Taxation of Cashback: How to Deal with Taxes on Cashback?

What is a cashback?

A cashback is an amount returned on the total amount that you have spent. When making a transaction, you are required to pay the full amount for the product or service. Thereafter, you get a cashback, either instantly or after a specified time.

Different types of cashbacks?

Cashbacks are, primarily, or two types which are as follows –

• Instant cashbacks
• Deferred cashbacks

Instant cashbacks, as the name suggests, are cashbacks which are offered immediately after you pay for a transaction. Instant cashbacks are usually offered by mobile payment wallets wherein, after you make a payment from the wallet, you get a cashback back in your wallet. For instance, suppose you book movie tickets through your mobile wallet for a total of INR 1000. There is a cashback offered by the wallet wherein 10% of the transaction value is allowed as cashback. So, after you buy the movie tickets from the mobile wallet and pay INR 1000 for them, INR 100 would be credited back to your mobile wallet immediately as cashback earned on this transaction.

Deferred cashbacks, on the other hand, are cashbacks which are allowed after a specified time period. These types of cashbacks are usually offered by credit cards or debit cards wherein, after you make a transaction, the cashback is credited to your card account within 1-3 months. For instance, your credit card is allowing you a cashback of INR 3000 if you buy a particular brand of mobile. So, after you buy the mobile, the cashback of INR 3000 would be credited to your credit card account within 60-90 days of your purchase.

Tax treatment of cashbacks

Cashbacks are nothing but a benefit that you receive on your purchases. Cashbacks seem like an income and so many are confused about their tax implications. Let’s understand how cashbacks are taxed –

• If the good, on which the tax payer earned a cashback, is purchased for the use in the tax-payer’s business or profession and the good purchased is not a capital good, there are two ways of taxing the cashback. One, the reduced cost price of the good, i.e. the price of the good after deducting the cashback from the amount paid, can be availed as a deduction. Two, the total amount paid for the good, can be availed as a deduction from business income and the cashback should be shown as ‘other business receipts’. The cashback, in this instance, would then be taxed as a business income.

Example – A business bought stationery for INR 10,000 on which it received a cashback of INR 2000. The business can, either claim a deduction of INR 8000 for the purchase of stationery or claim a deduction of INR 10,000 and record INR 2000 as ‘other business receipt’. In the second instance, though the whole cost would be allowed as a deduction, the cashback would be added to the business income and then it would be taxed.

• If the good, on which the tax payer earned a cashback, is purchased for the use in the tax-payer’s business or profession and the good purchased is a capital good, the calculation of depreciation on the good purchased would be done on the net price of the good, i.e. on the price after deducting the cashback. Alternatively, the business can calculate depreciation on the total value of the good purchased and the cashback received should be added to the business income and then taxed.

Example – A business bought a computer for INR 50,000 on which it received a cashback of INR 5000. If the rate of depreciation is 10%, the business can either calculate depreciation on INR 45,000 or on INR 50,000 in which case the cashback received of INR 5000 would be added to the business income and then taxed.

In case of buying goods for personal use, Section 56 (2) (x) of the Income Tax Act comes into play. The section specifies the provisions of gift tax. The section states that if any sum of money is received by the taxpayer without any consideration, then the same sum of money would be subject to taxation. However, the sum of money would be taxable only if it exceeds INR 50,000. So, given the provisions of this section, there might be a tax implication on cashbacks. Here are such implications –

• If the taxpayer buys goods or services for personal use, the cashback received would be taxable in the hands of the tax-payer under the category ‘Income from other sources’. The cashback would be considered as a gift under the provisions of Section 56 (2) (x) of the Income Tax Act and if the aggregate cashbacks are more than INR 50,000, they would be subject to taxation as per the income tax slab rates of the taxpayer.

Example – The taxpayer has made several transactions over the financial year for buying goods and services for personal use. The aggregate cash back that the taxpayer has received is INR 30,000. Since the cashback is below INR 50,000, it would not be taxable. However, if the taxpayer would have received aggregate cashbacks of INR 55,000, the total cashbacks received would have been taxable at the slab rates of the taxpayer.

• If the taxpayer buys goods or services for personal use and the aggregate cashbacks are below INR 50,000 but the taxpayer has received other gifts during the financial year and the aggregate gifts received with the cashbacks exceed INR 50,000, cashbacks would be taxable.

Example – The taxpayer bought two goods on which he received a cashback of INR 5000 and INR 10,000. The taxpayer also received cash gifts from non-relatives totalling INR 40,000. In this case, though the total cashback received is lower than INR 50,000 but the aggregate value of gifts received and cashbacks is INR 55,000 and so the cashbacks would be taxable.

So, this is how taxation on cashbacks works. Understand these simple instances of how and when cashbacks are treated so that you can file your returns properly.