Tax implications on Cashback
Cashbacks
Cashbacks are incentives or an offer of money as a present that stores/banks/apps are offering to their customers. A cashback can either be instant or deferred till a specified time or till the next purchase/transaction.
Cashback v/s Discounts
By the definition of cashback, it is most often mistaken for discounts. However, cashback is not a discount. When a customer receives a discount, he/ she pays the discounted amount. Whereas, when a customer pays for the product in full and receives the incentive (like money/tokens) as a credit in his / her card/account/wallet etc then it is called “cashback”.
Hence, conceptually “cashback” is not merely a discount. However, for books of accounts and taxation purposes, a cashback can be treated like a discount in certain circumstances.
Taxation of Cashbacks:
Cashbacks pertaining to Business or Profession
If the taxpayer receives the cashback on the purchase/payment of its business-related expenses then, the expenses will be reduced to the extent of the cashback earned. If the cashback pertains to capital goods then the cost of goods net of cashback should be capitalized. This treatment is similar to discounts/rebates.
Cashbacks pertaining to Personal Expenditure
If you receive cashback on expenditure pertaining to your personal expenses/payments then it need not be treated separately since the personal expenditure is not claimed/mentioned in your tax return.
However, cognizance of Section 56(2) (x) of the Income Tax Act can be taken in case the cashback received is significant.
What does section 56(2) (x) say?
Section 56 (2) (x) mentions that “where any person receives, in any previous year, from any person or persons on or after the 1st day of April 2017, any sum of money, without consideration, the aggregate value of which exceeds Rs. 50,000, the whole of the aggregate value of such sum is considered as “Income from Other Sources”.
In other words, if any gift or money received from any person exceeds Rs 50,000 in a year then it is taxable. Accordingly, if the aggregate of cashback received on your card/bank/ wallet etc exceeds Rs 50,000 in a financial year then it can be considered as Income from Other Sources in a Tax return and the entire amount is taxable.
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