In India, credit card transactions themselves are not directly taxed, meaning you are not charged a specific tax simply for using a credit card. However, certain expenses, fees, and transactions associated with credit card usage can have tax implications, particularly for high-value transactions, foreign transactions, and specific types of purchases. Here’s a breakdown of how credit card transactions are indirectly impacted by taxation, the relevant fees, and compliance requirements for individuals and businesses.

1. No Direct Tax on Domestic Credit Card Spending

Spending on a credit card, whether for personal or business use, does not incur direct income tax. For personal expenses, credit card transactions are generally non-taxable. However, the interest or fees associated with credit card usage are not tax-deductible for personal expenses, unlike some business expenses that may qualify.

2. TCS on Foreign Credit Card Transactions (Section 206C(1G))

When using an Indian credit card for foreign transactions, such as travel, shopping, or foreign subscriptions, the Tax Collected at Source (TCS) applies to certain transactions under Section 206C(1G):

• Rate of TCS:
  • 5% TCS is applied on foreign credit card transactions above ₹7 lakh in a financial year.
  • 20% TCS applies from July 1, 2023, on most foreign remittances except for medical or educational expenses, which remain subject to 5%.
• Example: If you spend ₹10 lakh in foreign currency on a credit card, TCS at 5% will apply on ₹3 lakh (exceeding ₹7 lakh), amounting to ₹15,000. If spending is under other remittances, TCS at 20% on ₹3 lakh would amount to ₹60,000.
• Claiming TCS Credit: TCS collected can be claimed as a tax credit at the time of filing your income tax return.

3. GST on Credit Card Fees and Charges

Credit card issuers charge various fees, such as annual fees, late payment fees, interest charges, and cash withdrawal fees. These charges are subject to Goods and Services Tax (GST):

• 18% GST is applied on these charges, increasing the total cost of these services. For example, if the annual fee is ₹1,000, an additional 18% GST makes it ₹1,180.
• Implications for Businesses: Businesses using credit cards for expenses can claim an input tax credit (ITC) on GST charged on business-related credit card fees. However, GST on personal credit card fees and interest is non-deductible.

4. Credit Card Rewards and Cashbacks

Cashbacks and rewards earned from credit card transactions are generally not taxable as they are considered discounts rather than income. However:

• Rewards in Cash: If rewards are received as direct cash deposits (and not as a discount on purchases), they may be viewed as income. Though typically minor, it’s wise to consult a tax advisor if cashback amounts are significant.

5. Income Tax on Credit Card Expenses as a Red Flag

The Income Tax Department monitors high-value credit card transactions to identify potential cases of tax evasion. Large or frequent credit card spending may trigger scrutiny if not supported by declared income, especially for transactions such as:

• Large Purchases: Luxury goods, high-end electronics, or real estate down payments.
• High Overseas Spending: Large foreign transactions are reported to tax authorities and may invite scrutiny if disproportionate to reported income.

Taxpayers should ensure that their credit card expenses align with their declared income to avoid tax inquiries or notices.

6. Claiming Business Expenses Paid by Credit Card

For business owners and professionals, credit card expenses incurred for business purposes can be claimed as deductions under Section 37 of the Income Tax Act, provided they are wholly and exclusively for business.

• Allowable Deductions: Expenses such as travel, office supplies, client entertainment, or marketing costs charged to a credit card are deductible if they meet the criteria for business expenses.
• Non-Deductible Items: Personal expenses on a credit card cannot be claimed as a deduction. Additionally, interest on credit card payments for business expenses may be claimed if it is directly related to business activities.

7. Reporting Credit Card Transactions in Income Tax Returns

Although there’s no need to report each credit card transaction, certain expenditures should be reported if they exceed specified thresholds under the Annual Information Statement (AIS) or Statement of Financial Transactions (SFT). These include:

• Credit Card Payments Above ₹10 Lakh: For credit card payments aggregating more than ₹10 lakh annually, credit card companies report these transactions to the tax authorities.
• Cash Deposits and Withdrawals: Cash transactions over ₹2 lakh via credit cards are also reported, as they may indicate undeclared income.

8. Tax Planning Tips for Credit Card Usage

To use credit cards in a tax-efficient manner, consider the following strategies:

8.1 Use Separate Cards for Personal and Business Expenses

Separating personal and business expenses across different credit cards simplifies tax filing and ensures only business expenses are claimed as deductions.

8.2 Track Foreign Transactions for TCS Threshold

Monitor foreign spending to stay under the TCS threshold, or prepare to claim TCS credit if spending crosses ₹7 lakh for medical or educational expenses, or otherwise prepare for 20% TCS on other remittances.

8.3 Keep Records of Business-Related Expenses

Retain receipts and documentation for credit card expenses related to business activities, as these records are essential for supporting tax deductions in case of an audit.

8.4 Pay Credit Card Bills on Time to Avoid Extra Costs

Avoid late fees, which attract 18% GST and cannot be claimed as a deduction. Timely payment also helps avoid high-interest charges, which can add to costs, particularly on unpaid business expenses.

9. Implications of Credit Card Transactions on Creditworthiness

While not a direct tax implication, credit card transactions can impact financial health and creditworthiness:

• High Credit Utilization: A high credit utilization ratio on your credit card can lower your credit score, potentially affecting your ability to secure loans.
• Tax-Friendly Credit Building: Using credit cards responsibly for tax-deductible business expenses and paying them off in full each month helps maintain a good credit score without incurring extra costs.

Conclusion

While credit card transactions are not directly taxable, their associated fees, interest, and overseas transactions can have indirect tax implications. For individuals, maintaining a reasonable spending pattern and monitoring high-value transactions helps avoid scrutiny. For businesses, claiming allowable deductions on business expenses charged to credit cards and keeping records for GST input credits can optimize tax benefits. Staying informed on TCS thresholds for foreign transactions and planning accordingly ensures tax efficiency and compliance with income tax regulations in India.

For more information on GST & other taxation related topics, visit bizconsulting.io.