Digitization now a day has gain much importance. Due to entry of new players in the digital payment market, there has been immense competition in this sector results many cashback offers, Rewards, Discounts, etc. available. But question comes about Income Tax liability on these receipts. Cashbacks and Rewards seem like an income and many are confused about the Income tax implications on them.
For example, Many a times, while making recharge in our mobile phone through payment apps, a cashback of Rs. 10 to Rs. 50 is received. Same is the case when you make payment for fuels, electricity, grocery, etc. through online payment applications, we receive cashbacks, coupons, etc.
Now, the question here is “Are these Cashbacks/ Rewards/ Referral code earned taxable under Income Tax?” Let’s address this question.
Can Income Tax department trace any E-wallet transactions?
The answer to this question is very simple – anything done electronically can be traced. Tracing the online transaction by the Income Tax Department is very easy.
Income Tax on Cashbacks
Cashbacks are of 2 types:
- Instant Cashbacks
- Deferred Cashbacks
Instant cashbacks are cashbacks which are offered immediately after you pay for a transaction. For instance, suppose you book movie tickets through Paytm/ Google pay/ PhonePe for a total of INR 100 and there is a cashback of 10% of transaction value offered by the wallet. So, after you buy the movie tickets from the mobile wallet and pay INR 100 for them, INR 10 would be credited back to your mobile wallet immediately as cashback earned on this transaction.
Deferred Cashbacks are applicable to the next transaction done. For instance, if you book a cab through an online app and you refer your friend, you will receive cashback referral if your friend also books a cab through the same app. Now, such cashback referral earned can be used when you next book your cab.
Hence, we need to determine taxability of such transactions in the Income Tax Act, 1961.
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If the goods or services on which the tax payer earned a cashback, is purchased for the use in the tax-payer’s business or profession and the good purchased is not a capital good, there are two ways of taxation on cashback-
- Reduced cost price of the goods or services, i.e. the price of the goods or services after deducting the cashback from the amount paid.
- Total amount paid for the goods or services, can be availed as expense from business income and the cashback should be shown as ‘other business receipts’. The cashback, in this instance, would then be taxed as a business income.
If the goods, on which the tax payer earned a cashback, is purchased for the use in the tax-payer’s business or profession and the good purchased is a capital good, then
- The calculation of depreciation on the good purchased would be done on the net price of the good, i.e. on the price after deducting the cashback.
- Alternatively, the business can calculate depreciation on the total value of the good purchased and the cashback received should be added to the business income and then taxed.
Read Also: Cash Transaction Limit in India – cash payment and cash receipt
If the taxpayer buys goods or services for personal use and the aggregate cashbacks are below INR 50,000 but the taxpayer has received other gifts during the financial year and the aggregate gifts received with the cashbacks exceed INR 50,000, Income tax on cashbacks would be taxable under the category of ‘Income from other sources’. Read More : Gift – Tax Liability – Income Tax on Gift in India
Taxability of e-wallet transactions
Now a days, it has become easy to send and receive money through your phone. Sometimes, Debts to friends may be settled through online transactions. For example, you’re at a restaurant with your friends, and you pay the whole bill in cash, while everyone pays you through an app or via UPI.
Do such receipts need to be declared in your returns? Simply, such receipts may be treated as gifts, and gifts up to a sum of Rs. 50,000 are exempt from gift tax. But if bigger amounts are transferred between friends, the entire amount will be subject to Income tax. However, it can be exempt if such transactions are received from family members or relatives or are made with respect to settlement of dues on producing the required proof of records.
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Income Tax of Gift Vouchers
If you have received a gift voucher from your employer for any reason and the value of such voucher exceeds Rs. 5,000, then it would be subject to Income tax.
However, gift vouchers received from friends and family upto Rs 50,000 are exempt under Income Tax. In other words, vouchers over the value of Rs. 50,000 received from family or friends in a financial year are subject to tax under the head ‘income from other sources’.
Income received from relatives such as spouse, siblings, children, or any lineal ascendant or descendant of the individual or the individual’s spouse, is exempt from tax in the hands of the recipients.
Read Also: Everything about Section 194N- TDS on Cash Withdrawal
Taxability of Reward Points and Air Miles
Reward point is a perk offered by banks to cardholders as a reward for every time they spend. You can collect these points as you spend on your transactions. Once you have collected enough points, you can redeem them for gift vouchers, merchandise, air miles, etc.
These are generally not taxable, however there are some exceptions. For instance, rewards that are earned from a credit card points and cashbacks are generally considered a rebate/discount and not a taxable income. Therefore, if you earn 2% on Rs.100 purchase, that Rs. 2 is not extra income but considered Rs. 2 rebate on your Rs. 100 purchase.
Read Also: 15 High Value Transactions traced by Income Tax department
However, one possible exception is that if you apply for a card and you get a bonus, then the bonus would be considered taxable income. Further, if you have ever wondered that some banks give bonus after making first purchase, it’s to avoid any tax implication that could have been arise on welcome bonus.
In case of Business Credit cards, if you earn 2% on Rs.100 as business expense then such Rs. 2 shall not be taxable as it is considered as a rebate but it does affect the amount to be claimed as deduction as business expense. Here, you would not be eligible for a business expense of Rs. 100 but only Rs. 98.
Raed Also: TDS and TCS Rates Chart – Examples of how to calculate TDS for FY 2020-21
Further, Many banks offer a bonus if you open a new account and meet a requirement of funding it with a certain amount or making a certain number of direct deposits or transactions. Such transactions are generally considered taxable.
Same way Credit Card Referral bonuses could also be taxed.
For any questions, you may reach us at Discussion Forum
The author of above article is CA Rahul Gaur.
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