A key question in digital payments is whether TDS applies to interchange fees, payment gateway charges, or Merchant Discount Rate (MDR). The settled position—backed by CBDT clarifications and judicial rulings—is that TDS is generally not required.
The CBDT, via Notification No. SO 2143(E) dated June 2016, specifically exempted TDS on interchange fees for credit/debit card transactions. More fundamentally, these charges are treated as fees for banking or technical services, not as “commission or brokerage” under Section 194H of the Income Tax Act. Courts have consistently held that the relationship between a merchant and a payment gateway provider is principal-to-principal, not principal-agent.
Supporting this, RBI’s March 2020 guidelines on Payment Aggregators and Payment Gateways recognize them as independent outsourcing partners, not agents.
In a landmark ruling (September 2025), the ITAT in One Mobikwik Systems Ltd. v. JCIT held that no TDS under Section 194H is required on payments made to payment gateway service providers. Thus, businesses using such services need not deduct TDS on these charges
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