Income Tax on Credit Card: How to Avoid Income Tax Notices - ABCD Aditya Birla Capita

A credit card is a highly useful tool if one uses it wisely and with caution. It is a great financial instrument that not only allows you to buy now and pay later, but also gives you added benefits, discounts, cashback and much more.Additionally, if you want to build a good credit score , then you can use your credit card and pay its bills regularly on time. Your credit score will go up in no time and that can help you in securing a personal loan.Useful though it is, you must remember that frequent credit card usage for high value transactions may attract the attention of the Income Tax Department of India. Of course, making these transactions is perfectly legal if you’re fully and accurately filing your IT returns and paying income tax.The IT Department just has to make sure that people making high value transactions on their credit cards, or paying high dues for credit cards are reporting the same in their ITR and are not carrying out any tax evasion.Now there may be some situations where you may end up with a notice from the Income Tax Department with regards to your credit card usage.You Are Likely To Receive A Notice From The IT Department In The Following Scenarios:

• If you are paying credit card dues of Rs. 1 lakh or more.
• If you are making a purchase with a credit card for products or services worth Rs 10 lakh or more.

If you ended up doing any of the above, then you must report it while filing your Income Tax Returns. The Income Tax Department may scrutinize your transaction and ask you to prove the source of such funds and whether you’re paying the applicable income tax on it. But we advise that it is probably better to not overspend on your credit card and avoid scrutiny from the Income Tax Department.

Banks, registrars, companies and post offices are mandated to report transactions of a high value to the Director of the Income Tax Department whenever such a transaction occurs. Not just for credit cards, but any high value deposit, withdrawal, sale or purchase is reported by the bank to the Income Tax Department. These authorities are required to submit Form 61A, called the Statement of Financial Transaction.Following this report, the investigative wing of the Income Tax Department evaluates the high value transaction and verifies whether the same has been reported in the Income Tax Filing for the individual. From here on they can decide whether to scrutinize the transaction further or not.The IT department has amended Form 26AS to include high value transactions, including transactions through credit cards. Part E of Form 26AS includes information about high value transactions. If you want to report a high value transaction, make sure to include it in this section during income tax filing.

A tax notice after excessive spending on your credit can be avoided if you limit your credit card usage. Credit card companies offer reward points and cashback, and this may lead people to use their credit card for large transactions in order to secure discounts. Since a credit card is an electronic payment medium, every transaction gets logged in the system and goes on a permanent record. Thus a large transaction will be easily visible to the IT department.The best way to avoid a tax notice is to avoid overspending using your credit card, even if you’re filing your IT returns properly. This is just to avoid the unnecessary stress that you may encounter if a tax notice comes your way. Prevention is better than cure, as they say.But even if you do use your credit card above the threshold limit due to unavoidable reasons, make sure you file your Income Tax Return on time and mention your high value transactions in the given section. Your Income Tax Return should be in sync with the details in Form 26AS, including your credit card usage. Pay the appropriate tax liable to you and you may just avoid any tax notice due to your high value credit card transactions.

The IT department keeps track of high value transactions in order to curb the menace of tax evasion. Hence your bank is required to send them a report in case your credit card bills cross Rs. 1 lakh, or you make a purchase of Rs. 10 lakh or more. Not just for your credit card, but any transactions above a certain threshold are marked by your bank and they may even call you to enquire about the source of the transaction. Hence, you must use your credit card with caution and file your IT returns as per your income and expenses.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.