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Income Tax on Cashback

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Sakshi Shah

IFOS
Income Tax
Income Tax on Cashback

Cashback is a reward for a customer on the purchase of goods or services. The calculation is a percentage of the purchase amount. Cashback is different from Discount. While the discount is a deduction from the purchase amount, cashback is a reward as a percentage of the purchase amount which the customer can utilize on the next transaction. Under this article, you can read about Income Tax on Cashback in different situations.

Types of Cashback

Instant cashback is a cashback offered immediately once the customer pays for the transaction. For example, if you book a movie ticket on an online app under an offer of 10% instant cashback. If the movie ticket is for INR 500, You are liable to pay INR 450 only (500 – 10% cashback).

Deferred cashback is a cashback that the customer can utilize on the next transaction. For example, if you book a movie ticket on an online app under the referral offer and you refer the app to a friend, you will receive a cashback. You can utilize this cashback on your next transaction.

Income Tax on Cashback – Business Expense

Cashback is a reward or benefit that a customer receives on the purchase of goods or services. It is also a discount since it reduces the cash outgo on the same or next purchase of the customer. Thus, it is considered as an income and is taxable. Let us understand when such cashback is treated as an income and the taxes on cashback.

Revenue Expense for Business

If a business purchases goods or services (not a capital good) and earns a cashback, it can claim the purchase amount reduced by cashback as a revenue expense. Alternatively, the business can claim the purchase amount as an expense and report cashback as an income.

Example

ABC Enterprises purchased online stationery worth INR 5,000 and received an instant cashback of INR 1,000. They can claim net amount of INR 4,000 as an expense. Alternatively, they can book INR 5,000 as an expense and INR 1,000 as an income.

Capital Expense for Business

If a business purchases goods or services (capital good) and earns a cashback, it can treat the purchase amount reduced by cashback as an asset (capital expense) and claim depreciation on the same. Alternatively, the business can claim the entire purchase amount as an asset, report cashback as an income, and pay tax on it.

Example

ABC Enterprises purchased a laptop worth INR 50,000 and received an instant cashback of INR 5,000. They can claim the net amount of INR 45,000 as an asset and claim depreciation expense on the same. Alternatively, they can report INR 50,000 as an asset, report INR 5,000 as an income and pay tax on it.

Income Tax on Cashback – Personal Expense

If an individual purchases goods or services for personal use and earns a cashback, it is as a gift as per Section 56(2) of the Income Tax Act. As per Section 56(2), if a taxpayer receives any sum of money without any consideration that exceeds INR 50,000, it is taxable at slab rates.

Therefore, if the aggregate cashback during a financial year is up to INR 50,000, it is an Exempt Income. The taxpayer should report such cashback as an Exempt Income in the ITR filed on the Income Tax Website.

If the aggregate cashback during a financial year exceeds INR 50,000, it is a taxable income under the head Income From Other Sources and taxable at slab rates. The taxpayer should report such cashback as IFOS income in the ITR.

If the taxpayer has received aggregate cashback and has other gifts during the financial year, the aggregate amount of gifts and cashback exceed INR 50,000, cashback would be taxable.

FAQs

How is Cashback different from Discount?

Discount is a deduction from the purchase amount and the customer pays the net amount only. Under cashback, the customer pays the full amount and then receives a cashback. Discount is offered instantly and cashback may be offered instantly or after a specified time period.

Should I report Cashback in my Income Tax Return?

Yes. It is advisable to report cashback income in the Income Tax Return. If the aggregate cashback during the financial year exceeds INR 50,000, taxpayer should report it as Income From Other Sources (IFOS) and pay tax at slab rates. However, if the aggregate cashback is up to INR 50,000, taxpayer should report it as Exempt Income in the ITR.

Is Cashback received on Credit Card / Debit Card Offers taxable?

Taxation of cashback on credit card/debit card offers is similar to any other cashback. If the taxpayer receives cashback on a personal expense, it is taxable if aggregate cashback exceeds INR 50,000 during the financial year. If the taxpayer receives cashback on a business expense, he/she should claim an expense for the net amount (purchase – cashback).

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