Income Tax On UPI Transactions And How Does it Work?

Digital payments through UPI apps and e-wallets are rapidly replacing physical cash as a payment method. According to the National Payments Corporation of India (NPCI), UPI transactions marked a record of 13.89 billion transactions, i.e. 49% per year growth in June 2024. UPI payment platforms or e-wallets come with a user-friendly interface; anyone can use it with just a few clicks. However, did you know that you might need to pay tax on UPI transactions? Read on to know more. 

What does a UPI transaction mean?

The Unified Payments Interface (UPI) is a user-friendly, and real-time payment solution, which adopts substantial growth in digital payments. It facilitates the inter-bank  transactions by just few clicks. 

UPI transactions usually provide seemless transfer of payments between ‘peer to peer’ or ‘peer to business’. UPI transactions can be made whenever requested by the receiver of payment. You can link multiple bank accounts in one mobile app and make the payments. Use your bank account number and Indian Financial Security Code (IFSC) to register on the UPI app, use your UPI ID or UPI Number to make the transactions. It is as easy as that.

Intervention of Income Tax Rules in UPI Transactions

UPI transactions are subject to income tax in a similar way to income from mutual funds or fixed deposits. Section 56(2) of the Income Tax Act applies to all e-wallet transactions, as they are classified as 'income from other sources'. 

When submitting an ITR, you must provide detailed information about your salary and other sources of income, such as funds received from an e-wallet or UPI app. If you believe that transactions or money received through UPI are not tracked, you are mistaken. It is because the Income Tax Department tracks your every transaction.

Taxability Of UPI and E-Wallet Transactions

The UPI and or e-wallet transactions are subject to taxes in the following situations:

• With UPI transactions, people can send or receive cash whenever needed. A receipt for a sum up to Rs 50,000 is exempt from tax. Anything over that is treated as a gift and is taxable. However, if you have just received money your friend owed you, it won't be taxable. 
• According to Income Tax rule 3(7) (iv), when employers offer a gift voucher for more than Rs 5,000 via UPI, UPI tax is applicable. However, if such amounts transferred through e-wallets are not reported, it might result in reassessment under Section 147 of the Income Tax Act. 
• Users of e-wallets earn cashback rewards if they use their e-wallets to make online payments, which is why the use of e-wallets is rising. The term 'gift' under this Act is any sum you have received, and hence cashback from these e-wallets is termed as a 'gift' and is governed under the Act. 
• According to Section 56(2) of the Income Tax Act, cashback is taxable if it exceeds Rs 50,000 in a single fiscal year. Similarly, gift vouchers from friends and family valued more than Rs 50,000 in a single fiscal year are taxable. 
• If you are wondering whether there is a limit on UPI transactions for UPI taxation, the answer is Rs 1 lakh. The limit is Rs.2 lakh for transactions related to capital markets, insurance, collections and foreign inward remittances. The limit is Rs.5 lakh for tax payments and payments to educational institutions, hospitals, IPO, and RBI retail direct schemes. This is the maximum amount that you can transfer using UPI. However, if the transfer exceeds the stated threshold, it is subject to tax. The NPCI has set this. 

UPI and E-Wallet Transactions in India

Prime Minister Narendra Modi recently expressed that digital transactions will soon surpass the usage of cash as merchants and consumers in India are voluntarily adopting UPI. As per data, in January 2023, UPI recorded 803 crore transactions worth Rs 12.98 lakh crore. As per NPCI, apps like Google Pay, Phone Pay, Paytm and CRED are some of the prominent fintech players in the Indian digital payment space.

In India, users seem to use the service a lot to pay merchants, but user-to-user transfer also seems to be popular. As per the same report, P2P transactions comprised 45.12% of the total volume, while peer-to-merchant transactions comprised 54.88% of the total number of transactions. 

What are the Benefits of UPI Transactions?

Here are some of the notable benefits of UPI transactions.

Quick and convenient

Over the past few months, the number of transactions through e-wallets and integrated payment interfaces has continued to rise. Due to ATM limits, withdrawal fees, transaction limits, etc., individuals now prefer digital wallets, cash-free methods and UPI variants. 

You can send and receive money in real time using UPI. It can be accessed anytime and linked to multiple bank accounts. Since it comes with a user-friendly interface, even people who are not tech-savvy can use UPI to make payments. 

Win-win situation for the government and taxpayers

Under Sections 10AA, 801A or 80RRB, a resident, business, or HUF that has not claimed a tax deduction need to pay 6% of the turnover or gross as UPI tax if the manner of a transaction is digital. However, for non-digital transactions, paying 8% as per Section 44AD of the Income Tax is necessary. 

For the government, electronic transactions increase tax revenue and offer a foolproof method for reducing cash transactions that are unable to trace.

No additional charges required

Using digital payment does not entail any additional usage charges. You need a unique ID or PIN to get started with a UPI app. This speeds up the process and eliminates the need to enter information each time you make a transaction. 

Earn cashback

People frequently use a specific online service or payment method solely to earn cashback. For instance, if you use a payment app to order food worth Rs 500, you may receive Rs 50 in cashback. This money gets credited to your credit card, e-wallet or bank account. 

Final Word

UPI is an excellent alternative to internet banking as it eliminates all the stress related to sending and receiving money online. However, it is important to note that tax on UPI transactions is applicable in certain situations. It will help you to file your Income tax returns without any loopholes. 

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