Income Tax Department Targets Credit Card Spending on Behalf of Others
New Delhi: The Income Tax Department is cracking down on individuals using their credit cards to pay for expenses incurred by others,a practice often undertaken to accumulate reward points and cashback. Notices are being issued under various sections of the Income Tax Act as the department identifies meaningful discrepancies between declared income and credit card spending, according to officials.
The initiative comes as the department leverages the enhanced financial transaction tracking capabilities of the Annual Facts Statement (AIS) to detect unusual payment patterns. This includes identifying instances where credit card payments are used to falsely inflate claims for House Rent Allowance (HRA).
Taxpayers found to have unreported expenses face potential taxation as undisclosed income, along with penalties under Section 270A, which can reach up to 200% of the tax due. even reward points and cashback earned through these arrangements are being considered taxable income.
The department is also scrutinizing artificial arrangements where individuals pay expenses for friends or relatives, perhaps triggering action under Sections 69/69C related to unexplained income and expenditure. Company directors and consultants using personal cards for official expenses and receiving reimbursements with significant reward earnings may see those earnings taxed as business income under Section 28(iv).
Taxpayers with significant discrepancies between income and spending – for example,reporting an annual income of ₹5-6 lakh while demonstrating ₹10-15 lakh in credit card expenses – are likely to receive notices under Section 142(1) or Section 148A. While no direct tax currently exists for reward points, substantial cashback deposited directly into bank accounts may be subject to tax liability.
The crackdown aims to address the misuse of credit cards for rewards and cashback, and ensure accurate reporting of income and expenses.
