Fake rent payment with credit card: People, particularly millennials, are resorting to various tactics to manipulate credit card reward systems to earn even more rewards and cashback
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In recent years, credit cards have become an essential part of our lives, providing us with convenience, security, and a variety of perks such as cashback, reward points, and discounts. The surge of the digital economy has resulted in a rapid increase in credit card usage in India.
Using a credit card for all your expenditures can prove highly advantageous, allowing you to accumulate reward points, cashback, and airmiles by merely shifting all your expenses onto your credit card.
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However, people, particularly millennials, are resorting to various tactics to manipulate credit card reward systems to earn even more rewards and cashback. One of the most commonly used methods is to make fake rent payments to friends and family members.
Numerous platforms now permit tenants to use their credit cards to pay their monthly rent for a nominal fee (typically 1% of the rent amount), with the funds transferred directly to the landlord’s bank account. This presents an excellent opportunity to earn rewards and enjoy an interest-free credit period of around 45 days. However, if you employ this method to manipulate the credit card reward system or transfer credit limits to banks, you must be aware of the consequences.
Why do people make fake rent payments using credit cards?
There are several reasons why someone might make a false rent payment to a friend or family member using a credit card, including:
- Claiming tax deductions
- Earning more reward points, cashback, or airmiles using credit cards
- Meeting credit card spending targets
- Converting credit card credit limits to bank account balances for business purposes
- Converting credit card limits to bank accounts in case of financial emergencies.
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What are the issues linked to fake rent payments using a credit card?
Tax Benefits Fraud: Firstly, paying fake rent and submitting fraudulent rental receipts to claim tax deductions is illegal. Such malpractices are actively monitored by the Income Tax Department, and tax evaders are issued notices. The Assessing Officer can demand proof of the claimed deduction, and failing to provide the necessary documentation can lead to disallowance of the exemption. Submitting fake bills intentionally can attract a penalty of 200% and interest under sections 234A, 234B and 234C of the I-T Act.
Reporting Rent as Income: If a friend or family member receives rent, they must report the received amount as their income while filing their tax return. If the rent exceeds INR 1 lakh in a financial year, the landlord’s PAN card number must be entered, and the Income Tax Department expects rental income to be declared in the Income Tax Return filed. Failure to do so could result in receiving an Income Tax notice.
Deducting TDS on Rent Payments: If the rent paid exceeds a specific threshold, the tenant must deduct tax at source (TDS) at a 10% rate under Section 194-IB of the Income Tax Act. If the total rent paid or expected to be paid throughout the year exceeds INR 2.4 lakhs for audit cases and INR 50,000 per month for non-audit cases, the payer of the rent must deduct TDS under Section 194I of the Income Tax Act. The limit of INR 2.4 lakhs (audit) / INR 50,000 per month (non-audit) applies to each payee, not for each property.
Should You Deduct TDS on Rent?
a. Companies, firms, trusts or associations of persons, and individuals or HUFs, where the payer is engaged in a business whose accounts were audited is currently liable to deduct TDS on rent exceeding INR 2.4 lakhs.
b. Individuals and HUFs not covered in the above section can deduct TDS at 5% if the rent paid exceeds INR 50,000 per month.
Failure to deduct TDS on rent may result in a penalty interest of 1% per month until the TDS is deducted.
To ensure compliance with income tax regulations when paying or receiving rent in India, it is essential to be aware of the relevant tax rules and obligations. Seeking guidance from a tax professional or chartered accountant based on individual circumstances is highly recommended. Therefore, it is imperative to avoid paying fake rent using credit cards for the purpose of earning rewards, completing any kind of spending target, or transferring limits to the bank. As mentioned earlier, paying fake rent is illegal and may result in serious consequences, including receiving income tax notices.
