UPI New Tax Twist: In what is widely regarded as a significant change in India’s digital payment landscape, the government has announced a controversial tax policy that has left millions of UPI account holders confused and worried.
From June 1, 2025, you will pay Goods and Services Tax (GST) for all Unified Payments Interface (UPI) transactions above ₹2,000, radically changing the way the citizens of the country interacts with one of its most favored payment systems.
The Policy Change That Jolted Digital India
The announcement was made in a late March notification from the Finance Ministry after months of behind-the-scenes discussions.
A 1.5 % tax will be levied on all UPI transactions over ₹2,000, the advisory said—a step that finance ministry officials believe will mop up an additional annual revenue of ₹15,000 crore roughly.
“This is not simply another tax,” says Vijay Sharma, a senior economist at the Delhi School of Economics who did not play a role in the policy formation.
“It is a game-changer in the way that digital transactions are treated under our tax system. The government is virtually admitting that UPI is now past its infancy and one of the substantial ways of generating revenue.”
Timing of the move had raised eyebrows throughout the financial industry.
Now with UPI transactions at over ₹12 lakh a month as of March 2025, the platform has grown to being more than just a user-friendly payment option to the buttress of India’s cashless dreams.
Last year, more than 58 billion transactions had flown through the platform and the average value of the transaction was around ₹1,800.
“The digital payment infrastructure is expensive,” the finance minister, Nirmala Sitharaman, said in a news conference last week.
What we’re putting through is a very minimal contribution to the users who are making much more valuable transactions, with everybody’s day-to-day and with smaller transactions being completely tax-free.”
The Mechanics: How Would This Work?
What’s going on with this new tax is that one needs to know how the sausage is made:
When a user triggers a UPI payment higher than ₹2,000, the interface app (it could be PhonePe, Google Pay, Paytm and so on) will calculate and include the 1.5% GST on the payment amount.
This implies that a ₹5,000 payment will effectively cost the sender ₹5,075, with the extra ₹75 being routed to the government’s exchequer.
This tax is collected and remitted by payment service providers. Operators of the UPI infrastructure will have 45 days to make the required technical changes.
they have been asked to ensure full, free, no-frills digital payment options and will not wait for the compliance to become mandatory after the expiry of the deadline on June 1.
Curiously, though, the tax is on the sender, not the recipient, of funds. This sets up a kind of interesting dynamic where the highest incidence when it’s paying a seller goes to consumers, and by the way, when you’re sending from one person to another, that causes the person who’s the sender to take in the tax burden.
“The tech infrastructure is complicated but doable,” says Rahul Maheswari, CTO of a popular payment gateway.
“The difficult thing is educating the users and dealing with the friction that is going to inevitably come with a model that has been, up until now, extremely frictionless.”
Are Small Businesses Getting Hammered Hardest?
This limit of ₹2,000 was, apparently, set to ensure that micropayments—those for daily groceries, local transport and other essentials which contribute significantly to the UPI’s volume—can continue as usual.
But it can have a big impact on small business owners, who transact the kind of amounts that are in excess of this sum very regularly.
Take Ramesh Yadav, who operates a small electronics repair shop in Pune. “For most small repairs I get between ₹2,500-₹8,000,” he says, visibly worried.
“I certainly can’t charge more to a customer and if they have to pay extra GST some will naturally ask me to absorb the charges or go back to cash. And in either case, my business is affected.”
The Federation of Indian Small Businesses, for one, has already come out hard against the proposal.
Its president, Miles Beale, said in a strongly worded statement, “After encouraging small businesses to embrace digital payments, the government is now saying, ‘Thanks for doing that.
This makes it worth trying to break down, or go back to exchanging cash.”
Anand Mahindra put it this way: “As we understand the #fiscal challenges, we need to ensure that our taxation policies don’t lead to killing the #DigitalRevolution that we have begun.” #UPITaxConcerns”
The Consumer Psychology
There are several interesting changes some consumer behavior experts anticipate as a result of this policy:
Breaking Up Payments: Customers could conceivably break up larger transfers into a series of sub-₹2,000 payments to sidestep the tax altogether—a workaround the finance ministry acknowledges, but hopes to stamp out with further regulatory updates.
Back to Cash: On transactions just beyond the threshold, a lot of consumers could switch back to cash payments, which could reverse some of India’s hard-won gains in moving toward digitization.
Merchant Preferences: Merchants could begin offering discounts on non-UPI based payment that does not attract this further taxation, leading to a stunning web of payment preferences according to different transaction sizes.
“The challenge is this was one thing where UPI had managed to kill mental accounting on transaction costs,” says Dr Meenakshi Gupta, who studies consumer behaviour at IIM Ahmedabad.
There was zero friction for all the users, who wouldn’t even think that they are sending UPI. This tax brings back that cognitive load.”
The World View
India’s action is not without international precedent. A number of countries have tested similar state-led tax on digital payments with mixed results:
Brazil introduced a 0.75% tax on all digital transactions in 2023, but backtracked on this six months later following public outcry and a reported drop in digital payment usage.
South Korea, on the other hand, has had in place a modest 0.5% tax on large digital transfers since 2021, and it has helped generate a lot of revenue without having much of an effect on usage.
“The implementation context is the major difference,” says Arvind Virmani, former Chief Economic Advisor of the Government of India.
South Korea already had near-universal digital payment penetration when they implemented their tax. Despite the impressive digital payments revolution in India, it is still fragile in many sectors and locations.”
The Indian experiment is closely being monitored by global payment companies.
Given that UPI is being exported to multiple nations with Singapore, UAE and parts of Africa getting the NPCI developed UPI architecture, the success, or failure, of this tax could well determine taxation for digital payments around the world.
The Tech Challenge
Beneath the surface, the tech work of this tax is a devil and the devil is in the details for payment apps and the National Payments Corporation of India (NPCI), which powers the UPI platform.
NPCI to upgrade the system to handle the new tax calculations It has announced a string of system upgrades to be made to facilitate computing of the new taxes, which would include enriched transaction categorisation that could help in providing potentially exemptions to certain category spends like education fees, healthcare payments and charity.
Payment apps also have the added task of reprogramming user interfaces to prominently show the tax component, revamping terms of service, training their customer support teams for the incoming deluge of queries when the tax kicks in place.
“We’re trying to reverse engineer a tax layer on to a system that is supposed to work seamlessly for free,” says a senior developer at one of India’s top payment apps, who spoke on the condition of anonymity.
“It’s the equivalent of asking a sports car to operate as a delivery truck without making changes to the underlying structure.”
With the day of reckoning near, a number of critical questions remain unanswered:
—Will there also be exemptions for certain sectors or types of transactions?
– How will the tax work for UPI autopay subscriptions that exceed the limit?
— What will stop people from splitting transactions to avoid the tax?
How is dispute resolution going to work for transactions where there’s disagreement over the tax element?
The Reserve Bank of India has constituted an expert committee to address these questions and to come up with detailed regulations before the deadline.
But with only weeks left, the payment industry is fretting over the tight timing.
Balancing Act on Digital Taxation
I think the most balanced view is expressed by Nandan Nilekani – a key driver behind the creation of India’s digital infrastructure: “Eventually any digital public good, it’s got to have some kind of sustainable funding.
The issue isn’t whether UPI should be a revenue generator, but how to design that revenue model without losing sight of its core objective of financial inclusion.
That debate continues, but one thing already is clear: India’s digital payments landscape is at a crossroad.
The failure — or success — of this tax experiment will have repercussions long after its financial impact has been forgotten, perhaps changing the way governments around the world think about taxing digital financial services.
But for India’s average consumer, the more pressing issue is navigating this new reality. Already the financial advisors are at work, coming up with ways: Like bundling smaller purchases to keep them below the threshold, shopping with alternative payment methods for the big ticket ones and monitoring monthly spending pattern on UPI to better manage it.
With June 1 on the horizon, the government and the public are readying for what could end up being the largest test to date of India’s digital payment revolution — one that will show whether convenience will ultimately outweigh cost on the minds of tens of millions of UPI users.
