We frequently use our credit cards for shopping, ticket-bookings and for many other purposes. Every time we use our credit cards, the card issuing bank offers some benefits to its customers or cardholders. In terms of “Reward points” or “Loyalty points”. Reward points are rampant. Open a new bank account, you’ll get bonus points. Switch to a new credit card, you’re rewarded with more points. Depending upon how you receive the points, you could owe tax on their value.
Ways to Redeem Your Credit Card Rewards:
From getting free airline tickets to paying for a new TV, credit card reward programs offer many ways to save you money on everyday items and big-ticket purchases.
- Pay with rewards or points: As an added perk to cardholders, some credit card issuers offer the ability to shop online at select retailers and pay for your purchase with all or part of your reward points or cash.
- Buy a gift card:Gift cards are one of the most popular ways to redeem credit card rewards because of their flexibility and point-to-dollar value.
- Apply towards travel:Redeeming your credit card rewards for travel can save you hundreds of dollars on airfare or hotels. However, the need to accrue lots of miles or points, blackout dates and other travel restrictions often make travel redemption frustrating.
- Donate to charity:You may have points or miles which are about to expire or you’re switching credit cards, consider donating your points instead of spending them on something you don’t need.
- Redeem for cash or statement credit:You could use your rewards to pay down existing debt or transfer the money into an interest-bearing savings account, retirement account or college savings fund.
HAVE YOU EVER THOUGHT WHAT WILL BE TAX IMPLICATION ON REDEMPTION OF CREDIT CARD POINTS? WHETHER IT WILL BE TAXABLE OR IT WILL BE TAX-FREE? AND IF TAXABLE, THE RATE OF TAX IT WILL ATTRACT?
According to the Internal Revenue Service (IRS), credit card rewards may be taxable as income. The types of rewards and the way in which you receive them determine whether they are considered taxable. In many cases, the rewards are viewed by the IRS as a discount, not as income. For example, a cash-back program for using your credit card is treated as if it were actually a post-purchase discount. There are some credit card reward programs that offer large sign-up bonuses, however, which the IRS may end up counting as taxable income.
Before we evaluate the taxability of such benefit schemes, it would be imperative to first take cognizance of the provision of Section 56(2)(x) of the Income-tax Act. This provision provides for levy of tax if any sum of money is received without consideration. This tax, popularly known as ‘gift tax’, is levied only if the aggregate value of such sum exceeds Rs 50,000 during the financial year. If the benefits are not given in the form of cashbacks but in form of accessories (i.e., free earphone, power banks, etc.), this provision shall not be applicable. However, market value of freebies can be taxable if goods are purchased for the purpose of business or profession as all benefits, arising in the course of business or profession, are taxable under section 28(iv) whether they are convertible into money or not.
In instant discount schemes, if the customer opts to pay for the order using the prescribed debit card or credit card, an extra discount is offered by the website which is instantly subtracted from the listed price and customer pays the net discounted amount only. If the customer is buying the goods for his business or profession, the net price shall be allowable as business expense or if it is a capital asset (i.e., laptop, ACs, TVs, etc.) then the depreciation will be allowed on the net amount only.
However, if goods are purchased for personal consumption and not for any business or profession, then nothing shall be chargeable to tax as no monetary benefits are received by way of credit to the account of the customer.
Deferred cash backs
In ‘Cashback’ schemes, if customer chooses to pay with the credit card or debit card of partner bank, the bank credits the predetermined cashback in card user’s account at the end of a pre-determined ‘cooling’ period. If an individual receives cashback in relation to purchase of any goods, not being a capital asset, for the purpose of business or profession carried on by him, then the buyer can either claim the deduction only for the net expenditure after reducing the amount of cashback from total expenditure or to add the cash back to ‘other business receipts’ and declare in income tax return as part of gross income.
If cash back is received in respect of purchase of a capital asset to be used for the purpose of business or profession carried on by him, then he can claim depreciation on the net amount after reducing the total value by the amount of cashback or he can claim depreciation on gross amount and pay tax on the cashbacks as other business receipts.
Frequent flyer miles
Frequent flyer miles are the rewards which can be redeemed while booking tickets for a flight. So these are just like instant discounts. As in the case of instant discounts, no taxability will arise on frequent flyer miles whether they are linked with the business or profession or not. These rewards can also be availed by way of instant reduction from the billed amount, in which case no taxability shall arise. In both the cases if these rewards are linked with the business or profession carried on by the assessee, he can claim only net expenditure as business expense.
Therefore after the above discussion it can be concluded that. Whether the redemption of reward points will be taxable or not depends on the way how the rewards are received.
If the rewards are earned through the use of the card itself; for example, receiving one reward point for every hundred rupees spent on a card, then these rewards are considered as rebates and are not taxable. However, rewards provided as an incentive for opening an account could be considered taxable income.
In contrast, rewards for opening a credit card account generally are credited. Only after the cardholders meets a certain spending minimum on the card over a specified time period. The rewards are therefore viewed as rebates and consequently are not taxable.