Suman Singh, a freelance graphic designer from Delhi, is paid ₹1,000 through UPI for creating a logo. Her client makes the payment using a digital wallet such as PhonePe or Paytm. A 1% service fee (₹10) will be charged by the payment aggregator for the transaction. This charge is subject to an 18% GST, or ₹1.80. Consequently, after deductions, Suman gets ₹1,000 - ₹11.80 = ₹988.20. This example shows how service fees on UPI transactions—rather than the transaction amount itself—are subject to GST.

It's crucial to remember that there are no GST or service fees associated with UPI transactions between bank accounts. Only the service fees that payment aggregators charge for transactions done using digital wallets are subject to GST.

GST on UPI – Create a Table Mentioning Different Categories of UPI with Price and Applicable GST Rate

The Goods and Services Tax (GST) applicable to Unified Payments Interface (UPI) transactions varies based on the nature of the transaction and the parties involved. Here's a detailed breakdown:

Merchant Discount Rate (MDR) on UPI Transactions:

Transaction Type	Applicable GST Rate	Notes
UPI payments via digital wallets (PPIs)	18% on MDR	MDR typically ranges from 0.5% to 2%; GST is levied on the service fee, not the transaction amount.
UPI payments via bank accounts	Nil	No MDR or GST applicable; UPI transactions remain free for consumers and merchants.

Government Incentives for Low-Value UPI Transactions:

Transaction Type	Applicable GST Rate	Notes
Government incentives to banks	Nil	Incentives under schemes like the Promotion of RuPay Debit Cards and low-value BHIM-UPI transactions are considered subsidies and are not subject to GST.

GST on Underlying Goods and Services:

Transaction Type	Applicable GST Rate	Notes
Goods purchased via UPI	5% to 28%	GST rate depends on the specific goods category; UPI is merely the payment method.
Services availed via UPI	18%	Standard GST rate for services; UPI facilitates the payment process.

Impact of GST on the UPI Industry with Examples

Aspect	Before GST on Service Fees	After GST (18%) on Service Fees	Impact
Transaction Value (Example)	₹2,000	₹2,000	No change in the amount paid by the customer
Payment Method	UPI via Wallet (e.g., PhonePe, Paytm)	UPI via Wallet	The same method, but the fee is now taxable
Service Fee Charged by Aggregator	₹20 (1% of ₹2,000)	₹20	The same fee is charged by an aggregator
GST on Service Fee	Nil	₹3.60 (18% of ₹20)	New tax burden incurred
Total Cost to Merchant	₹20	₹23.60	18% increase in processing cost
Cost to Customer	₹2,000	₹2,000 (indirectly may increase if the merchant passes the cost on)	Could rise if the merchant adjusts the pricing
Merchant Margin (Example)	₹200 profit per item	₹196.40 (after fee + GST)	Profit margin reduces
Adoption Incentive	High (no tax, low friction)	Medium (costs may deter use for small transactions)	Possible shift away from digital payments

Key Takeaways:

GST applies to service fees, not to UPI transactions directly.
UPI via bank accounts remains GST-free.
Small vendors may reduce UPI usage or pass costs to customers.
Encouraging transparency and tax compliance, but possibly at the cost of digital payment adoption.

Input Tax Credit (ITC) on UPI

As of June 2025, the Input Tax Credit (ITC) is not applicable to UPI transactions. This is primarily because Unified Payments Interface (UPI) transactions do not attract Goods and Services Tax (GST). The Government of India has clarified that there is no GST levied on UPI transactions, irrespective of the transaction amount.

Why UPI Transactions Are Not Subject to GST?

No Merchant Discount Rate (MDR) on UPI: Since January 2020, the government has waived the Merchant Discount Rate (MDR) on Person-to-Merchant (P2M) UPI transactions. MDR is a fee that payment service providers charge merchants for processing digital payments, and GST is applicable to such fees. With the removal of MDR on UPI, there is no service fee on which GST can be levied.
No Proposal for GST on UPI Transactions: The Ministry of Finance has officially stated that there is no proposal under consideration to impose GST on UPI transactions, including those exceeding ₹2,000

ITC Applicability on UPI Transactions

Aspect	Details
GST on UPI Transactions	No GST applicable
MDR on UPI Transactions	Waived since January 2020
ITC Eligibility	Not applicable due to the absence of GST
Government Clarification	No proposal to levy GST on UPI transactions
Impact on Businesses	No additional GST burden on UPI transactions

Currently, UPI transactions are exempt from GST, and therefore, businesses cannot claim Input Tax Credit (ITC). This exemption simplifies compliance for businesses and encourages the use of digital payment methods. However, businesses should stay informed about any future policy changes regarding digital payment taxation.

FAQs Related to GST on UPI

1. Is GST charged on UPI transactions?

No, GST is not levied on UPI transactions between bank accounts or wallets. The Ministry of Finance has confirmed there is no GST proposal on UPI payments.

2. Are service charges on UPI payments subject to GST?

Yes, if a payment aggregator charges a service fee (e.g., for wallet-based UPI), 18% GST applies to that fee—not the transaction amount.

3. Can I claim an Input Tax Credit (ITC) on UPI payments?

No, ITC cannot be claimed on UPI transactions because they do not attract GST in the first place.

4. Do merchants pay GST when accepting UPI payments?

Merchants do not pay GST on UPI receipts but may pay GST on any MDR or service fee if charged by the payment provider.

5. Are government incentives on UPI taxable under GST?

No, incentives paid to banks for promoting UPI use are treated as subsidies and are not taxable under GST.

6. Is GST applicable on payments through UPI wallets like Paytm?

Yes, if a wallet or aggregator charges a service fee, GST at 18% applies to that fee.

7. Will GST be charged if I pay a bill via UPI?

No GST on the payment method itself, but the bill (e.g., electricity, mobile) will include GST based on the service.

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