Whether rewards received in the form of "Cash Backs" or "Reward Points" are taxable?

Reward points and cash backs are a trend in day-to-day's life. These have become one of the best means of marketing and sales promotion. 

Whenever we are spending digitally, irrespective of the type of goods purchased or services availed, most of the credit/ debit card companies, e-wallet vendors provide us with reward schemes in the form of cash backs or some fancy points on the basis of the amount spent. This monetary benefit can be used in the form of discounts at time of transacting in future reducing the overall cost of the product(s) purchased or service(s) availed.

The following questions arise from the perspective of Income Tax on these benefits:

1. Whether these benefits will be considered as income?
2. Whether this income shall be taxable?
3. How shall these rewards be taxed?

Section 56(2)(x) of the Act explains the provisions of 'gift tax' (taxing a sum of money received without any consideration). This is applicable only if the benefits are in the form of cash and not in kind (benefits received other than cash). Moreover, in case these rewards are received in the course of business or profession, they would be taxable irrespective of whether they are received in cash or kind. 

For every assessee, these benefits shall be taxable only if the amount exceeds the limit of Rs. 50,000 in a financial year.

Therefore, cash backs and reward points (which are later converted in the form of cash benefits) would be considered as income in the hands of the assessee only if received in cash.

Now, if these benefits are considered as income, then, Income tax shall also be levied and they would be taxable under the head "Income from Other Sources" only if they exceed the threshold limit of Rs. 50,000.

Now let us understand the concept with the help of some examples:

There is also a judgement by the US court in the case of Konstantin Anikeev and Nadezhda Anikeev vs. Commissioner of Internal Revenue [2021] 127 taxmann.com 612 (TC-US) where the United States Tax Court passed the judgement in the favour of Internal Revenue Service (IRS), thus, taxing the rewards received by the assessee on payment of credit card bills.

 

After this ruling, there are high chances that the Income Tax department may open a Pandora's box of assessments and re-assessments in our country in order to tax its assessees based on the above judgement.

Disclaimer: This is just a basic concept. However, the applicability of the law shall depend on case to case basis.

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