Applicability of TDS on interchange fees and payment gateway charges?
Tax Deducted at Source (TDS) is generally not applicable to interchange fees, payment gateway charges, or the Merchant Discount Rate (MDR). This position has been clarified by the Central Board of Direct Taxes (CBDT) and upheld by various court rulings.
CBDT Clarification and Judicial Rulings
1. Exemption via Notification: The CBDT issued a notification in June 2016 (Notification No. SO 2143(E) [No. 47/2016 (F.No. 275/53/2012-IT(B)]) which exempted TDS on interchange fees charged on credit/debit card transactions.
2. Nature of Payment: The charges are considered fees for banking or technical services, not “commission” or “brokerage”. Section 194H of the Income Tax Act requires TDS on commission or brokerage, but courts have determined that the relationship between a merchant and a payment gateway provider is not that of a principal and agent, but rather principal to principal.
3. RBI Guidelines Support: The RBI guidelines issued in March 2020 treat payment gateways as outsourcing partners, not agents. The RBI circular on “Guidelines on Regulation of Payment Aggregators and Payment Gateways” clarifies their role as independent service providers.
4. Payment Gateway ITAT ruling:
In a landmark ruling in September 2025, the ITAT, in the case of One Mobikwik Systems Ltd. (earlier known as One Mobikwik Systems Pvt. Ltd.) vs. Joint Commissioner of Income Tax (OSD), TDS Circle, Gurgaon (ITA Nos. 7830/Del/2018, 273 & 274/Del/2025), held, that no Tax Deducted at Source (TDS) is required to be deducted under Section 194H of the Income Tax Act, 1961, on payments made to payment gateway service providers.
The copy of the order is as under:
