Income Tax on UPI Transaction Limit
Cash payments in India are being quickly replaced by digital ones via e-wallets and UPI apps. The National Payments Corporation of India (NPCI) reports that in June 2024, UPI transactions reached a record of 13.89 billion, representing a 49% annual rise. Anyone may utilise UPI payment systems or e-wallets with just a few clicks thanks to their user-friendly interface. Did you know, though, that you might have to pay taxes on UPI transactions? Continue reading to learn more.
Table of Content
What are UPI Transactions?
Unified Payments Interface is what UPI stands for. India's first significant move towards a cashless economy is UPI. You may now use your smartphone as a virtual debit card thanks to this recent advancement. Stated differently, you can do transactions without a card or cash. Sending and receiving money is as easy as using your smartphone as a debit card. The Unified Payments System interface enables you to transfer money across many bank accounts within a single smartphone app without disclosing your account information or IFSC code. Mr. Raghuram Rajan, the former governor of the RBI, created UPI in 2016. The customer and the bank are connected through this interface.
Benefits of UPI Transactions
These are a few noteworthy advantages of UPI transactions.
Easy and fast: The volume of transactions made using integrated payment interfaces and e-wallets has increased during the last several months. People now favour digital wallets, cash-free solutions, and UPI versions because of ATM constraints, withdrawal fees, transaction limits, etc. With UPI, you may send and receive money instantly. It is connected to several bank accounts and accessible at any time. UPI's user-friendly interface makes it possible for even non-techies to utilise it to make payments.
A win-win scenario for taxpayers and the government: If a transaction is conducted digitally, a resident, business, or HUF that has not claimed a tax deduction is required to pay 6% of the turnover or gross as UPI tax under Sections 10AA, 801A, or 80RRB. However, in accordance with Section 44AD of the Income Tax, 8% must be paid for non-digital transactions.
In addition to increasing tax revenue for the government, electronic transactions provide a reliable way to cut down on cash transactions that are impossible to track.
No extra fees are needed: There are no extra fees associated with using digital payments. To begin using a UPI app, you must have a unique ID or PIN. This expedites the procedure and removes the necessity of entering data every time a transaction is made.
Receive cashback: Often, people choose a certain online service or payment method just to get cashback. For example, you can get Rs 50 in cashback if you order Rs 500 worth of meals using a payment app. This money is credited to your bank account, e-wallet, or credit card.
Intervention of Income Tax Rules in UPI Transactions
Income from UPI transactions is taxed similarly to that from fixed deposits or mutual funds. Since e-wallet transactions are categorised as "income from other sources," they are all subject to Section 56(2) of the Income Tax Act. You must include comprehensive details about your income and other sources of income, including money received through an e-wallet or UPI app while filing an ITR. You are incorrect if you think that money received or transactions made using UPI are not logged. The reason for this is that your single transaction is monitored by the Income Tax Department.
Taxability Of UPI and E-Wallet Transactions
The following circumstances make UPI and/or e-wallet transactions taxable:
People can send or receive cash whenever they need it with UPI transactions. A receipt for up to Rs 50,000 is not subject to taxes. Beyond that, it is taxable and considered a gift. It won't be taxable, though, if you recently got money that your friend owes you.
Income Tax Rule 3(7)(iv) states that UPI tax is due when employers provide a gift voucher worth more than Rs 5,000 through UPI. Nevertheless, failure to declare such e-wallet transfers may lead to reassessment under Section 147 of the Income Tax Act.
The use of e-wallets is increasing because users who use them to make online payments can earn cashback benefits. Cashback from these e-wallets is considered a "gift" and is subject to the Act as the term "gift" under this Act refers to any amount you have received.
If cashback exceeds Rs 50,000 in a single fiscal year, it is taxable under Section 56(2) of the Income Tax Act. Likewise, gift cards from relatives and friends that total more than Rs 50,000 in a single fiscal year are subject to taxes.
The answer to the question of whether there is a cap on UPI transactions for UPI taxation is Rs 1 lakh. For transactions involving financial markets, insurance, collections, and international inward remittances, the limitation is Rs. 2 lakh. For tax payments as well as payments to hospitals, schools, IPOs, and RBI retail direct schemes, the cap is Rs. 5 lakh. The maximum amount you can send with UPI is this. However, the transfer is taxable if it is over the specified threshold. This has been determined by the NPCI.
Interchange Fees on UPI Transactions
In accordance with the NPCI's recommendations, UPI transactions over Rs. 2000 made through PPIs will be subject to an interchange fee of 1.1%. Customers who use PPIs to make UPI payments for peer-to-peer (P2P) and peer-to-merchant (P2M) transactions will not be required to pay this interchange fee. Customers are not charged, as the interchange fee only applies to PPI merchant transactions.
When UPI is connected to a bank, customers are exempt from interchange costs. When UPI is connected to wallets, merchants must pay interchange fees. Customers who use UPI to send money to friends, relatives, merchant bank accounts, or other individuals will also not be charged the interchange fee. Keep in mind that you must promptly complete your ITR and record all of your UPI transactions if you are over the UPI transaction limit and are in a tax bracket.
UPI and E-Wallet Transactions in India
As Indian consumers and businesses freely embrace UPI, Prime Minister Narendra Modi has stated that digital transactions will soon overtake cash usage. According to data, UPI recorded 803 crore transactions of Rs 12.98 lakh crore in January 2023. Apps like Google Pay, Phone Pay, Paytm, and CRED are among the leading fintech companies in the Indian digital payment market, according to NPCI. Users appear to utilise the service frequently in India to pay merchants, but user-to-user transfers also appear to be common. According to the same survey, peer-to-merchant transactions accounted for 54.88% of all transactions. On the other hand, P2P transactions made up 45.12% of the overall volume.
Taxable UPI Receipts
Now that you are aware that UPI transactions are subject to tax, let's examine the different kinds of UPI transactions that are subject to income tax. The UPI transaction tax is due in the following situations:
Gifts more than Rs. 50,000: A gift of up to Rs. 50,000 is not subject to taxes. However, you may be required to pay tax on this UPI receipt if you receive a gift from a friend or family member that exceeds Rs. 50,000.
Employers' gift: You might occasionally receive a bonus or gift card from your company. You must take into account the consequences of UPI transaction tax in situations where such benefits are transferred through e-wallets or UPI. More precisely, any sum or voucher over Rs. 5,000 that you get from your employer via UPI is taxable, according to Income Tax Rule 3(7)(iv).
Cashbacks using UPI: Cashbacks on various transactions may occasionally be available to UPI users as well. In the recipient's eyes, these cashbacks are properly considered gifts. As a result, UPI transaction tax will apply. Any cashbacks over Rs. 50,000 received in a single fiscal year would be subject to taxes.
Transactions Over a Certain Amount: You should be mindful of the total limit for tax-free UPI transactions in addition to the sub-limits for cashbacks, employer payments, and presents from friends and family. In India, UPI transactions above one lakh rupees are liable to taxes.
Strategies to Manage Income Tax on UPI Transactions
You must comprehend the tax ramifications of UPI transactions in order to manage income tax, and you must take action to guarantee that you abide by all applicable laws and guidelines. The following tactics can assist you in handling UPI transaction tax:
Sort Your Transactions Properly: Accurately classifying your UPI transactions is essential. Determine if the money was received as gifts, income, or repayments. Payments for goods sold or services provided are included in income. Repayments are money repaid for a loan, whereas gifts are money sent by friends or relatives. Paying UPI transaction tax only on taxable receipts is ensured by proper classification. Repayments are often not taxed (unless interest is included), but income and donations exceeding specific limits are. Making the right classification will help you minimise mistakes and guarantee that tax laws are followed.
Keep Thorough Records: Maintaining thorough documentation of every UPI transaction is necessary to guarantee UPI transaction tax compliance. Thus, begin by recording every transaction, including the date, amount, and reason. This makes it clearer if the money received falls under the categories of income, gifts, or repayments. In order to properly classify receipts and provide proof of your transactions, detailed records are crucial when submitting taxes. Additionally, keeping well-organised documents makes it easier to track taxable amounts. Additionally, it facilitates the easy production of documentation in the event that tax authorities need it. This practise also assists you in precisely identifying qualified deductions and exemptions so that you can take advantage of them. Moreover, when you receive more than Rs. 2,000 through UPI transactions performed through Prepaid Payment Instruments (PPIs), like e-wallets, as a merchant, you must pay UPI transaction fees of roughly 1.1%. You can better account for the transaction fees you must pay by keeping thorough records of your transactions.
Use Exemptions Wisely: Reduce the amount of tax you owe on UPI transactions by making use of the applicable tax exemptions. For example, you can think about getting larger gifts in smaller instalments to keep inside the Rs. 50,000 tax-free limits, as gifts up to that amount are not taxable. As an alternative, you can lower your UPI transaction tax liability by spreading out any prospective gifts over several fiscal years. To fully benefit from these exemptions, you can arrange different UPI transactions in this way. Additionally, by understanding these limitations and making thoughtful use of them, you can drastically lower your taxable income. Making wise use of exemptions guarantees that you maximise your financial gains while still adhering to tax regulations.
Keep an eye on valuable transactions: Pay special attention to high-value UPI transactions. During a fiscal year, transactions totalling more than Rs. 1 lakh are taxable. You can plan and potentially divide large payments into smaller sums to stay under tax-free limitations by keeping an eye on these transactions. By using this strategy, you may control your taxable income and prevent unforeseen tax obligations. Additionally, by actively monitoring these transactions, you can ensure that you continue to adhere to tax laws and make well-informed choices regarding the timing and structure of your transactions.
Conclusion
UPI is a great substitute for online banking since it removes all of the anxiety associated with online money transfers. It is crucial to remember that there are circumstances in which UPI transactions are subject to tax. You would not have any problems filing your income tax returns thanks to it.
FAQ
Q1. How much money can I transfer through UPI?
According to NPCI regulations, you can use UPI to make up to Rs 1 lakh per day. For transactions involving capital markets, insurance, collections, and international inward remittances, the maximum amount that can be paid with UPI is Rs 2 lakh. The cap is Rs. 5 lakh for tax payments as well as payments to hospitals, schools, IPOs, and RBI retail direct initiatives. This cap, though, could differ between banks. For example, the highest amount you can pay using Canara Bank is Rs 25,000.
Q2. How much UPI transactions are tax-free?
Tax exemptions apply to any amount received using UPI apps or digital wallets up to Rs. 50,000. To put it simply, UPI transactions can only be up to Rs. 50,000 in value. Any amount over this is subject to taxation.
Q3. If I receive money in my UPI wallet, is that amount chargeable to tax?
This amount is not taxable if you received it from a relative, as that term is defined by the Income Tax Act. If you received the money from someone else, though, it should be included in your total income and subject to taxation at the appropriate slab rates.
Q4. Do I have to pay tax if I get money from friends?
You are exempt from paying taxes if your buddy gives you a gift under Rs 50,000. However, the full amount will be taxable if you receive a larger sum from friends.
Q5. What are the tax implications of gifts received from your employer via UPI?
Your employer's gifts and vouchers are tax-free up to Rs. 5,000. Income Tax Rule 3(7)(iv) states that amounts over this cap are taxed.
Q6. Are UPI cashbacks taxable?
Any UPI cashbacks you get are regarded as presents. If the total amount of cashback in a fiscal year surpasses Rs. 50,000, UPI transaction tax is applied.
Q7. Which transactions are reported to the Income Tax Department?
Online payments, stocks, bonds, debentures, mutual funds, and other transactions are monitored by the income tax department. All transactions pertaining to your PAN card are monitored by the IT department.
Q8. What is the limit of UPI transactions per day?
You can only do up to 20 transactions per day. You will have to wait 24 hours for the limit to be renewed if you go over it. Additionally, the restriction might change based on the bank's policies.
Q9. How can I ensure timely tax payments on UPI receipts?
Regularly assess your tax liability and, if required, make advance payments to ensure timely payment of UPI transaction tax. You can save penalties and interest by paying your taxes on UPI transactions on time.
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