benefits both government and taxpayers It saves the taxpayers from paying more taxes. It also serves as a foolproof method for tracking transactions and reduces the use of cash, which is hard to track. Electronic transactions help increase the government's overall tax revenue.
No need for additional charges There are no additional or hidden charges applicable to the usage of UPI apps and digital wallets. All you need is a PIN or a Unique ID to start using the UPI app. As you don’t have to enter the same information again and again, this speeds up the process, making it extremely quick and easy to use.
Intervention of Income Tax Rules in UPI Transactions
UPI transactions in India are taxed in a similar manner to that of Income from Mutual Funds and fixed deposits. UPI transactions are considered income from other sources and are taxed under section 56(2) of the Income Tax Act. Taxpayers are required to submit all the information related to UPI and digital wallet transactions while filing their ITR. Any funds received through e-wallet and UPI are also subject to tax as per the provisions of the Income Tax Act 1961. The income tax department tracks all UPI transactions. Therefore, it is important to report such income in the ITR.
Taxability of UPI Transactions
Here are the conditions under which the UPI transactions are subject to tax -
UPI transactions upto Rs.50,000 are exempt from tax. Any amount exceeding this limit, received through UPI apps or digital wallets, is treated as a gift and taxed as per the provisions applicable to income from other sources. However, if the money received is a repayment of any sum owed to you, it will not be taxed.
As per Income Tax Rule 3(7)(iv), any gift voucher received from the employer through UPI or e-wallets, the amount of which exceeds Rs.5000, is subject to UPI tax. Also, any non-reporting of income through e-wallets might result in assessment under section 147 of the Income Tax Act.
The users of e-wallets often receive cashback for making online payments using the wallets. This has resulted in an increase in the use of e-wallets. Any sum you have received through digital wallets or UPI apps is termed as a gift and is chargeable to tax.
As per section 56(2) of the Income Tax Act, any cashback or gift voucher that exceeds Rs.50,000 during a fiscal year is taxable. Also, gift vouchers from friends and family exceeding Rs.50,000 are taxable.
UPI transactions exceeding Rs.1,00,000 are subject to tax as per the provisions stated by NPCI. It is the maximum amount that you can transfer using UPI. Any transfer above this amount is subject to tax.
The Tax Rules for UPI or E-Wallet Transfers from Friends Explained
Consider a scenario where you lend a substantial amount of money to a close friend who is going through a tough financial situation. Over time, your friend manages to get back on their feet and decides to repay you. Instead of handing you physical cash, they opt to transfer the amount electronically through a mobile wallet or UPI transaction.
Now, the question arises: is this repayment considered as taxable income for you? The answer lies in the nature of the transaction. In most cases, when friends or family members transfer money to settle debts, it is not treated as income. However, it's crucial to understand the specifics.
If the repayment amount is within the ₹50,000 limit, it falls under the exemption from income tax. Anything beyond this threshold might attract taxation. To avoid complications, ensure that the repayment falls within the exempted limit.
In the event of a detailed examination by the Income Tax Department, having documented proof of the debt settlement can be crucial. A written acknowledgment from your friend acknowledging the debt settlement can serve as valuable evidence in case the authorities seek verification.
In summary, the tax implications of electronic transfers from friends depend on the nature of the transaction. If it's a repayment of a debt and falls within the exempted limit, there's typically no need to declare it as income. However, it's advisable to keep documentation handy to substantiate the purpose of the transaction if required during scrutinizing.
Interchange Fees on UPI Transactions
As per the recommendations of NPCI, an interchange fee of 1.1% will be applicable on UPI transactions exceeding Rs.2000 made through PPIs.
However, customers will not have to pay this interchange fee for UPI payments made through PPIs for peer-to-merchant (P2M) and peer-to-peer (P2P) transactions. The interchange fee is only applicable to PPI merchant transactions, and there is no charge for customers.
Customers do not have to pay interchange fees when UPI is linked to a bank. Merchants have to pay interchange fees when UPI is linked to wallets. The interchange fee will also not apply to customers who make UPI payments to friends, family, and individuals or merchant bank accounts.
Whether you have been using cash, cards, or Internet banking for all your transactions, UPI and digital wallets are excellent alternatives. You can easily send and receive money through these modes. However, UPI transactions attract tax under certain conditions.
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