Tax on UPI Transactions
UPI is now one of the most popular methods Indians use to transfer and receive money but not every transaction is tax-free. Whether it's a gift, freelance payment, reimbursement, or cashback, some UPI transfers may be subject to income tax depending on value and source. By knowing some of these rules, you'll be able to avoid taxes and penalties related to the Income Tax Department.
Is Income Tax Applicable on UPI Transactions?
Income tax can apply to UPI transactions, but not in all cases. UPI is merely a mode of payment, and sending or receiving money through UPI does not make a monetary transaction subject to tax. It can either be taxable, tax free or just not liable based on the nature of sources and purpose of the money under the Income Tax Act, 1961. If the transaction relates to gift, business income, cashback, etc., it could be treated as 'income from other sources' as defined under Section 56(2) of Income Tax Act and must be disclosed in your Income Tax Return (ITR), whereas if you are just repaying money to a friend or sending money to a family member, it would generally not be taxable.
The Income Tax Department keeps track of many digital characteristics, which includes all UPI transactions and e-wallets. So, being aware of the taxable types of transactions can help you minimize being scrutinized and penalized during tax operations.
Taxable UPI Transactions
The following types of UPI transactions are taxable under Indian tax law. Each scenario has been explained in context to help you identify when to report such income in your Income Tax Return.
Type of UPI Transaction | Is It Taxable? | Example |
Gifts received from non-relatives above Rs.50,000 in a financial year | Yes | You receive Rs.60,000 from a friend for a birthday gift. Since it exceeds Rs.50,000 limit and is from a non-relative; the entire amount is taxable under Section 56(2). |
Payments received for freelance or business services | Yes | A consultant receives Rs.25,000 from a client via Google Pay to design a logo. This is professional income and must be declared under ‘Profits and Gains from Business or Profession’. |
Cashback or rewards exceeding Rs.50,000 per year | Yes | You earn Rs.300 cashback on every online food order. By year-end, the total cashback is Rs.52,000. This is treated as a gift and becomes taxable under Section 56(2). |
Gift vouchers from employer above Rs.5,000 | Yes | Your employer gives you a Rs.10,000 Amazon voucher via Paytm. Rs.5,000 is exempt, while the remaining Rs.5,000 is treated as a salary perquisite and is taxable. |
Unexplained credits received via UPI | Yes | Rs.70,000 is credited to your account via UPI from an unknown sender. If you cannot justify the source, it may be treated as unexplained income under Section 68 and taxed accordingly. |
Crowdfunding or donations received for personal benefit | Yes | You run a fundraiser for your travel expenses and receive Rs.80,000 via UPI. Since it’s not for a certified charitable cause, the amount is taxable unless proper documentation exists. |
Non-Taxable UPI Transactions
Not all UPI activities are taxable. The following types of UPI transfers do not attract tax liability, but it's important to maintain documentation for clarity in case of scrutiny.
Type of UPI Transaction | Is It Taxable? | Example |
Personal transfers to or from family and friends | No | You transfer Rs.5,000 to your roommate for rent or receive Rs.3,000 from a friend to split dinner bills. These are casual transfers and not treated as income. |
Gifts received from defined relatives | No | You receive Rs.1 lakh from your father as a wedding gift. Since he is a defined relative under tax law, the amount is fully exempt. |
Peer-to-peer gifts below Rs.50,000 in a year from non-relatives | No | A friend gifts you Rs.20,000 and another friend gifts Rs.25,000 during the same year. The combined value is under Rs.50,000, so it is not taxable. |
UPI transfers as repayment of a personal loan | No | You lent Rs.15,000 to a friend, and he repays the amount via PhonePe. Since it is not income, there is no tax liability. It is advisable to keep a screenshot or message as proof. |
Refunds or reimbursements from merchants | No | You cancel a product order, and the e-commerce platform refunds Rs.2,500 via UPI. This is not new income but a return of your own money. |
Employer reimbursements for actual expenses | No (if supported by bills) | Your employer reimburses Rs.8,000 for a work-related hotel stay. Since you submit bills for the expense, it is not taxable. If you fail to provide bills, it may be treated as income. |
Transfers between your own bank accounts via UPI | No | You move Rs.50,000 from your savings account to your salary account via a UPI app. Since you own both accounts, there is no tax implication. |
UPI limits and Income tax
UPI transaction limits are governed by the National Payments Corporation of India (NPCI). They are not tied to tax obligations. However, if UPI transactions are frequently at high value or breach a limit, the Income Tax Department may seek more information. UPI limits are for operational and risk purposes but are informal limits which could trigger the department's attention if history indicates possible tax evasions or undisclosed sources of income.
UPI transactions limits
The National Payments Corporation of India (NPCI) has set limits for UPI transfers:
- Up to Rs.1 lakh for general payments
- Up to Rs.2 lakhs for capital market, insurance and collection-related payments
- Up to Rs.5 lakhs for education fees, tax payments, IPOs, and hospital bills
Can the Income Tax Department Track Your UPI Transactions?
Yes. With the integration of PAN, Aadhaar, and Know Your Customer (KYC) via all banking and fintech channels, all your UPI transactions can be tracked. If you think your small-value digital transfers won't be traced, you are mistaken. UPI payments are directly linked to your bank account, and bank records can be obtained by tax officers through scrutiny or reassessment.
What Can the Income Tax Department Track via UPI?
- Business Income Disguised as Personal Transfers: For example, you have a home, or you run a freelancing business, and you get paid via UPI by clients directly into a personal account. In that case, the department could classify such transactions as unreported business income.
- Gift Transactions Exceeding Exemption Limits: Similarly, if you receive more than Rs.50,000 from non-relatives, via UPI, in a financial year and if you do not declare it; it could be taxed at Section 56(2) as a gift.
- Excess Cashback or Digital Gifts: Accumulated cashback and digital points, in a UPI app, may exceed Rs.50,000 in your lifetime. These may also be treated as income, taxed as ‘income from other sources’.
- Employer UPI Payments: If an employer reimburses an employee or sends them a digital voucher via UPI, and the total amount exceeds the exemption limits or if the reimbursement is not documented, the payment may be treated as salary perquisites and taxed accordingly.
- High Value Transactions that do not match the Income declared: If you say you earn Rs.5 lakh every year, but your bank statements show frequent UPI payments amounting to more than that income, the Income Tax Department will expect an explanation as to the discrepancies between your UPI transactions and income level.
- Criminal Liability for undisclosed UPI based income: Undetected income that is based on UPI payments may be treated as undisclosed income under the following sections:
- Section 68: Unexplained cash credits
- Section 69: Unexplained money or investments
- Section 147: Income escaping assessment
In addition to this, penalties under section 270A can apply for the underreporting/misreporting of income. Penalties can reach as high as 200% of the tax amount owed based on matters not reported.
Documentation You Should Maintain for UPI Transfers While UPI transactions are traceable to some extent (especially if they are connected to your Aadhaar and PAN), it is good practice to keep documentation like this to avoid any scrutiny by the tax authorities. Here is what to keep:
- Screenshots or confirmations of any UPI transfers, particularly in case of large gifts, reimbursements, or repayments.
- Bank statements showing the amount, date and the name of the sender with regards to both receipts/inflow and payments/outflow of amounts.
- Written communication (WhatsApp messages, emails, or notes) confirming the reason for the transfer, such as ‘repayment of a loan’, ‘personal transfer’ or ‘reimbursement of travelling expenses’.
- Invoices or bills for any payments made on behalf of others or for payment for any reimbursements made by your employer. If you happen to be registered under the Goods and Services Tax regime (registered under the Contractor, Supplier or Dealer position), then be sure to issue GST compliant invoices for sales or services based on UPI payment.
- Gift deeds or declaration letters, in the event of large personal gifts, particularly where those gifts are near exemptions.
Note: A digital record will not only assist you in the timely and accurate filing of your ITR, but it will also protect you in the event of reassessment, or notices under Sections 133(6) or 147. In this digital era, proper documentation is as important as compliance with tax obligations.
FAQs on Tax on UPI Transactions
- How is GST applied to UPI Transactions for businesses?
UPI is not subject to GST in the case of an individual. However, a GST registered business must issue proper GST invoices for UPI payments and must report UPI payments in the GST return. UPI payments of greater than Rs.2,000 made through digital wallets such as PhonePe or Paytm also have an interchange fee of up to 1.1% to be paid by the merchant. Additional unreported UPI transactions can result in GST mismatches or tax notices.
- What tax mistakes are generally common with respect to UPI transactions and filing?
Many people consider that UPI payments are personal and business-related when the two are mixed up for tax purposes. Related to the above point, one significant error is the failure to report cashbacks, where UPI is linked to a business. The magical Rs.50,000 benchmark. UPI payments could result in UPI credits hitting your bank account, and where there is no explanation, it could trigger Section 68 or Section 69 under scrutiny. UPI payment mistakes could open up a re-assessment and penalties.
- What are the penalties for not passing income based on UPI income?
The failure to disclose UPI income may mean it gets taxed as unexplained money or for example under Section 68, Section 69 or Section 147. Penalties under Section 270A can vary from 50% to 200% of the tax liability. Interest could also apply as per Sections 234B/234C and would also contribute to ETA liability.
- How do we know if a UPI transfer is a gift or income under the tax laws?
If money is received using UPI without the recipient providing goods or services back in return, it could be a gift. If that sender is not a relative and during a financial year exceeds the value of Rs.50000, it is then taxable income as per Section 56(2). If you are being paid for freelance work, consultancy or any professional services, even if the work is not documented, it is considered income and must be reported on your ITR.
- If a friend repays loan money back via UPI, is the payment treated as income and taxable?
No, repayment of loans or borrowed amounts from friends or relatives is not taxable income. The taxpayer must retain practical documentation (at a minimum proof, i.e., past transaction record, chat screenshots or even your kids writing up a note) to show the repayment was of a loan. If a taxpayer doesn’t keep records, the receiver of money can be viewed as unexplained income or a commercialized gift.
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