Income Tax on Credit Card | How to Save Yourself from an Income Tax Notice
As a frequent Credit Card user, if you are involved in making any high-value purchases, it will surely attract some amount of tax. Read further to know more about income tax on Credit Card transactions and how you can save yourself from an income tax notice.
We all require financial aid at some point in our life – be it a medical emergency, wedding, education or any other reason. In the financial ecosystem, you will come across a variety of options, but one of the ways to avail instant funds is through a Credit Card.
Credit Cards are usually a popular option, as they give you the ability to purchase now and pay later. Subscribing to a Credit Card is also not difficult, as there is minimum documentation involved in the application process. If you meet the income eligibility and have a decent credit score, you can easily get a Credit Card. One of the significant aspects you need to pay attention to is income tax applicable on Credit Card transactions. Make sure you do not cross the spending limit, as the Income Tax Department monitors the Credit Card transactions. Every Credit Card user’s detail is linked to their PAN Card and every expense is managed electronically by the Government. Any high-value transaction needs to be reported during the ITR filing.
You are likely to receive a notice from the IT department in the following scenarios:
- If you are paying Credit Card bills of over Rs 1 lakh.
- In case you are using the card to purchase any product or service costing Rs 10 lakh.
Moreover, it is necessary that you mention this amount at the time of ITR filing. In fact, you need to file all expenses incurred through the Credit Card. Once you file the expenses, you are liable to pay income tax on your Credit Card. Thus, overspending through Credit Cards should be avoided, even though it may fetch you reward points.
How does the Income Tax Department know about the high-value transactions?
Banks, companies, registrars, or post offices are required to report the high value transactions to the Director of IT Department. To intimate about the transactions, these authorities are mandated to Form 61A called ‘Statement of Financial Transaction’. The Investigation Wing of the IT Department then evaluates the high value transactions and checks whether the individual has included the Credit Card transactions in the ITR filing or not.
To trace such high value transactions, whether through Credit Card or any other mode, the IT Department has revised Form No. 26AS from Jun 01, 2020. Part E of the Form 26AS displays information about high value transactions.
How can you save yourself from an income tax notice?
While a Credit Card gives you a lot of flexibility, you should be careful about spending excess using a Credit Card, to avoid tax notice. Tax notices are usually issued based on the data filled in the tax system. As a taxpayer, you can avoid such notices by filing your tax returns well within time. Your income details, as declared in the ITR, should be in sync with Form 26AS and ensure that the Credit Card transactions do not cross Rs 2 lakh in a financial year. If you are making any high value transactions through the Credit Card, make sure you mention it at the time of ITR filing to eliminate receiving the income tax notice.
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