As per the data provided by RBI, in the last year alone, credit card transactions had surpassed other modes of payment by 3.7 times. Thereby stating how credit card usage has taken centre stage outshining the other means of payment.
Over the last few years, more and more people have resorted to using credit cards. The rewards, welcome bonuses, cashbacks, fee waivers, provision to pay the borrowed amount at a later date, and such other features that a credit card offers, has lured people into preferring credit cards over other forms of payment.
Although there is no harm in paying using your credit card, there will be tax implications if you overspend the provided credit card limit. This is particularly for credit card payments that are of high value.
Income Tax Implications for Credit Card Transactions
There are no distinct rules for expenses made through a credit card. However, it is requisite that banking institutions report any transactions that are high in value to the Income Tax Department as and when done. Such payments tend to draw the attention of the IT Department and you might be required to offer a plausible explanation for the same. Nonetheless, if you file your income tax returns accurately and pay your taxes with due diligence you have nothing to be worried about.
Every financial year, institutions that provide banking services are required to report all transactions that are of high value to the Income Tax Department. This is not restricted to transactions made through credit cards alone, but are also applicable to high value purchases, sale, deposits and withdrawals.
The financial institutions are expected to fill Form 61A, which is often referred to as the Statement of Financial Transactions and report such transactions. Moreover, even common taxpayers have to report transactions that are of high value through Form 26AS.
Once the transaction has been reported, the Income Tax Department evaluates the said transaction and verifies to check if the same has been filed under the Income Tax as well. Based on what the outcome is, the IT department will determine whether or not to scrutinise the credit card transaction.
Credit Card Transactions that Attract Tax Scrutiny
When the credit card payments you make exceed a certain limit, it unintentionally attracts scrutiny from the Income Tax Department. There are two cases under which a legal notice might be sent to you.
They are stated below:
• If the credit card payment due exceeds the limit of ₹1 Lakh and is paid in cash
• If the purchases made using the credit card surpass the limit of ₹10 Lakhs
The Income Tax Department does not carry out an investigation on your credit card transactions above ₹1 Lakh, if the settlement made is well within the taxable income declared by you. Nonetheless, if the credit card payment made is disproportionate to your declared income liable to tax, it can raise a concern.
The Ideal Credit Card Payment Range
As long as your credit card payments are made using digital channels and remain in tone with the income declared by you, it is unlikely that you will be under the radar of the Income Tax Department. Nevertheless payments made through your credit card that are above ₹1 Lakh will be marked. Additionally, high-value transactions will also be subject to scrutiny especially if a single transaction outweighs your declared income.
Therefore, it is advisable that you do not overspend your credit limit and keep a tab on your credit card expenses. Having said that, if you happen to fall under any of the cases mentioned above, you will be liable to paying penalties since the Income Tax Department will observe your high-value payments and send a legal notice to you.
Things You Can Do as a Credit Card User
In order to protect yourself from such situations, you can follow the steps given below:
• Stick to your planned monthly budget
• Make sure to pay your credit card bills on time every month
• Refrain from making extravagant purchases that exceed ₹10 Lakhs using your credit card
• Avoid paying your credit card dues in cash if they surpass the ₹1 Lakh limit
• Keep your credit utilisation ratio below 30%
• Eschew from using your credit card more than the prescribed 80% limit.
• Maintain a record of all your credit card payments
• Limit the usage of your credit card
The Income Tax Department is obligated to keep a track of all transactions that are high in value to control the evasion of tax. Therefore, every time you make a credit card payment that is of a high value, the respective financial institution is mandated to report your transaction if it exceeds the pre-set maximum limit. This is applicable to all forms of high-value transactions, regardless of the mode of payment. If your transaction gives rise to suspicion, you might be expected to provide a clarification.
Therefore, be judicious with the way you use your credit card, and file your income tax returns in accordance with your income and expenditure.