Taxability of UPI / E-Wallet Transactions (2024)

Since demonetisation in 2016, digital payments made through Unified Payment Interface (UPI) apps and e-wallets become more popular than cash transactions in India. 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 article will tries to explains the tax implications of UPI transactions.

UPI Transactions?

UPI stands for Unified Payments Interface and is a major step taken by India to achieve a cashless economy. You can save your digital cards in your mobile and use the same though this technology for making payment for purchases. 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.

UPI was introduced in the year 2016 at the time of demonetisation in India. This interface acts as an intermediary between the customer and the bank.

Taxability of 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.

Here are the conditions under which the UPI transactions are subject to tax -

• UPI transactions (other than business transactions) upto INR 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 INR 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 INR 50,000 during a fiscal year is taxable. Also, gift vouchers from friends and family exceeding INR 50,000 are taxable.
• The UPI transaction limit per day is INR 100,000 as per National Payments Corporation of India (NPCI). However, the limit is INR 500,000 for payments to educational institutions and healthcare. The maximum UPI daily transfer limit can change from bank to bank between INR 25,000 to INR 100,000.

When UPI transactions are made through PPIs (Prepaid Payment Instruments like Paytm, PhonePe , Mobikwik, etc.), interchange fees will be imposed. The interchange fee is associated with card payments and is charged to cover the processing, accepting and authorising transactions costs. This fee is similar to the merchant discount rate applicable to credit cards. It increases revenue for payment service providers and banks.

Tax implication on UPI or E-Wallet Transfers from Friends

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 INR 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.