India has digitized to a different level. When the world did not figure out UPI, we had the largest franchises to the smallest vendors using it. Credit cards are another very popular digital way of transaction and along with these transactions come rewards and cashbacks. Credit cards like the Rupay credit card, MasterCard or Visa card offer ample rewards to their users on each transaction. However, this brings about confusion amongst a lot of users as to whether these rewards and cashback are considered income and does credit card rewards tax exist.
What Is Cashback?
Cashback is an amount returned on the total amount spent either immediately or within a specified period. This is done under the rewards scheme applicable to the card being used.
Let’s Understand the Different Types of Cashbacks:
Instant Cashback: This type of cashback is offered mostly when E-wallets are used to make payments. A % of the total amount spent is immediately credited back to your wallet as soon as you pay. E.g. If you have spent Rs 1000 on shopping and your card is offering you 10% instant cashback in your wallet. You will receive Rs 100 in your wallet as soon as you pay Rs 1000. So, technically you have paid only Rs 900.
Deferred Cashback: This type of cashback is mostly received on your card. The period is mainly 30-90 days, unlike instant cashback. E.g.- If your card is offering you a cashback of Rs 3000 if you purchase electronics from a particular store. The money will be credited to your account within 1-3 months.
Tax Implications of Digital Transactions
Tax on Cashbacks: Now that you have understood what instant and deferred cashback is, you need to understand how tax on credit card rewards work. If the cashback is received on goods and purchases made for business or professional purposes, it can be put under ‘business expense’ and the tax applicable will be under the ‘’other business income category as per the Income Tax Act of India.
Income tax on credit cards is not applicable if you have purchased goods for personal use and the total cashback earned is less than Rs 50,000, as per the Income Tax Act of India. But any amount above this limit will be considered income and will be taxable under the income from other sources category.
Tax on E-Wallets: It is very easy to send and receive money on GooglePay or PayTm. More often than not even on a simple outing, one person pays the bill and the rest of the people transfer their share to this person. This is fine as long as the amount is under Rs 50,000. Any amount that exceeds Rs 50,000 will be considered taxable. Unless, you have sufficient proof that the transfer has taken place amongst family members, in that case, the tax can be exempted.
Taxation On Gift Vouchers: Gift vouchers can also be taxed if they exceed the value of Rs 5000 when received from friends and Rs 50,000 when received from relatives and extended family, under the income from other sources’ category. Having said that, if the gift is received from immediate family members such as parents, spouses, siblings or children it is exempted from tax.
Credit card tax can be reduced by claiming various deductions and exemptions that may apply to you under the Income Tax Act. It is important to understand how cashback works to be able to file your income tax returns properly. We hope this was helpful. If you have any more questions refer to our FAQ section below.
FAQs
Ø Are Discounts Taxable?
Discounts do not generate any income.
Ø Are Cashbacks Allowed Only on the Purchase of Goods?
It depends on the merchant offering the cashback, if the merchant offers, cashback can be received on services too.
Ø Are Cashback Rates Fixed?
Cashback rates differ from merchant to merchant and the total transaction amount.
Ø How is Cashback Treated for Individuals?
If the cashback is received as a discount on the purchase price, it is not taxable. However, if more than Rs. 50,000 it may be taxable under the income from other sources’ category.
Ø What is the Difference Between Cashback and Discount in Terms of Taxation?
Discount refers to the reduction in price that you receive while purchasing goods or services. Cashback on the other hand is a monetary benefit you receive in your E-wallets or cards on the total purchase amount.
Ø Can Cashback be Considered a Gift?
Cashback can be considered a gift if given without a purchase. Gifts if not incoming from immediate family are taxable under the ‘Income from other sources’ category.
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