Credit Card Rewards: Are These Perks Tax Free Or Taxable?

Understanding how different credit card rewards work and their tax treatment can help you choose a card that’s right for you and maximise the benefits it has to offer to your advantage.

Based on your investments and expenses, the Income Tax Act offers various deductions under Sec 80C, 80D, and 80G to help you lower your tax liability. 

Source : ABPLIVE AI

Credit cards are an integral part of today’s financial landscape. A key financial tool, they make payments simpler and more secure while also offering value-added benefits on usage. Benefits like rewards, cashback, discounts, co-brand offers, and travel perks are among the most popular, catering to various lifestyles and needs, and allowing users to save on specific expenses. But, are you aware of the tax implications of these rewards and how they can affect your savings? Understanding how different credit card rewards work and their tax treatment can help you choose a card that’s right for you and maximise the benefits it has to offer to your advantage.

Types Of Credit Card Rewards

Credit card rewards can broadly be classified into the following categories:  

Cashback rewards: A percentage of your spend is credited back into your statement as cashback, shaving off part of the cost. For instance, your card offers 1 per cent to 3 per cent cashback on dining expenses. Cashback rewards are useful for those who want direct savings on expenses.

Reward points: You earn reward points for every rupee you spend using your credit card. The reward points accumulate over time and can be redeemed as statement credits, products, or discounts on a variety of expenses like travel, dining, and online shopping. Many banks also offer accelerated reward points on purchases from particular retailers or specific expenses like dining. For example, a credit card offers 1 reward point for every Rs 100 you charge to your card. Once you have accrued enough points, you can redeem them for discount vouchers, or products from the rewards catalogue offered by your bank. Credit cards with rewards programs are useful for frequent travellers or shoppers whose lifestyle is aligned with the rewards offered by their cards.

Travel rewards: This allows you to earn travel credits or air miles on spending which can then be redeemed for booking flights, hotels, or airport lounge access. For instance, a credit card offers 2 air miles for every Rs 100 spent and quarterly domestic lounge access. As the name suggests, these rewards are ideal for frequent travellers, allowing them to save on travel bookings.

Fuel rewards: Many credit cards offer a fuel surcharge waiver of up to a certain percentage on fuel purchases. This is usually in the form of discounts or cashback.

Co-branded rewards: Earn rewards and enjoy exclusive perks and deals on shopping with the partnered brand. For example, if you have a co-branded card from a major grocery chain, you may earn accelerated rewards on purchases made at their stores, along with discounts, early access to sales, or special value-added benefits.

Lifestyle & entertainment perks: Get dining discounts, movie tickets, and complimentary memberships. Some perks may be subject to spending requirements or conditions. 

Are Credit Card Rewards Taxed?

Have you ever wondered if your card rewards or cashback are taxable? According to the Income Tax Act, rewards and cashback above Rs 50,000 earned annually from credit card transactions are taxed under ‘Income from Other Sources’. If your annual rewards exceed Rs 5,000, the credit card issuer will deduct TDS at 10 per cent before crediting said rewards. However, discounts on purchases and redemptions for flights, shopping, or vouchers are tax-free. Reward points that are converted to cashback will be taxable. But, you can avoid tax liability if you use them for non-cash benefits like shopping or travel. Based on your investments and expenses, the Income Tax Act offers various deductions under Sec 80C, 80D, and 80G to help you lower your tax liability. 

Credit card rewards are, perhaps, among the most important features that people often consider when shopping for cards. The trick to getting the most out of your chosen card is to ensure it aligns with your needs and understand how those rewards are taxed so you can minimise your tax liability. 

(The author is the Senior Manager - Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)