The Reserve Bank of India (RBI) has introduced a new rule that mandates a 0.5% Tax Deducted at Source (TDS) on Unified Payments Interface (UPI) transactions above a certain threshold, effective from July 2024. This move aims to enhance tax compliance and curb high-value transactions escaping the tax net.

Understanding the New TDS Rule on UPI Transactions

From July 1, 2024, UPI transactions exceeding Rs. 5 lakh in a financial year will be subject to a 0.5% TDS deduction. This measure is expected to impact businesses and individuals conducting high-value digital transactions.

According to the RBI, this step is designed to prevent tax evasion and ensure that large digital payments are properly accounted for under the tax system. The deducted TDS will be credited to the payee’s PAN and can be adjusted against their annual tax liability.

Who Will Be Affected?

The 0.5% TDS on UPI transactions will primarily affect:

• Freelancers and business owners who receive payments through UPI regularly.
• High-net-worth individuals (HNIs) conducting large transactions for investments, real estate, or other high-value purchases.
• E-commerce sellers and merchants who rely on UPI for large sales volumes.

For most common users who conduct day-to-day transactions below Rs. 5 lakh per year, there will be no impact. The policy is focused on monitoring high-value digital payments rather than everyday spending.

Impact on Digital Payments

The introduction of TDS on UPI transactions is expected to have mixed consequences:

Positive Impacts:

• Increased tax compliance and transparency in digital transactions.
• More regulated and monitored high-value payments.
• Encouragement for businesses to maintain proper financial records.

Negative Impacts:

• Additional tax burden on individuals and businesses conducting high-value transactions.
• Potential decline in large-scale UPI payments, shifting to other transaction methods.
• Administrative challenges for businesses handling deductions and filings.

How Will TDS on UPI Work?

The deduction process will be automated through banks and payment service providers. Here’s how it will work:

1. When a transaction crosses the Rs. 5 lakh threshold in a financial year, a 0.5% TDS will be deducted automatically.
2. The deducted amount will be credited to the government and linked to the recipient’s PAN.
3. Users can claim the deducted TDS while filing their Income Tax Returns (ITR), reducing their overall tax liability.

Ways to Avoid or Minimize TDS on UPI

If you frequently make high-value UPI transactions, consider these strategies to minimize your TDS liability:

• Diversify transaction methods: Use bank transfers, NEFT, or RTGS for large payments instead of UPI.
• Split transactions across multiple financial years: If possible, plan large payments to remain under the threshold.
• Claim TDS deductions in ITR: Ensure that you file your tax returns correctly to reclaim any excess TDS deducted.

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Public Reactions and Industry Response

The announcement has received mixed reactions from the public and businesses. Many support it as a step toward greater financial transparency, while others argue that it may discourage digital transactions and increase paperwork for businesses.

E-commerce platforms, fintech companies, and digital payment service providers are urging the government to reconsider or introduce exemptions for small businesses and individual users.

Conclusion

The new 0.5% TDS on UPI transactions over Rs. 5 lakh per year is a significant policy change that will impact high-value digital transactions. While it promotes tax compliance, it also introduces an additional financial burden for certain users. As the rule comes into effect in July 2024, individuals and businesses must prepare for its implications and adjust their financial strategies accordingly.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial or legal advice. Please consult with a tax professional or financial advisor for specific guidance regarding TDS and UPI transactions.