A new wave of income-tax scrutiny is sweeping across India — and this time, the target is not undisclosed assets or shell companies, but the growing misuse of credit cards to artificially generate reward points and cashback. As banks tighten KYC and the tax department strengthens data-matching through AIS and SFT, practices like “manufactured spending”, card rotation, and fake rent payments are increasingly being treated as potential unexplained income or expenditure.
Why Credit Card Rewards Have Become a Tax Hotspot?
Over the past few years, India’s credit card ecosystem has exploded — fuelled by aggressive fintech campaigns, rent-payment apps, and high-value lifestyle cards. But the same systems have also given rise to behaviour that the tax department now sees as potential misuse:
- Transactions routed only to collect points, not to make real purchases
- Wallet loads followed by bank withdrawals
- Payment of rent to relatives only to reverse the amount
- Cards handed to friends for their personal or business spends
- Personal cards used for corporate expenses to accumulate rewards
With banks now required to report high-value card payments through Specified Financial Transactions (SFT) — usually where annual payments exceed ₹10 lakh — and these details appearing directly in the taxpayer’s Annual Information Statement (AIS), the department has a clear picture of spending patterns. This visibility has triggered a surge in compliance notices.
What the Department Is Flagging: Key Behavioural Patterns Under Scrutiny
1. Money Cycling & “Manufactured Spending”
One common method involves charging large sums via credit cards — often as “rent”, wallet loads or payments to related persons — followed by immediate refunds or transfers back.
The amount appears in SFT as genuine spending even though no real consumption happened, allowing the user to harvest cashback or miles.
Tax officers are treating such patterns as:
- Unexplained expenditure (Section 69C) where the source of funds to pay the card bill is unclear, or
- Unexplained money/investment (Sections 69/69A) where the financial trail does not match declared income.
A widely discussed example involves a Chennai-based individual who faced over ₹1 crore in tax demand after the department treated nearly ₹69 lakh of such card cycling as unexplained, since he had not filed returns.
2. Lending Credit Cards to Friends & Relatives
Many people share their cards with others in exchange for splitting reward points. The problem: the reimbursements often lack proper documentation.
While an ITAT ruling from Ahmedabad held that a friend’s misuse does not automatically make the expenditure the cardholder’s, assessing officers frequently:
- Treat the entire spend as the cardholder’s unexplained expenditure, or
- Treat the reimbursements as unexplained credits if the payer’s source of funds is unclear.
This can lead to additions under Sections 68, 69 or 69C.
3. Rent Payment Apps Used for HRA + Reward Games
Another trend involves routing “rent” through credit card payment apps while also claiming HRA exemption.
In some cases:
- There is no valid rental agreement
- The landlord does not declare corresponding rental income
- The transactions are reversed or lack economic substance
The department may both:
- Reject the HRA claim, and
- Treat the card payments as rotation for earning points, attracting additions under Section 69C.
4. Personal Cards Used for Business Payments
Directors, consultants and freelancers often pay corporate expenses with their personal cards and keep the rewards.
While reimbursements themselves are not income, the rewards may be taxed as:
- Business perquisites (Section 28(iv)) if linked to business activities
- Income from other sources if cashback is redeemed into the bank, especially above ₹50,000 per year
This grey area is becoming a regular point of inquiry.
5. Lifestyle Mismatch: High Card Spend vs. Low Declared Income
Even without misuse, a mismatch between income and lifestyle — e.g., a ₹5–6 lakh annual income but ₹12–15 lakh credit card spend — frequently triggers:
- AIS mismatch alerts
- e-Campaign notices
- Scrutiny under Section 142(1) or reassessment action under Section 148A
Legal Provisions Most Commonly Invoked
Depending on the nature of the transaction, the department typically relies on:
- Section 69C: Unexplained expenditure
- Sections 69/69A: Unexplained money, wallet balances or deposits
- Section 28(iv): Business-linked reward benefits
- Section 56(2)(x): High-value rewards/cashback treated as “money without consideration” (a debated area)
Penalties and interest for under-reporting — including Sections 234A/B/C, 270A and even 271AAC — may follow.
Are Reward Points Themselves Taxable? The Practical View
Generally NOT taxable when:
- Rewards/cashback act as a simple discount on personal purchases
- Points are used for flights, shopping or statement adjustments
Risk increases when:
- Cashback is credited as cash to a bank account
- Rewards arise from someone else’s spending
- Points are generated through artificial rotation
In reality, the department is far more concerned with the underlying transactions than with the rewards themselves.
Types of Notices Being Seen Across India
- AIS / Compliance Portal Alerts
– Asking users to explain high-value credit card activity - 142(1) / 148A Notices
– Seeking bank statements, card statements and source of funds - Assessment Orders Treating Transactions as Unexplained
– Especially when returns were not filed or income is disproportionately low
How Taxpayers Should Respond?
1. Reconcile everything before replying
- Collect full-year statements for all cards
- Match every credit card payment with bank entries
- Create a category-wise summary (rent, utilities, travel, wallet loads, business expenses)
2. Separate legitimate expenses from rotation
Show documentary evidence for genuine spending. For manufactured spending, evaluate whether to accept a partial addition or declare income voluntarily.
3. Use the Compliance Portal carefully
Provide clear explanations with proof — vague replies often lead to full scrutiny.
4. Consider updated returns
If misreporting is discovered, an updated return under Section 139(8A) may reduce penalties.
Practical Do’s & Don’ts for Credit Card Users
Do
- Maintain a clear money trail for third-party payments
- Keep card spending proportionate to reported income
- Disclose high-value monetised rewards
- Treat business-related rewards appropriately in accounts
Don’t
- Engage in rent payments solely for reward points
- Run wallet-bank-card loops
- Lend your card casually
- Ignore AIS mismatch messages
Conclusion: The Era of Invisible Credit Card Activity Is Over
India’s tax authorities are now closely tracking digital spending patterns. What was once considered harmless “reward optimisation” is increasingly being examined under the lens of unexplained income. As jurisprudence evolves, the guiding principle for taxpayers is clear:
Enjoy your reward points — but ensure every rupee behind them can withstand scrutiny.
Read More: Income Tax Dept. Seeks Justification for Household Expenses, Including Haircuts and Perfumes
