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Taxation on UPI and E-Wallet transactions

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Transactions via e-wallets and UPI transactions have accelerated manifold, mostly during the last couple of months. In the current times when there are restrictions in respect of withdrawal from same bank ATM, cash transaction limit, withdrawal charges etc. Most people conduct cashless transactions like UPI payments and those made through online wallets. They provide them with certain cashback rewards, and the process appears seamless compared to traditional bank transfers. However, it is essential to understand that UPI and e-wallets attract tax. The funds transacted through such electronic modes are taxable under the Income Tax rules.

UPI and E-Wallet Transactions
Transactions via the electronic wallet and integrated payment interface (from now on referred to as “UPI”) have continuosly increased over the last couple of months. Today’s people, who have ATM limits, withdrawal fees, transaction limits, etc., at the same bank prefer cash-free methods, digital wallets and UPI variants, which will continue to be a stagnant pass in the future.

A unified payments interface or UPI lets you do real-time money transfers; it is accessible anytime, enables payment/collection of money, is free of cost and stores multiple bank accounts. However, just as income from sources like Fixed Deposit (FD) or Mutual Funds is taxable, there is also Income Tax on UPI transactions.

According to NPCI, UPI transactions in India recorded 4.2 billion UPI transactions amounting to Rs 7.71 lakh crore (about $103 billion) were clocked in October 2021, and 189 banks can be found on the UPI platform, which recorded 3.6 billion transactions worth Rs. 6.5 Lakh crores in September 2021.

As per income tax rules, reporting of salary income, income from other sources, capital gains, etc., is compulsory in the income tax return (ITR) filing. In addition, funds received via UPI or e-wallets are also required to be put forth during tax filing.

Below are the taxable limits of e-commerce or UPI transactions:

  • All electronic wallets and UPI transactions (financing) over INR 1 lakh are income tax.
  • In accordance with the Income Tax Act of 1961 Sec 56 (2) (X), cashback will be levied if the total amount for the fiscal year exceeds INR 50,000.
  • Taxes are levied on gift certificates of INR 5,000 or more offered by employers as gifts to employees through UPI transactions under Income Tax Regulation 3 (7) (IV).
  • Coupons received from friends or family of more than INR 50,000 in the fiscal year is subject to

Benefits of UPI and E-Wallet Transactions
Another reason people choose to transact electronically via e-wallets or UPI platforms is that the government is urging more people to do e-commerce. As per Section 44AD of Income Tax Act, 1961, a Resident/Firm/HUF that has not claimed tax deduction under Section 10AA or 80IA to 80RRB is required to pay 6% of the turnover or gross as tax if the mode of the transaction is digital, as opposed to 8% for non-digital transactions. For the government, electronic transactions mean more tax collection and a surefire way to limit cash transactions that are unaccountable and untraceable.

Some more benefits of UPI Transactions are as follows:

  • Cross-platform
  • Widely accepted by all banks
  • Quick
  • Convenient,
  • Free-to-use
  • Taxpayer-friendly,
  • Cashback
  • Hassle-free

While filing an Income tax return, income gains from savings, rentals, equity bonds, mutual funds, stocks, stocks, etc., must be mentioned when filing your income tax return. Similarly, profits from transactions in e-wallets and UPIs must be reported in the ITR submission.

Although the law distinctly states when and how UPI/e-wallets transactions are taxed, there is an ambiguity in the interpretation and application of section 56(2) of the Income-tax Act. Hence, it is rudent to consult your CA or lawyer for a fair understanding of the apposite applicability of income tax rules on UPI/ e-wallets.

At AJSH, we assist our clients in dealing with various income tax compliances, including income tax assessments, ITR filings, tax advisory, and other related services by providing them adequate support and guidance from our end. If you have any questions or wish to know more about UPI and e-wallet transactions, kindly contact us.


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