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Digital payments made through UPI apps and e-wallets are becoming more popular than cash transactions in India. More and more people are adopting to the cashless payment method using UPI to make payments online.
This is mainly due to the convenience and ease of use of UPI platforms and e-wallets, which allow users to link multiple bank accounts and transfer funds without sharing their account details. However, UPI transactions and the income received through UPI platforms and e-wallets are not exempt from tax. Depending on the nature and amount of the transactions, they may be treated as income from other sources, gifts, or business income and taxed accordingly. This guide explains the tax implications of UPI transactions and how to calculate them.
UPI stands for Unified Payments Interface. UPI is the first major step taken by India to achieve a cashless economy. This new development helps you use your smartphone as a virtual debit card. In other words, you don’t need any cash or card to carry out transactions. You can simply use your smartphone as a debit card and send and receive money through it.
Unified Payments System is an interface that allows you to link more than one bank account in one smartphone app and transfer funds without having to share your account number or IFSC code.
UPI was introduced in the year 2016 by then former RBI Governor, Mr. Raghuram Rajan. This interface acts as an intermediary between the customer and the bank.
UPI makes money transfers quick and easy—whether it’s person-to-person or person-to-business.
You can send or receive payments instantly, whenever requested by the receiver. Link multiple bank accounts in a single mobile app and start transacting effortlessly.
To register, use your bank account number and IFSC code. Once registered, use your UPI ID or mobile-linked UPI number to make payments.
Given below are the benefits of using UPI transactions -
UPI transactions in India are taxed in a similar manner to that of Income from Mutual Funds and fixed deposits. UPI transactions are considered income from other sources and are taxed under section 56(2) of the Income Tax Act. Taxpayers are required to submit all the information related to UPI and digital wallet transactions while filing their ITR. Any funds received through e-wallet and UPI are also subject to tax as per the provisions of the Income Tax Act 1961. The income tax department tracks all UPI transactions. Therefore, it is important to provide detailed information about your salary and other sources of income, such as funds received from an e-wallet or UPI app while filing your ITR.
Here are the conditions under which the UPI transactions are subject to tax -
Merchants use UPI to collect payments for routine business transactions. While UPI transactions themselves are not taxable, merchants may still be liable to pay income tax and GST based on their registration status and annual turnover.
If you pay merchants using PPI wallets like PhonePe Wallet, Paytm Wallet, or Amazon Pay Wallet, an interchange fee of up to 1.1% applies to transactions above ₹2,000. However, this fee is charged to the merchant, not the customer.
| Transaction Type | GST Rate |
|---|---|
| Goods sold through UPI | 5% - 28% (varies as per goods) |
| Services availed via UPI | 18% |
| Digital Payment Services | 18% |
When UPI transactions are made through Prepaid Payment Instruments (PPIs) like wallets, an interchange fee is charged. This fee, similar to the merchant discount rate on credit cards, covers the cost of processing, authorising, and accepting payments. It helps generate revenue for payment service providers and banks.
In 2025, this interchange fee applies to merchants—not customers—when a customer makes a UPI payment using a PPI wallet. For example, if someone pays through a PhonePe QR code using their wallet, the merchant pays the fee to PhonePe.
The interchange fee varies by service type:
The National Payments Corporation of India (NPCI) has introduced new rules for UPI transactions made through Prepaid Payment Instruments (PPIs) like mobile wallets. Here's what you need to know:
No, customers do not have to pay any interchange fee on UPI payments made via wallets like PhonePe, Paytm, or Amazon Pay.
The fee varies by sector and applies only to transactions above ₹2,000 through PPIs:
| Category | Interchange Fee |
|---|---|
| Fuel | 0.5% |
| Post Office, Telecom, Utilities, Education, Agriculture | 0.7% |
| Supermarkets | 0.9% |
| Insurance, Mutual Funds, Government, Railways | 1.0% |
| Maximum Fee Limit | 1.1% |
When you recharge your wallet (like PhonePe or Paytm) with over ₹2,000:
Remember, if you crossed the UPI transaction limit and fall under tax bracket, it is important to report all your UPI transactions and file your ITR timely. And if you find taxes complicated or need help with ITR filing, don’t worry, our tax experts are here to help you throughout your ITR filing journey. From tax planning to tax filing, our experts have got you covered. Book an online CA now!
Any sum received through UPI apps or digital wallets not exceeding Rs.50,000 is exempt from tax. In simple words, the maximum limit on the value of UPI transactions is Rs.50,000. Any amount exceeding this is chargeable to tax.
If you have received this amount from your relative (as defined by the Income Tax Act), then this amount is not taxable. However, if you have received the amount frm any other person, then the income should be added to the total income and charged to tax as per applicable slab rates.
You can make only 20 UPI transactions on a daily basis. In case you exceed this limit, you will have to wait 24 hours to get it renewed. However, the limit may differ depending on the bank's guidelines.
Any amount received from friends through UPI that does not exceed Rs.50,000 is chargeable to tax. However, any amount exceeding this limit is taxed as per the applicable rates.
