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 expressly clarified by the Central Board of Direct Taxes (CBDT) and consistently upheld by judicial authorities.

CBDT Clarifications and Judicial Precedents

1. CBDT Exemption Notification
In June 2016, the CBDT issued Notification No. SO 2143(E) [No. 47/2016 (F.No. 275/53/2012-IT(B))], which explicitly exempted interchange fees charged on credit and debit card transactions from the purview of TDS. This notification provided much-needed certainty to merchants and payment ecosystem participants.

2. Nature of the Payment
Interchange fees and payment gateway charges are characterized as consideration for banking or technical services, rather than “commission” or “brokerage.”
Section 194H of the Income Tax Act mandates TDS only where payments are in the nature of commission or brokerage arising from a principal–agent relationship. Courts have consistently held that the relationship between merchants and payment gateway service providers is principal-to-principal, not principal-to-agent, thereby excluding such payments from Section 194H.

3. Support from RBI Guidelines
The Reserve Bank of India, through its March 2020 circular titled “Guidelines on Regulation of Payment Aggregators and Payment Gateways”, has clarified that payment gateways function as outsourcing partners and independent service providers, not as agents of merchants. These regulatory guidelines further reinforce the non-applicability of TDS under the commission framework.

4. ITAT Ruling on Payment Gateway Charges
In a landmark ruling delivered in September 2025, the Income Tax Appellate Tribunal (ITAT), Delhi Bench, in the case of One Mobikwik Systems Ltd. (formerly 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 TDS is required to be deducted under Section 194H on payments made to payment gateway service providers.
The Tribunal reaffirmed that such payments do not constitute commission or brokerage and fall outside the scope of TDS obligations.

Conclusion

In light of CBDT notifications, RBI guidelines, and consistent judicial interpretation—including recent ITAT rulings—interchange fees, payment gateway charges, and MDR are not subject to TDS under Section 194H. This settled position provides regulatory clarity and reduces unnecessary compliance burdens for merchants operating in the digital payments ecosyste