Income Tax On UPI Transactions

Unified Payments Interface is shifting the paradigm of cash transactions in India. Today so many of us are opting for digital payments because of its seamless and user-friendly interface. According to the reports by the National Payment Corporation of India (NPCI), UPI transactions marked a record of 20,60,735.57 cr. in August 2024. With such a high growth scale, it is crucial to understand the nitty-gritty associated with UPI transactions, such as tax implications. In this blog post, we are going to dive deep and give you an overview of income tax rules on UPI transactions in India. Read on to find out more.

Income Tax Rules of UPI Transactions

UPI facilitates real-time inter-bank transactions with a few clicks. This permits the users to link multiple bank accounts via a single mobile app. UPI supports peer-to-peer (P2P) and peer-to-business (P2B) transactions, which makes effortless transactions within seconds. To register on UPI applications like FREO Money, Google Pay, and Paytm, the user will require a bank account number and Indian Financial System Code (IFSC). After signing up, they can make transactions using their UPI ID or number.

Tax Implications On UPI Transactions

Under the Income Tax Act, UPI transactions are subject to tax regulations that are similar to that of mutual funds and FDs. According to section 56(2) of the Income Tax Act, all digital payments are identified as ‘income from other sources’ and hence, taxable.

While filing an Income Tax Return (ITR), it’s mandatory to disclose not only your salary but other sources of income, which comprises the funds received through UPI or e-wallet apps. The Income Tax Department closely monitors these transactions to ensure that they adhere to the tax regulations.

Tax on UPI and E-Wallet Transactions

UPI transactions are subject matter to tax under specific conditions or situations per se. This includes:

Receiving Gifts

If you receive or send gifts through UPI transactions and the value surpasses ₹50,000 in a financial year, then it is taxable and falls under ‘income from other sources.’ However, if you have received the money your friend owed you, then it is not taxable.

Business Payments

Income received through UPI for business transactions is declared as business income. According to the Income Tax Rule 3(7) (iv), it is taxable. If these transactions are transferred via e-wallets are reported, then a reassessment is conducted under section 147 of the Income Tax Act.

Earned Cashback

Using e-wallets for online payment often provides you with cashback rewards. This is yet another reason why its usage is elevating. According to Section 56(2) Income Tax Act, the cashback is taxable if it exceeds ₹50,000. If your friends or family send you a gift voucher for more than ₹50,000, then it’s taxable, too.

If you are wondering if there is any limit and tax on UPI transactions, the answer is yes. The limit is Rs 1 lakh. For transactions related to the capital market or insurance, the limit is Rs. 5 lakh. For educational, hospitals or IPO, it’s Rs—5 lakh. Any time the transfer goes beyond the amount, then it is taxable.

Tax Rules for UPI or E-Wallet Transfers from Family/Friends Explained

Let’s take up a scenario where your friend is going through a financial crisis and asks you to lend a substantial amount. Over time, your friend manages to cross this financial turbulence and decides to repay you. Instead of cash, they opt for UPI transactions.

Now, you might wonder if this UPI transaction is taxable or not. The short answer is yes and no. In most circumstances the amount received from a friend or a family member is not taxable as it was meant to settle the debts and not labeled as income.

If the amount is under Rs. 50,000, then it is tax exempted. But anything beyond that will attract taxation. Hence, it becomes utmost crucial to keep the documents in handy while filing the ITR. If, by chance, the Income Tax Department seeks verification, then these documents can act as verified evidence.

Summing it Up

As UPI continues to gain popularity, understanding its tax implications is essential for compliance with the Income Tax Act. Whether you are using UPI for personal transactions, business payments, or receiving gifts, it is crucial to report these transactions accurately in your ITR to avoid any legal repercussions. With the Income Tax Department tracking these transactions closely, it is best to stay informed and compliant with all the laws.

FAQs

1. How many UPI transactions are tax-free?

   If the amount received through UPI apps or digital wallets does the most. 50,000, then it is tax-free. Any amount that crosses it is chargeable to tax.

2. If I receive money in my wallet, is it chargeable to tax?

   For instance, if you have received the amount from your relative, then as per the Income Tax Act, it is not taxable. But if you have obtained from any other person then it should be added to the total income and charged as per the Income Tax slab rates.

3. Is the amount received from friends through UPI taxable?

   Any amount received from your friends that does not exceed Rs. 50,000 is not taxed. But if it goes beyond that, then it is taxable.