As the nation eases out of lockdown, we're soon going to be rushing to the stores for some much-needed retail therapy and more-than-necessary vacationing. That means finding the best stores, with the best deals, the highest discounts, and of course, cashbacks! Besides, we're going to need to use up all those frequent flyer miles before they lapse, or worse, another airline crashes out of the sky (we aren't saying that's going to happen).
Naturally, as Chartered Accountants, while imagining this amazing future, we couldn't help thinking about the inevitable return-filing deadline, slated for 30th November this year (stay ahead of your taxes and book your return filing service). While you may never have imagined that cashbacks on your credit card and other mobile wallets may have a tax implication, it's our job to save you from getting the dreaded income-tax notice.
So let's jump straight into a breakdown of these different benefits, and whether they may be taxable. These sales promotion strategies can be of infinitesimal names and types but for simplicity we will analyse them under the following heads:
- Loyalty card points / frequent flyer miles
- Free goods and services like movie tickets, meal passes, etc.
Discounts refer to exactly what you understand them as - a reduction in the price of the product. So if a TV has a price tag of Rs.5,00,000, with a flat 20% discount on it, you pay Rs.4,00,000 to the retailer and take it home.
These discounts are not taxable, as there is no income or credit to your account by virtue of the discount.
If you are purchasing the TV for your business, note that can only claim depreciation on the net amount paid for the TV, i.e., Rs.4,00,000.
Cashbacks are slightly different from discounts, as for the TV costing Rs.5,00,000 with a 20% cashback offered by the mobile wallet (e.g. Paytm), you must pay Rs.5,00,000 to the retailer at the time of purchase. The cashback is credited to your account or mobile wallet usually within 7-10 days of the purchase. This is a scheme beneficial to the customer as well as the mobile wallet as it gives some free cash to the customer, and ensures repeated transactions from the mobile wallet (as mobile wallets get paid a certain fee per transaction).
But cashbacks received, if more than Rs.50,000 are taxable. Though the net effect of both discounts and cashbacks is same, the TV lands up costing you Rs.4,00,000, there is an important provision in the Income Tax Act which makes cashbacks taxable.
The provision in question is Section 56(2)(x) of the Act, which lays down that where any person receives any sum of money without consideration (i.e., without paying for it), and such sum of money exceeds Rs.50,000 during the year, the same shall be chargeable to tax under the head Income From Other Sources.
So coming back to our TV example, if you got a cashback of 20%, i.e., Rs.1,00,000 it would thus be taxable. Since the cashback is a sum of money received by you, you must report it in your return of income and pay tax on it.
Note that the above section covers all sums of money received without consideration during the year. So if you received any other cashbacks or gifts from friends, amounting to say, 25,000, and the cashback on the TV was just Rs. 30,000 the entire Rs.55,000 would be taxable and must be reported in your return. However, if this sum came up to say, Rs.45,000, it would be exempt and you would not be required to pay any tax on it.
Don't forget, if you're a salaried individual, these credits increase your income during the year which is usually not covered by the TDS deducted by your employer. So be sure to check the impact on advance tax liability at the time of receipt to avoid an interest liability at the time of return filing.
Further, if the purchase is for the purposes of a business, depreciation on the asset can only be claimed on the net amount paid (i.e. Rs.4,00,000).
Loyalty card points / frequent flyer miles
These benefits allow you to purchase goods and services by using up the points. You may have come across them at Shoppers Stop or Jet Airways.
These are similar to discounts, as you pay only the net amount for the product. They do not result in any receipt of money and are thus not taxable.
Free goods and services like movie tickets, meals, etc.
Several banks have tie-ups with movie theaters to allow their patrons some free movie tickets per month. As the credit card market gets more competitive, these offers are becoming increasingly lucrative to attract customers to take . Luckily, such free goods and services are not taxable in the hands of the individual.
However, you must keep in mind if the same is received by your business, the monetary value of the free goods or services will be treated as business income and subjected to tax, as per Section 28.
We have seen above the tax implications of various promotion schemes encountered in our day-to-day lives. So the next time you get excited with a scratch card on Google Pay (we know we do), and especially while making large purchases like TVs, fridges, mobile phones, etc. make a small mental note of the cashback. If the amount crosses Rs.50,000, it may save you a great deal of trouble to have paid your dues when the taxman comes knocking.
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Tags income tax