The festival season is now approaching, and with it, various offers and schemes are being offered by manufacturers, retailers and credit card companies to attract customers. This year, the offers are even more tempting, due to the economic slowdown. The offers are of various types. In some, along with the main item being purchased, you are offered additional items free. For instance, on purchase of a car, you may be given free car accessories, insurance or a gold coin; on purchase of a flat, you may be offered free furniture; on subscription to a magazine, you may get free books or magazines; and so on. In others, you are offered reward points, which can be redeemed for buying other items. Some schemes have a lucky draw through which customers can win a prize, such as a car or a refrigerator. While the schemes are tempting, you also need to keep in mind that is no such thing as a free lunch and the reward or prize that you receive may be subject to tax. So how are these gifts and rewards taxed?
The manner of taxation really depends upon the type of scheme and the nature of the expense in your hands. In the case of a scheme where along with the main item that you are purchasing, you are also given some additional items free of cost, the price that you are paying for the main item is really the price for the whole bunch of items. These are effectively being given to you at a discounted price. A discount cannot be regarded as income and, therefore, there would not be any tax consequences in respect of such free items received.
Taxation of winnings in lucky draw
In case of a scheme where a lucky draw is held and a few lucky customers win prizes, you are really receiving the prize without paying any consideration for it. If the payment or purchase that you have made, which qualifies you for the lucky draw, is your business or professional expenditure, then the prize that you receive is also a business receipt. The fair market value of the prize would then be taxed as your business income.
What if such payment or purchase is not business expenditure, but personal expenditure, as would be the case mostly? All winnings from lotteries, crossword puzzles, races, including horse races, card games and other games of any sort or from gambling or betting of any form are regarded as your income. The question really arises is whether such a lucky draw can be regarded as a lottery or a game. A lucky draw is certainly not a game, but it can be regarded as a form of lottery. The prize that you receive, therefore, would be taxable as your income. Further, such prize would be taxable at a flat rate of 30% and not at your tax slab, irrespective of the level of your income.
Tax on reward or loyalty points
So far as reward or loyalty points or frequent flier miles are concerned, these are merely entitlements which may or may not be utilized. No income, therefore, arises at the point of time on grant of reward or loyalty points or frequent flier miles. However, there could be a possible tax liability at the time when such reward loyalty points or frequent flier miles are utilized for obtaining a benefit. If the reward or loyalty points or frequent flier miles are earned in relation to expenditure, which is a business or professional expenditure, the benefit arising due to encashment of the reward or loyalty points or frequent flier miles would also be taxable as an income.
Further, if the benefit is also utilized for the purpose of the business or profession (for example, a ticket is taken by encashing frequent flier miles for a trip which is a business trip), then there would be no tax impact as the income is utilized for the purposes of business and would be regarded as a business expenditure. However, if the reward or prize is utilized for personal purposes, though the earning of the loyalty points or frequent flier miles was on account of your business or professional expenditure, then the personal benefit obtained would be taxable as your income.
Where, however, the expenditure which gave rise to the reward or loyalty points or frequent flier miles was a personal expenditure and was not claimed as a business or professional deduction, then the encashment of such reward or loyalty points or frequent flier miles would not give rise to a taxable income. This is on account of the fact that the expenditure incurred by you for earning the points would be regarded as having been paid for both the original purposes as well as for the benefits available under the loyalty programme.
Whenever an offer looks attractive to you, please consider the tax implications as well. Though it may appear as a free prize or reward, it may still end up costing you 30% of the value of such prize or reward by way of taxes thereon.
Gautam Nayak is a chartered accountant.