Monthly credit card expenditure by Indian users has increased rapidly in the last few years. With inbuilt rewards, cashback and the facility to pay the bill after a certain period, credit cards are finding more traction among users compared to debit cards.
According to RBI’s data for November 2022, the value of total credit card transactions on online e-commerce websites was 3.7 times more than the debit card expenses. For payments at PoS also, the value of credit card payments was 1.2 times more than debit card transactions.
While there is nothing wrong in making payments with credit cards as long as you can repay the amount in time, users should also know that there may be some tax implications for overspending with a credit card, especially in cases of high-value transactions. This article looks at the Income Tax rules related to credit card payments.
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Is there a specific Income Tax rule for credit card expenses?
Tax experts say there are no specific rules for spending with credit cards. But it is mandatory for banks to report high-value transactions to the Income Tax Department.
“Banks, companies, registrars, and post offices are some common entities that are mandated to report their credit card transactions whenever it occurs in every financial year. That is why these entities fill up Form 61A, which is a Statement of Financial Transactions. Ordinary taxpayers also fill up Form 26AS to report high-value transactions, including credit card transactions,” says Abhishek Soni, Co-founder and CEO of Tax2win, a Fisdom company.
The rule: Financial institutions have to report any transaction above Rs 10 lakh through Form 61A. Additionally, the Income Tax department has included credit card transactions in Form 26A for individuals, where high-value transactions need to be reported by individuals.
Paying credit card bills above Rs 1 lakh in cash may attract tax scrutiny. “The tax authorities specifically seek information on bill payments through cash which is in excess of Rs 1 lakh to ensure there is no tax evasion,” says Gaurav Chopra, Founder and CEO of IndiaLends.
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Do excess credit card expenses attract Income Tax scrutiny?
According to Soni, paying credit card bills that carry high-value transactions unintentionally attracts the Income Tax Department investigation, for sure. He says that credit card users may receive a legal notice in the following two scenarios:
- If there are Rs 1 lakh or more credit card dues paid in cash.
- If there is a credit card purchase worth Rs 10 lakh or more.
Furthermore, part E in Form 26AS also records high-value transactions of Indian taxpayers.
Chopra further says that the Income Tax department may seek an explanation in case of cash settlement above Rs 1 lakh if the cash settlement is disproportionate to the declared taxable income of the user.
“Credit cards like any other spending channel will attract tax scrutiny if bills are paid in cash. In the case of credit cards, issuers are required to report credit card bill payments in excess of Rs 1 lakh. This does not mean that if a payment of over Rs 1 lakh will definitely attract scrutiny, but if an individual’s cash settlements are disproportionate to their declared taxable income, the IT department will seek an explanation,” says Chopra.
How much can you spend with the credit card without drawing taxmen’s ire?
Chopra says that the issue is not with spending with a credit card. As long as the spending and bill repayment is through digital channels and the individual has made purchases as per their declared taxable income, the taxman doesn’t bother. However, cash payments above Rs 1 lakh may be flagged.
Secondly, high-value transactions are also flagged, and the taxman could look into such transactions in specific cases where a single spend is disproportionately high for the individual’s income.
“If you fall into any of the above-stated scenarios, then it will be better to prepare for substantial penalties, as you know that the Income Tax department can trace the credit card expenses and will definitely send you a legal notice for excessive credit card bills of yours,” says Soni.
What should credit card users do?
Experts say it is always better to avoid spending unnecessarily with a credit card as it may have other financial implications for your credit profile. But it is okay to use a credit card if you can afford to pay back the bill in time.
“You should avoid overspendings on unnecessary online shopping, eating stuff, and other accessories. Likewise, you can avoid such a situation by simply limiting your credit card usage. Hence, stick to your monthly budget and ceases your extravagant credit card payments! It definitely helps to shun the awkward situation of any income tax scrutiny,” suggests Soni.
