Getting cashbacks for online transactions? You may be liable to pay tax

They are treated as gifts now; could be taxed if value exceeds Rs 50,000 in a year

Almost all payment apps and wallets nowadays offer cashbacks or cash rewards. When you transact on some of them via the Unified Payments Interface (UPI), the cash reward is transferred directly to your bank account. At times, there are offers from an e-commerce website in partnership with credit card issuers, where the cashback is added to the account after a few months. 

However, too many of these rewards can become taxable. For individuals, cash rewards could be taxable as gift tax. "Provisions of Section 56(2)(x) of the Income-Tax Act talk about money received without consideration, also known as gift tax. If the value of all gifts received in a financial year crosses Rs 50,000, the receiver is liable to pay tax," says Naveen Wadhwa, a chartered accountant with Taxmann.com. He says the taxation would be different if the individual makes a purchase for business and gets a cashback.

Usually, users of wallets and payment apps do not cross the threshold of Rs 50,000 in a financial year. Tax experts say an individual should not look at such benefits in isolation. It could be possible that the cashbacks across transactions in a financial year sum up to Rs 8,000 or Rs 10,000. Such a situation is more likely if an individual shops on an e-commerce website where his credit card issuer provides cashback after a few months of the transaction. If you have received other gifts from friends or distant relatives in a financial year, say, valued Rs 45,000 and there are also cash rewards worth over Rs 5,000, then you would be liable to pay the gift tax. When filing the returns, this will be declared under the head income from other sources.

If an individual buys goods for his business, the taxation would depend on whether they are capital assets or not. For capital assets, the buyer can claim depreciation on the goods on the basis of the net amount, that is, after reducing the cashback from the amount. Alternatively, he can claim depreciation on the gross amount but has to pay tax on the cashback as other business receipts. If the item is not a capital good, the business owner can claim a deduction for the net amount, excluding the cash reward.

The taxation is applicable only for cash rewards. Many times a retailer or an e-commerce platform may offer an instant discount if a user pays through the debit or credit card of a partnering bank. In such a case, there won't be any tax incidence as no monetary benefits are received. Such benefits are considered promotional offers.

Similarly, frequent flyer miles are rewards which can be redeemed while booking tickets for a flight. So these are just like instant discounts. Just like in the case of instant discounts, there will be no tax in the case of frequent flyer miles for an individual taxpayer or business owners.