Application of Income tax rules on e-wallets or UPI transaction

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Following the 2016 demonetization, obtaining cash seemed a daunting task. During a time like that, more and more individuals started switching to cashless payments. Soon after, the National Payment Corporation of India (NCPI) developed and launched BHIM (Bharat Currency Interface) to provide effortless cashless payments.

UPI (Unified Payment Interface) and e-wallets are now very popular because they are very user friendly. Even during the pandemic it has been proved to be the best means of money transfer in order to avoid cash payments.

Our phones have become a virtual debit card; hence we are no longer required to carry cash or multiple cards with us. At a first glance, UPI and e-wallets may not be different. However, after careful inspection, it’s easy to perceive the difference.

Key Difference between UPI and e-wallets

  • UPI transaction befalls directly between bank accounts. In addition, the money remains in the bank along with interest paid by the bank. The email address (username@bank-name) called virtual payment address (VPA) is a unique account identity created on the bank’s website or generated in the UPI application. Anyone with a VPA can receive or send money immediately without paying any additional fees. However, the upper limit is INR 1 Lakh for funds transfer using UPI, any amount exceeding the INR One Lakh figure shall be taxed. All major banks, BHIM app, and private apps such as PhonePe, Google Pay, Paytm, WhatsApp, MobiKwik, etc., allow users to carry UPI transactions.
  • An e-wallet acts as an intermediary between bank accounts in the event a person needs to transfer funds from a bank account to the e-wallet such as Paytm, Freecharge, Amazon Pay, MobiKwik, PhonePe, ICICI Pockets and etcetera. The user will not receive any currency interest from the e-wallet. Here, the main account identifier is the phone number associated with the electronic wallet. Unlike UPI bank accounts, the money sent or received is kept in the app wallet. Only INR 10,000 can be transferred per transaction, and the users have to carry out their KYC (Know Your Customer) mandates for this purpose. The customer must be identified first and then confirmed. Aadhar ID, PAN card and driver’s license can be used for KYC verification. It is to combat financial crimes and money laundering.

Both UPI and electronic wallets are a revolutionary step towards a digital economy. NCPI’s BHIM UPI system is one of the most advanced digital systems in the world.

Application of Income tax rules on e-wallets or UPI transaction

The intervention of Income-tax rules

As an income from a fixed deposit or mutual funds is taxable similarly, income tax is also applicable on UPI transactions.

All transactions made through e-wallets are classified as an ‘income from other sources’ and hence shall come under the ambit of Section 56(2) of the Income Tax Act. When submitting an ITR, a person must provide detailed information about their salary and detailed information about other sources of income and receive funds from an e-wallet or UPI app.

Taxability of UPI/e-wallet transaction

  • Whenever people need to send or receive cash, they may do so with a UPI transaction. These transactions are like any other transaction and are to be recorded. If a person has borrowed finances from any relative or friend, they may settle the debt effortlessly with an e-wallet. However, it is vital that the settlement of debt is to be associated with a receipt.
  • The maximum limit for a UPI transaction is INR 1 lakh. But, if the transfer exceeds the stated limit, the amount is subject to Tax. This limit has been laid down by the NPCI (https://www.npci.org.in/)
  • In the case of e-wallets, users earn cashback rewards by making online payments through their wallet, which is why we saw an upward graph of the use of e-wallets. The term ‘gift’ under this Act means any sum of money that is received, and hence cashback by these e-wallets shall be termed as ‘gift’, and hence it shall be governed under the Act.  Cashback is taxable if the amount exceeds INR 50,000 in one financial year as stated under Section 56(2) of the Income Tax Act.  
  • Similarly, gift vouchers received from your friends and family that is cumulatively above INR 50,000 in a financial year are subject to Tax.
  • The UPI tax is also applicable whilst the employer gives a gift voucher above INR 5,000. It is subject to taxes under the Income Tax rule-3(7)(iv).
  • However, if such amount transferred in e-wallets is not declared, it could lead to reassessment under section 147 of the Income Tax Act.

Conclusion

Although the law clearly states when and how UPI/e-wallets transactions are taxed, there is ambiguity in terms with the interpretation and application of section 56(2) of the Income Tax Act. Hence, it is prudent to consult your CA or lawyers for a fair understanding of the apposite applicability of income tax rules on UPI/e-wallets. You can contact our team at Legal Window for better understanding and practical guidance. So what are you waiting for? Contact Legal Window now.

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