UPI
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 on UPI Transactions in India
There is no direct tax associated with UPI transactions. However, depending on whether the amount received is considered taxable income, exempt income, or a reportable transaction, income tax regulations may apply. The nature and intent of the transaction determine the tax treatment.
Certain amounts received as gifts that exceed the specified limit may be subject to taxation under the heading "Income from Other Sources" under Section 56(2) of the Income Tax Act. Similar to this, business income obtained through UPI is subject to taxation under the appropriate income head, such as "Profits and Gains from Business or Profession."
All taxable income, including business receipts, interest, gifts (if any), and other earnings obtained through digital payment methods like UPI or e-wallet apps, must be disclosed when filing your income tax return (ITR). To make sure that income tax laws are being followed, high-value digital transactions might be closely examined.
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.
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FAQs
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.
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.
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.
Do I have to pay income tax on all UPI transactions?
No, not all UPI transactions are taxable. Tax applies only if the amount qualifies as income under the Income Tax Act, 1961. Personal transfers, loan repayments, and money received from specified relatives are generally not taxable.
Do I need to report UPI transactions in my ITR?
If the amount received qualifies as taxable income (such as business income or taxable gifts), it must be reported while filing your Income Tax Return.
Is cashback earned on UPI apps taxable?
Cashback and rewards may be taxable if they qualify as income and exceed the prescribed limits under the Income Tax Act. Small promotional cashback amounts are generally not taxed separately but should be reviewed while filing ITR.
Naina Rajgopalan
Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She's been money-wise from a young age and has always shared her knowledge and tips with those around her. Being a part of the content team at Freo, a neobank that offers flexible and customised financial products, along with benefits such as insurance on balance, safe & secure banking, and so on, Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.
