Tuesday, January 12, 2016

Are cash backs and reward points taxable ?

The cashback that came to your Credit Card Account or your PayTM account last month may worry you - for it could be considered your income. Cashbacks are not discounts and hence may be taxed in specific cases...

 Background
Online shopping websites and some stores offer cash back on use of certain credit cards or mobile wallets to pay for the purchases you do through them. Travel websites are offering cashbacks on booking tickets, hotels or holidays by using credit cards or mobile wallets. Online taxi aggregators are offering cashbacks on taxi rides. Online food delivery order booking websites are offering cashbacks on orders. You can get cashbacks even on payment of your utility bills by using certain credit cards or mobile wallets. One hears stories of customers buying consumer durables and getting a cashback of Rs.4,000 or more. So, are such cashbacks taxable? What about your reward points on your credit cards, against which you do a redemption for coupons or other items?

How Cashbacks are different from Discounts
  • To understand its taxability, we have to understand that cashbacks differ from discounts. Discounts are reduced by the sellers from the invoice value itself, with only the net amount being payable. 
  • In case of cashbacks, one has to make the full payment, and the consumer gets the invoice for the full payment too. The cashback is credited to the customer’s credit card or mobile wallet or bank account immediately, or after a few months, as per the terms of the offer. In most cases, the cashback is really offered by the credit card issuer or by the mobile wallet that has tied up with the particular seller.

 How Cashbacks are similar to Discounts
While a cashback differs from a discount in terms of the amount of payment that one has to initially make, as well as the timing of the amount received back, it is, in some ways, similar to a discount. 
  • A discount is given for buying a particular item or service from a particular seller at a particular time, or for making a prompt payment for that item or service. 
  • A cashback is also given vis-à-vis a particular transaction of purchase of an item or service—it is given for making payment for the transaction through a particular mode. 
Therefore, for taxation purposes, logically, a cashback should be treated in the same manner as a discount. So, it is not an independent income, but a reduction of an expenditure.

 Taxability
Since Cashback, and reward points in the same context, is not an income but a reduction in expenditure, it is usually not liable to taxes. In fact, the money that you are being paid back is your own money which is already tax paid money that you earned sometime earlier, and now spending it.

 Now that cashbacks are considered as 'reduction in expenditure' and not an 'income', the taxability would now depend on its usage.
  • If the expenditure is in the nature of a business expenditure that one is claiming as a deduction against business income, it would only be the net expenditure (the expenditure after deducting the cash back) that would be allowed as a deduction. If the expenditure is for acquiring a business asset, on which one is claiming depreciation, the cost of the asset for the purposes of depreciation would be computed by deducting the cash back from the total cost of that asset.
  • If the expenditure is for your personal use as it is in most cases, such as purchase of a mobile phone for personal use or use of a taxi for personal travel (and since there is no provision to take tax benefits for personal expenditure), the cash backs and reward points are not considered as your income and are out of the tax provisions.

Timing of Cash back for Business Income
What would be the position if the expenditure is incurred in one year, but the cashback is received in the subsequent year? 
  • If a business is following the cash system of accounting for business income, the cash back would be reduced from the relevant head of expenditure or the relevant asset cost in the year in which the cashback is actually received. 
  • If a business is following the mercantile system of accounting, he / she would have to account for the cashback as an amount receivable by him / her in the initial year of expense itself, and reduce it from the expenditure or cost of asset. This is because of the fact that he / she would be entitled to the amount on account of the transaction itself—only the receipt of the cashback may have been postponed to the subsequent year.

Timing of Cash back for a Salaried Employee
It is interesting to understand the implications if you are a salaried employee, and have claimed reimbursement of the expenditure incurred from your employer on the basis of the gross payment made by you, without considering the cashback? 
Normally, any allowance given by an employer for business purposes is exempt only to the extent of the actual expenditure incurred by you. In this case, the actual expenditure incurred by you is a lower amount than the reimbursement, since it is your net expenditure which would be relevant for this purpose. Therefore, the excess reimbursement is actually taxable in your hands.

Summary
You can generally enjoy the flood of cashbacks while they last, without having to worry about taxation.


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The book "From the Rat Race to Financial Freedom" has many such investment concepts explained in a very simple and uncomplicated manner, especially in the Indian context.

Cheers

Manoj Arora
elevate your life...

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