What is cashback?

The ‘cashback’ works in such a manner that once you have transacted, you receive a portion of the transaction amount or a fixed amount back into your mobile wallet balance or credit card or even a direct credit to your bank account.

For example, many times while recharging our mobile phone through payment apps, we receive a cashback of Rs. 10 to Rs. 50. Same is the case when you make payment for fuels, electricity, grocery, etc. through online payment applications, we receive cashbacks, coupons, etc.

But were you aware that such tempting cashback offers, schemes and discounts can also attract taxes in specific situations? Let us discuss this in detail:

Taxability of Cashbacks

If you receive any kind of monetary benefit in the form of either gifts or cashback, these are counted under either the head, ‘Income from Other Sources’ or 'Profits and Gains from Business or Profession'. Treatment is describe as under

Profits and Gains from Business or Profession:-

Case 1 :- 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 or capital asset, there are two ways of taxation on cashback-

  1. 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.
  2. 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.

Case 2:- 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 there are 2 alternatives available :

  1. 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.
  2. 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.

Income From Other Sources :-

When you receive some money without any commensurate consideration (i.e. without receiving anything in return) and if the total value of such a sum exceeds ₹50,000 in a year, it is subject to the tax called gift tax.

This is in accordance with the provisions of Section 56(2)(x) of the Income Tax Act. As such, monetary benefits received in the form of cashback offers in your mobile wallet or credit card or even a direct credit to your bank account are counted towards this sum.

Differentiating between cashbacks and discounts is necessary in order to understand the taxability of cashbacks. There are two types of cashback which are described as under :-

Instant Cashbacks

Instant cashbacks, as the name suggests, are cashbacks which are offered immediately after you pay for a transaction. Instant cashbacks are usually offered by mobile payment wallets wherein, after you make a payment from the wallet, you get a cashback back in your wallet. For instance, suppose you book movie tickets through your mobile wallet for a total of INR 1000. There is a cashback offered by the wallet wherein 10% of the transaction value is allowed as cashback. So, after you buy the movie tickets from the mobile wallet and pay INR 1000 for them, INR 100 would be credited back to your mobile wallet immediately as cashback earned on this transaction.

Deferred Cashbacks

Deferred cashbacks, on the other hand, are cashbacks which are allowed after a specified time period. These types of cashbacks are usually offered by credit cards or debit cards wherein, after you make a transaction, the cashback is credited to your card account generally within 2-3 months. For instance, your credit card is allowing you a cashback of INR 3000 if you buy a particular brand of mobile. So, after you buy the mobile, the cashback of INR 3000 would be credited to your credit card account within 60-90 days of your purchase.

The cashback offers redeemed for personal consumption are subject to a declaration as ‘Income from other sources’ in case the total amount of such cashback is more than ₹50,000 in a financial year.

Another instance to be considered is where the amount of cashback you receive is less than ₹50,000 but in addition to the cashback offers, you have also received monetary gifts from people other than your relatives that is from non-relatives or friends etc. In this case, you will need to find the aggregate monetary value of these gifts and see if this amount exceeds ₹50,000.

Cashback offers are very tempting to redeem but make sure you keep track of the amounts being credited to avoid a massive tax burden.

Taxability of e-wallet Transactions

Money transfers via your phone are now simple and convenient. Sometimes, Debts to friends may be settled through online transactions.

Do these receipts need to be disclosed in your returns now that that question has been raised? Simply put, such receipts could be regarded as presents if they are considered as a nature of gits, and gifts up to Rs 50,000 are excluded from gift tax. Alternatively if considered as reimbursement of the expense paid, it will not be considered as part of Income, subject to proper justification.

Income Tax on Gift Vouchers

If your company has given you a gift voucher for more than Rs 5,000, income tax will be payable on that amount.

Gift cards from family members or relatives that are received but do not exceed Rs 50000 are exempt from 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’.

In the hands of the receiver, income received from family members such as a spouse, siblings, children, or any lineal ascendant or descendant of the individual's spouse is exempt from tax in the hands of the recipients.

Taxability of Reward Points and Air Miles

Banks provide cardholders with reward points as a benefit for each transaction they make. As you spend money on transactions, you can earn points. Once you have acquired enough points, you can exchange them for anything like gift cards, products, and air miles.

These are often exempt from taxes, but there are certain exceptions. For instance, rewards obtained through credit card points and cashbacks are typically regarded as a rebate or discount and are not subject to taxation. Therefore, if you receive 2 percent on Rs 200 transaction, the additional Rs 4 is considered a rebate instead of additional income.

One likely exception, though, is that if you apply for a credit card and receive a bonus, the bonus will be counted as 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.

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.

How does taxation on cashbacks work?

Cashbacks are nothing more than a perk you get when you make purchases. Many people are uncertain about the tax repercussions of cashbacks because they might appear to be income. Let's examine the taxation of cashbacks with the help of various examples.

Point 1

There are two ways to tax the cashback if the goods on which the taxpayer received a cashback was bought for use in the taxpayer's trade or business and the product is not considered as a capital goods. 1) You can claim a deduction for the product's reduced cost price, which is the price of the good after subtracting the cashback from the total amount paid.
2) Alternatively, the payback or the cashback can be reported as "other business receipts" and the total amount spent for the item may be deducted from business income. In this case, the cashback would be taxed as business income.

Example 1

A company spent INR 10,000 on stationery and got INR 2000 back as cash. The company has two options:
1) It can deduct INR 8000 for the cost of stationery or
2) It can deduct INR 10,000 and consider INR 2000 as "other business receipts." Although the entire cost would be deductible in this scenario, the payback would be applied to the business income and afterwards taxed.

Point 2

When a tax payer purchases a capital good for use in their business or profession and they receive a cashback on that purchase, depreciation on that good is calculated on the net price of the product—that is, the price that has been reduced by the cashback. Alternately, the company can determine depreciation based on the entire cost of the good acquired, in which case the cashback received should be added to the company's income before being taxed.

Example 2

A company spent INR 50,000 on a computer and received a payback of INR 5000. The cashback received in the amount of INR 5000 would be added to the business income and company will claim depreciation on INR 50000.
Alternatively company can reduce the cashback amount from the cost of the capital asset and compute depreciation on INR 45,000 rather than INR 50,000.

Point 3

The Income Tax Act's Section 56 (2) (x) applies when purchasing items for personal use. The gift tax provisions are outlined in the section. According to the section, if a taxpayer receives a certain amount of money for no specific reason, that amount will be taxable. The amount, however, would only be subject to taxation if it exceeded INR 50,000. As a result, given the terms of this section, cashbacks may have tax implications. These implications are listed below:

The cashback obtained would be taxable in the hands of the taxpayer under the category "Income from other sources" if the taxpayer purchases goods or services for personal use. According to Section 56 (2) (x) of the Income Tax Act, the cashback would be regarded as a gift, and if the total amount of cashbacks exceeds INR 50,000, they would be liable to taxation at the taxpayer's income tax slab rates.

Example 3

Throughout the fiscal year, the taxpayer has engaged in a number of transactions to acquire goods and services for personal purposes. The taxpayer has received INR 30,000 in cashback overall. The cashback will not be taxable because it is less than INR 50,000. However, if the taxpayer had received a total of INR 55,000 in cashbacks, the total amount received would have been subject to tax at the taxpayer's applicable slab rates.

Point 4

When a taxpayer purchases products or services for their own use and their total cashbacks do not exceed INR 50,000, they are not subject to taxation. Cashbacks would be taxable if the taxpayer got other presents throughout the fiscal year and the total amount of gifts received with the cashbacks exceeded INR 50,000.

Example 4

The taxpayer spent money on two items, and he was given cashback payments of 5000 and 10,000 rupees. The taxpayer additionally received a total of INR 40,000 in financial gifts from non-family members. Although the total cashback received in this instance is less than INR 50,000, the combined value of the gifts and cashbacks is INR 55,000, making the cashbacks taxable.

So, this is how cashback taxes operate. In order to properly submit your taxes, you must understand these straightforward examples of how and when cashbacks are addressed.

Conclusion

In this day of digitization and a storm of cashbacks, it is important to monitor cashbacks received throughout the year and determine if they fall under the purview of income tax. By disclosing this information on your income tax return, you can avoid receiving a Reassessment Notice under Section 147 for underreporting your income.