Income tax on Cashbacks, Rewards, E-wallet and Online payment

As we all know that digitalization has gained much importance now days. Entry of new players in the digitalization market created immense competition in this sector results into many cashback offers, reward, discounts, etc available. Now the query arises about income tax on these receipts. These offers seem like an income and confused about the income tax implications on these receipts.

Can income tax department trace any E- wallet transactions?

Yes, anything that can be done electronically can be traced. Tracing of any online transaction by income tax department is very easy.

Income tax on cash backs

1. Instant cashbacks:
   Instant cashbacks are those cashbacks which are offered immediately after you made a payment for a transaction. For example: suppose you book movie tickets through any online payment app like Paytm/Google pay/ Phonepe for a total of ₹500 and there is a cashback of 10% of transaction value offered by the wallet.
   So, after you buy the movie tickets from the mobile wallet and pay ₹500, ₹50 would be credited back to your mobile wallet immediately as cashback earned on this transaction.

2. Deferred cashbacks:
   Deferred cashbacks are applicable to the next transaction done. For example, if you book an auto through an online app and you refer your friend, you will receive cashback referral it your friend also books an auto through the same app. Now, such cashback referral earned can be used when you next book your auto.
   Hence, if the goods or services, on which the taxpayer earned cash back, are purchased for the use in the taxpayer’s business or profession and the good purchased is not a capital good, there are two ways of taxation on cashback:

1. 1. Reduced cost of 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 be taxed as a business income.

If the goods, on which the taxpayer earned cash back, are purchased for use in the taxpayers business or profession and the good purchased is a capital good, then

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 cash back received should be added to the business income and then taxed.

Taxability of e-wallet transactions:

These days, it has become easy to send or receive money through your phone.

Now the question arises that, do such receipts need to be declared in your returns? Simply, such receipts may be treated as gifts and gifts up to sum of ₹50000 are exempt from gift tax. But if bigger amount have been transferred between friends then the entire amount will be subject to income tax. However, it can be exempt if such amount is received from family members or relatives or are made with respect to settlement of dues on producing the required proof of records.

Income tax on gift vouchers:

If you have received a gift voucher from your employer of amount exceeding ₹5000 then this will subject to income tax.

However, gift vouchers received from family member or relatives of amount not exceeding ₹50000 will be exempt from tax.

Income received from relatives such as 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

Reward point is a perk offered by banks to cardholders as a reward for every time they spend. You can collect these points as you can spend on your transactions. Once you have collected enough points then you can redeem them for gift vouchers, merchandise, air miles, etc.

Generally, these are not taxable but there are some exceptions. For example, rewards that can be earned from a credit card points and cashbacks are generally considered a rebate/ discount and not a taxable income. Therefore if you earn 2% on ₹200 purchase that ₹4 is not extra income but considered ₹4 rebate on your ₹200 purchase.

However, one possible exception is that if you apply for a card and you get a bonus on that card then such bonus would be considered as taxable income.