By Rupin Chopra and Vikram Narula
With the advent of demonetization, the use of online payments and e-wallets has significantly risen. Business owners have accustomed themselves to accepting payments through online modes. Even amongst peers, transfers through e-wallets have become more frequent than ever. The facilitation of cashbacks, online gift cards, rewards and vouchers have also lured users towards recurrent use of e-wallets. They have gained immense popularity because of the convenient, secure and hassle free nature of transaction provided by them.
However, such transactions are not immune to tax scan. Mandatory KYC compliance for continuing the use of these wallets verifies the user and links his authentic governmental identification. The records maintained by these platforms further provide the proof of all transactions.
Provisions under Income Tax Act, 1961
Transactions made through e-wallets are classified as ‘income from other sources’ and are covered under section 56(2) of the Income Tax Act. This section states that an amount exceeding Rs. 50,000 in one financial year, for individual tax payers, would be subject to gift tax and has to be declared under ‘income from other sources’. Therefore, a friendly transfer of money below 50,000 mark is exempted, however, on exceeding Rs. 50,000, the entire amount transferred, will be taxable. The same provision is also applicable for cashbacks received in e-wallets. If they exceed Rs. 50,000 they have to be classified under either ‘income from other sources’ or as ‘profits and gains from business or profession’. The term ‘gift’ under section 56(2) of the Income Tax Act, includes any sum of money, which is why e-wallets are also covered under this category. However, if such amount transferred in e-wallets are not declared then it could lead to reassessment under section 147 of the Income Tax Act.
If payment in e-wallets are made towards settlement of debt owed then any amount received in this regard need not be declared. There can be situations where there has been frequent transactions amongst peers amounting to more than Rs. 50,000. Such transactions can classify as debt owed and need not be declared on producing proof of records. At times, a note from debtors might also be required stating such transaction to be a settlement of dues. In another instance, gifts received from relatives qualifying as members of the Hindu Undivided family is also exempted. Therefore, money received from family members or other relatives in e-wallets shall be exempted from taxes.
Upon any income received in e-wallet which arises from abovementioned transactions is subject to taxation, exceeding Rs. 50,000, but can be exempt if such transactions are received from family members or relatives or are made with respect to settlement of dues.