Learn how to calculate tax on UPI transactions: add all receipts to your gross income, apply deductions, and use income slabs. Section 44AD offers reduced tax for digital receipts.
If you are receiving income via UPI in India, remember: UPI is just a mode of payment, not a separate income source. Tax is calculated on the income received through UPI just like any other income—by adding all receipts (UPI and non-UPI) to determine gross income, applying eligible deductions, and then calculating tax as per applicable income slabs. Special provisions like Section 44AD offer reduced tax rates for digital receipts for small businesses.
Calculate Tax on UPI Transactions in India:
Digital payments through apps such as Google Pay are rapidly replacing hard cash as the preferred method of making payments. For anything to replace something as convenient and conventional as cash, it must offer stark and convincing advantages—especially among a traditional demographic like Indians, who are often sceptical about new technologies. So, what led to such a massive shift in the way payments have been made for centuries?
Apps like Google Pay operate on a technology called UPI. UPI, or Unified Payments Interface, is an online system that allows users to manage transactions across multiple banks through a single platform on their mobile phones. UPI was introduced in 2016 under the leadership of then RBI governor Dr. Raghuram Rajan, acting as an intermediary between the bank and the customer.
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The biggest advantage of UPI is the enhanced safety of money. People can make small transactions easily without withdrawing cash, keeping funds more secure from theft. Compared to traditional bank transfers—which involve logging into bank portals, entering multiple passwords, adding payees with exhaustive details, and waiting for verifications—UPI enables instant, accurate transactions. There’s also no need for carrying or dealing with change. However, one event played a key role in accelerating UPI adoption.
On 8th November 2016, two months after UPI apps were launched, the Government of India announced the demonetization of ₹500 and ₹1,000 notes, creating an immediate cash crunch. With withdrawal limits in place and severe panic setting in, UPI awareness skyrocketed. Companies quickly provided vendors the tools needed to accept UPI payments, greatly increasing adoption. Even after cash availability returned to normal, users preferred UPI for its ease and benefits.
Yet, when making significant payments through UPI—such as rent or salaries—the issue of taxation arises. How are UPI-based payments treated under the presumptive taxation scheme?
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Calculation of Tax on UPI Transactions in India
As outlined earlier, UPI is just a payment method. It facilitates transactions but is not a separate source of income. Thus, income tax is calculated on UPI transactions in the same way as for traditional payments, depending on the nature of the income and the provisions of the Income Tax Act like Section 80CCC.
At the end of the financial year, all receipts—both UPI and non-UPI—are aggregated to compute gross turnover or gross income. After applying deductions allowed under the Income Tax Act, the net taxable income is determined.
For individuals, the applicable income tax slab for that financial year is used to calculate the tax liability.
However, a special incentive exists to encourage digital transactions:
Section 44AD offers presumptive taxation to small businesses with turnover under ₹2 crores. Such businesses can declare income at a flat rate of 8% without maintaining detailed books. But if their receipts are digital (like UPI), the presumptive income rate drops to 6%, thus reducing the tax burden. This is a major advantage for small businesses embracing digital payments.
The above discussion primarily addresses the recipient’s perspective. What about the payer’s side? Does taxation change for them too?
Yes, it does—specifically via TDS (Tax Deducted at Source). When making digital payments, payers must evaluate if TDS is applicable based on the nature of the payment. If TDS is required, they must deduct the correct amount, pay it online (which can now be done through UPI too), and report it correctly during TDS return filing. Checking OTLAS TDS challan status is also crucial before filing ITR.
Conclusion
The Income Tax Department continuously monitors changes in how income is earned and transmitted to anticipate potential impacts on revenue. It frequently updates policies through circulars and notifications. Staying updated can be challenging for individuals and businesses alike. Therefore, consulting a professional tax advisor is highly recommended. Tax experts understand both the surface-level rules and the broader dynamics of India’s complex tax structure. If you need professional guidance for tax-related queries, contact Vakilsearch to connect with the right expert for your needs.
