Sharing your credit card for rewards? It could trigger a tax headache

Business Standard

12 hours ago

Do you let friends use your credit card for big purchases, or swipe it for others to earn cashback and reward points? It may sound like a harmless way to make some extra money, but tax experts caution that it can put you on the Income Tax Department's radar.
That's exactly the situation a Reddit user claims to be in. Identifying himself as a student with no job or business, he revealed spending nearly Rs 24 lakh on a credit card in a single year, most of it by letting friends use the card in exchange for cashback and reward points. The massive spend now shows up in his Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), leaving him worried about possible tax notices.
Why this is a red flag for tax authorities
Under the Income-Tax Act, banks must report credit card payments exceeding Rs 10 lakh a year as Specified Financial Transactions (SFT).
'In this case, the expenses are not commensurate with the student's declared income, which is nil. The department could treat the funds used to pay the bills as unexplained income under Section 69 and impose heavy penalties,' said Ritika Nayyar, partner, Singhania & Co.
Nayyar added that while cashback on personal expenses is usually treated as a discount, if total annual cashback exceeds Rs 50,000, it may be taxed as a gift under 'Income from Other Sources'. For simple income sources, ITR-1 could apply, but the choice of form depends on the individual's income profile.
Scrutiny triggers and legal exposure
'The transaction qualifies as high-value under Section 285BA read with Rule 114E,' said Saumya, associate, PSL Advocates & Solicitors.
'Tax officers look for mismatches between repayment sources and declared income, multiple cards splitting large spends, high foreign transactions, or signs of money rotation,' she added
She warned that letting friends use a credit card violates bank terms and could lead to liability under the Prevention of Money Laundering Act (PMLA) or even cheating provisions under the Bharatiya Nyaya Sanhita.
Safer routes for reward hunting
According to Shefali Mundra, tax expert at ClearTax, 'Using a card for others' spending can breach agreements and invite money laundering suspicion. Instead, use cards for personal expenses, maintain transaction records, and report substantial cashback earnings in tax returns.'
She cites the case of an Ahmedabad trader who lost Rs 32 lakh after allowing a friend to use 34 credit cards, a costly reminder that 'cashback chasing' can backfire.
Bottom line: In the age of AIS and SFT reporting, spending far beyond your declared means, even in the name of reward points, risks drawing the taxman's attention, along with potential legal consequences.