Income Tax on Cashback

Cashback is a financial incentive or reward program offered by businesses to encourage customers to make purchases. In this system, a percentage of the amount spent on goods or services is returned to the customer in the form of cash or other benefits. However, If the aggregate cashback during the F.Y. exceeds INR 50,000 then there will be an income tax on such cashback and it will be taxable under the head Income from Other Sources.

Types of Cashback

• Instant 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

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 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 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 a 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 goods) 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 income tax return.

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 other gifts during the financial year, then it will be taxable if the aggregate amount of gifts and cashback exceeds INR 50,000.

Example

Mr. Mehta received a gift from his distant relative on his birthday worth INR 35,000 and over the financial year he had an aggregate cashback of INR 18,000. The total being INR 53,000 which is above the limit of INR 50,000, the entire amount will be taxable in the hands of Mr Mehta under income from other sources.

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