But here’s something many overlook: certain UPI transactions can attract income tax, depending on their purpose and amount. Let’s break it down.
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To promote savings and investments among taxpayers, the Income Tax Department offers a range of deductions under Chapter VI-A of the Income-tax Act. While Section 80C is the most well-known, several other provisions also allow taxpayers to reduce their taxable income and overall tax liability. Let’s explore these deductions in detail.Digital payments via UPI apps and e-wallets are quickly becoming the preferred alternative to cash. As per data from the National Payments Corporation of India (NPCI), UPI recorded a staggering 185.86 billion transactions in the financial year 2024–25 — reflecting a 42% year-on-year growth. With their simple and intuitive interfaces, UPI platforms and e-wallets have made digital payments accessible to nearly everyone.
What is a UPI Transaction?
Unified Payments Interface (UPI) is a real-time, user-friendly digital payment system that has significantly accelerated the shift toward cashless transactions in India. It enables seamless inter-bank transfers with just a few clicks.
UPI supports both peer-to-peer (P2P) and peer-to-business (P2B) transactions, allowing users to send or receive money instantly at any time. You can link multiple bank accounts to a single UPI-enabled mobile app and carry out payments effortlessly.
To get started, simply register on a UPI app using your bank account number and IFSC code, and create a unique UPI ID or UPI number. Once set up, you can use this ID to send or receive funds without needing to share your bank details each time — it’s that simple
Income Tax Rules and UPI Transactions: What You Need to Know
UPI transactions, though quick and convenient, aren’t entirely beyond the purview of income tax laws. Similar to earnings from mutual funds or fixed deposits, certain UPI and e-wallet transactions are considered “income from other sources” under Section 56(2) of the Income Tax Act.
When filing your Income Tax Return (ITR), you’re required to disclose not just your salary but also other income—this includes any money received via UPI or digital wallets. Contrary to popular belief, UPI transactions are tracked by the Income Tax Department through bank records and digital trails
When Are UPI & E-Wallet Transactions Taxable?
Not every UPI transaction is taxed. But certain scenarios do attract income tax liability:
1. Business Payments via UPI
If you’re a business owner accepting payments via UPI, the transactions themselves aren’t directly taxed. However, your income from such payments is taxable under business income. If you’re GST-registered or your turnover exceeds the threshold, GST compliance also applies.
2. PPI Wallet Interchange Fees
When customers pay merchants through Prepaid Payment Instruments (PPIs) like PhonePe Wallet, Paytm Wallet, or Amazon Pay, an interchange fee up to 1.1% may apply for transactions over ₹2,000. Importantly, this fee is paid by the merchant, not the customer.
3. Gifts via UPI
Money received through UPI may be taxed as a gift, depending on the amount:
Up to ₹50,000/year: Not taxable.
Above ₹50,000/year: Taxable unless received from a relative or covered under an exempted reason (like loan repayment).
4. Employer-Provided Gift Vouchers
According to Rule 3(7)(iv) of the Income Tax Rules, if an employer sends you a gift voucher exceeding ₹5,000 via UPI, the amount is taxable as a perquisite. Failing to report this can lead to reassessment under Section 147 of the Act.
5. Cashbacks as Income
Cashbacks from e-wallets (e.g., Paytm, PhonePe, Google Pay) are increasingly common—but under tax law, they are classified as gifts:
If your total cashback (or any form of gifts) exceeds ₹50,000 in a financial year, the entire amount becomes taxable under Section 56(2).
6. UPI Transaction Limits and Tax
NPCI has set daily limits for UPI transfers:
₹1 lakh for regular payments
₹2 lakh for capital markets, insurance, and foreign remittances
₹5 lakh for tax payments, hospitals, educational institutions, IPOs, and RBI retail schemes
While transferring above these limits is technically allowed in special cases, high-value transactions may draw attention from the tax department, especially if they aren’t reflected in your ITR.
India’s Digital Payment Shift
The Indian government continues to promote a cashless economy, with UPI at the forefront. In FY 2024–25, UPI transactions hit an all-time high of ₹261 lakh crore, a 30% increase from the previous year.
According to NPCI, apps like Google Pay, PhonePe, Paytm, and CRED are leading this digital revolution. In fact:
Peer-to-Merchant (P2M) payments accounted for 54.88% of all transactions.
Peer-to-Peer (P2P) payments made up the remaining 45.12%.
This shows that both personal and business users are embracing UPI for day-to-day transactions.
Key Benefits of UPI Transactions
Unified Payments Interface (UPI) has transformed how India transacts. Here’s why UPI has become the preferred mode of digital payment:
1. Fast, Easy, and Always Available
UPI enables instant money transfers—anytime, anywhere. Whether sending or receiving money, it happens in real time. Users can link multiple bank accounts to a single app, eliminating the hassle of switching platforms. The intuitive, user-friendly design makes UPI accessible even to non-tech-savvy individuals.
2. Boosts Transparency and Tax Efficiency
For individuals, businesses, or Hindu Undivided Families (HUFs), UPI transactions offer tax advantages:
Under Sections 10AA, 80IA, and 80RRB, if you haven’t claimed tax deductions, digital transactions may be taxed at 6% of turnover, compared to 8% for cash transactions under Section 44AD.
This lower rate encourages cashless operations, benefiting both taxpayers and the government.
Digital payments also help the government curb untraceable cash transactions and enhance tax compliance.
3. No Extra Charges
Most UPI apps do not charge transaction fees. Once your account is linked and your UPI PIN is set, you can make payments without repeatedly entering banking details, saving time and improving convenience.
4. Earn Cashback and Rewards
Many UPI apps offer cashback incentives for using their platform. For example, spending ₹500 on a food delivery app might earn you ₹50 cashback—credited directly to your e-wallet, credit card, or bank account. These incentives make digital transactions even more appealing.
Final Word
UPI is a reliable, secure, and efficient alternative to traditional banking. While it’s widely accessible and comes with several benefits, it’s important to be aware that some UPI transactions are taxable. Understanding the rules can help you stay compliant and file your income tax returns accurately.
