Crackdown on 3rd-party credit card payments: IT dept issues notices

The Income Tax Department has launched a major crackdown on individuals who use their own credit cards to make payments on behalf of others, primarily to earn reward points. With expenses shooting far beyond declared income in several cases, the department has begun issuing notices under multiple sections of the Income Tax Act.

According to officials, many credit card holders failed to disclose these transactions in their income tax returns. As a result, the department is treating such spending as unaccounted income, triggering tax demands and penalties. The growing trend of misusing credit cards for rewards and cashback has now firmly come under the tax scanner.

The Annual Information Statement (AIS) has significantly strengthened financial transaction tracking. The IT Department can now easily detect unusual payment patterns such as rent payments made via credit card purely to claim House Rent Allowance (HRA). Officials say the system swiftly flags inconsistencies between a taxpayer’s financial profile and credit card expenditure.

Unreported expenses are being taxed as undisclosed income, and penalties are being imposed under Section 270A. In cases where deliberate concealment is established, the penalty can go up to 200% of the tax due. Even reward points or cashback earned through such transactions are being added to taxable income.

To earn rewards, many individuals have been paying rents or other expenses for friends or relatives. Such artificial arrangements, often created just to claim HRA, are now leading to action under Section 69/69C, which deals with unexplained income and unexplained expenditure.

In cases involving company directors or consultants using personal cards for official expenses and claiming reimbursements, large reward earnings may also be taxed as business income under Section 28(iv).

For instance, a taxpayer reporting an annual income of ₹5–6 lakh but showing credit card spends of ₹10–15 lakh is almost certain to receive notices under Section 142(1) or Section 148A. Though there is no direct tax provision on reward points or cashback, significant cashback credits received directly in a bank account may attract tax liability.

Payments made merely to create a false appearance of rent transactions, or rewards earned through third-party spending, may also fall under taxable income.