Income Tax on Credit Card: How to Avoid Income Tax Notices

• Banks report credit card spends above ₹10 lakh a year to the Income Tax Department, and the amount now shows up directly in your AIS.
• International credit card spending remains exempt from TCS, unlike overseas debit card or forex transactions.
• Credit card dues of Rs. 1 lakh or more, or purchases worth Rs 10 lakh or more, can attract a notice if not reported properly.
• Reward points and cashback are generally not taxable, but sign-up bonuses in some cases may be.

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 on credit cards, are reporting the same in their income tax filings and are not carrying out any tax evasion. This scrutiny process has only gotten sharper recently, with your Annual Information Statement (AIS) now pulling bank-reported credit card data directly onto your income tax profile.

Banks report credit card spends above ₹10 lakh in a financial year to the Income Tax Department as a Statement of Financial Transaction (SFT), filed in Form 61A under Rule 114E of the Income-Tax Rules, 1962. This data now flows into your AIS, which you can view by logging in at incometax.gov.in and navigating to Services > Annual Information Statement. If your declared income doesn't reasonably justify your credit card spending, the Income Tax Department may flag the mismatch and send a scrutiny notice. Cash repayment of credit card bills above ₹1 lakh in a single transaction is also separately reportable under the same rule.

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, you are eligible for a loan. If you are purchasing with a credit card for products or services worth Rs 10 lakh or more.
• If you did any of the above, you must report it when filing your income tax returns. The Income Tax Department may scrutinise 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 not to overspend on your credit card and avoid scrutiny from the Income Tax Department.

Also Read: What is a Credit Card?

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 scrutinise the transaction further or not.

Earlier, this information appeared in Form 26AS, but the Income Tax Department has since consolidated all SFT-reported data, including credit card transactions, into the AIS, which gives a fuller picture than Form 26AS alone. It's worth checking your AIS before filing your return each year, rather than relying only on Form 26AS.

No TCS currently applies to international credit card spending.

TCS still applies to other overseas remittance modes under LRS – debit card transactions, wire transfers, and forex purchases – at 20% once your total LRS remittances in a year cross the threshold. This threshold was raised from ₹7 lakh to ₹10 lakh effective 1 April 2025 in Budget 2025, with the rate unchanged at 20%. Credit cards remain specifically outside this framework.

Also Read: 3 Different Types of Credit Cards

A tax notice after excessive spending on your credit card 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 cards 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 step 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 liability to you, and you may just avoid any tax notice due to your high-value credit card transactions.

If a mismatch does trigger a notice, it's usually issued under Section 143(1)(a) for a discrepancy between your ITR and SFT data, or under Section 148 for reassessment where the mismatch is significant. Here's how to respond: log in to incometax.gov.in and go to e-Proceedings > View Notices; compare your credit card spend as shown in AIS against your declared income; if the spend came from savings, gifts, loans, or inherited funds, keep documentary evidence ready; and respond within the 30-day window given on the portal. Don't ignore a notice; non-response can lead to an ex parte assessment with additions made to your income.

Reward points are generally treated as a discount or rebate rather than income and are not taxable in the hands of the cardholder. Cashback is treated the same way - as a reduction in the purchase price, not as income. One exception: if your employer issues you a corporate credit card and you personally accumulate reward points on business spending, those points could be treated as a taxable perquisite. Sign-up bonuses and referral bonuses, if substantial, may be taxable as income from other sources.

If you're self-employed or run a business, you can claim GST input tax credit on business expenses paid via credit card, provided they're backed by valid tax invoices. If you use a personal credit card for business spending, document each transaction with the invoice and the business purpose behind it. Mixing personal and business expenses on one card makes both ITR filing and GST reconciliation harder than it needs to be.

Credit Card EMI Interest and Charges – Tax Treatment

For salaried individuals, credit card interest and late payment charges are not deductible. For business owners, interest on a credit card used for business purposes is deductible as a business expense, provided it's properly documented. The same applies to EMI conversion charges and processing fees: deductible for business use, not for personal use.

File your ITR even if your total income is below the basic exemption limit and your credit card spending is high; this step prevents mismatch notices. Check your AIS every year before filing. Make sure all income sources, including freelance income, rental income, and interest, are declared. Keep records of large expenses such as medical expenses, education fees, or travel in case you need to explain them later. And avoid repaying credit card bills in cash above ₹1 lakh per transaction, since that's separately reported.

The IT department keeps track of high-value transactions 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 purchase 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.

Also Read: Credit Card Interest Rates