Anniversary sales, festive celebrations, etc have merchants giving away cashback offers to its customers on purchases. Tempted by the possibility of buying more for less, customers get trapped in the feeling of instant gratification from the cash returns in their online wallet or bank accounts and end up buying things they do not need. This then leads to more cashback and eventually more purchases.
Other than having your household filled with more and more things, the problem with these offers is that you may fall under the income tax department's radar for not reporting income. This is because, in the eyes of the law, you have earned income for no consideration and will be taxable when they cross Rs 50,000 in one financial year.
For example, you have moved to a new house and wish to make certain household appliance purchases. You may spend hours comparing the price of a television, washing machine and air conditioner at your local store and find out that the online ecommerce website offers a better deal with cashbacks. This cashback from the same retailer ends up crossing Rs 50,000 in benefits and you must be aware than since your bank account is linked to your PAN, the income tax department has a check on the flow of money in and out of your bank account.
As per the section 56(2)(x) of the Income Tax Act, any monetary benefit received from a non-relative as a gift (without consideration) is taxable under "income from other sources" or "profit or gains from business or profession" when it exceeds Rs 50,000. Popularly known as 'gift tax,' this is imposed on monetary benefits and not when received in the form of accessories like a free pendrive or power bank on the purchase of a television. These accessories are, however, accountable for tax if purchases were made for business purposes.
In simple words, if you receive any monetary benefit by way of credit in your bank account or e-wallet or credit card, tax can be invoked when it exceeds the limit.
Things to note
- In case of instant discounts, that is, when the customer opts to make purchases using a particular debit or credit card so as to get an extra discount offered by the website/merchant, the item is instantly discounted and the buyer only pays the rest. The customer is not liable for a tax as no monetary benefit was received by him/her by way of credit to their bank account/e-wallet.
- If you may have received a monetary gift from a friend for say Rs 40,000 and you purchase a television later that year with a cashback worth Rs 15,000, you are liable to pay taxes under "income from other sources" even though your cashback did not cross the limit of Rs 50,000. This is because in total the monetary benefits received from non-relatives exceeds Rs 50,000 (Rs 40,000 + 15,000) for no consideration before the end of the financial year.
- You will get a notice from the income tax in the above scenario, here is how you can deal with it.
- Frequent flyer miles rewards from airlines work like instant discounts as they are not credited to your bank account and are therefore not taxable to you.