Home >Money >Personal Finance >Do cashbacks help you save or are they just a marketing gimmick?
Nikunj Parsana, 37, IT professional (Nandan Dave/Mint)
Nikunj Parsana, 37, IT professional (Nandan Dave/Mint)

Do cashbacks help you save or are they just a marketing gimmick?

  • Cashbacks can be a great way to save, but they shouldn’t be the reason you opt for a product or service
  • Sellers use offers like cashbacks to hook customers, so choose wisely and don’t prioritise offers over quality

Nikunj Parsana, 37, an Ahmedabad-based IT professional, embraced the e-commerce phenomenon about seven years ago when not many others were hooked to it like they are now. From gadgets to diapers for their baby boy, Parsana and his wife Shweta started ordering everything online for the sake of convenience. Given how prolific the couple were when it came to buying things online, Parsana figured that he might as well make the most of it by availing all the online offers he could. He chanced upon the idea of cashbacks, not so popular at the time, but had his misgivings about whether they were as good as they sounded.

“I thought there would be some catch or conditions initially. As a family, we shop online a lot, so I wanted to know how we could make the most of offers and save some money," he said. Parsana did his research and started making the most of cashback offers, and he has since saved quite a bit on online purchases. But do they work for everyone and is there a fine print to watch out for?

How it works

The idea of a cashback offer sounds too good to be true. You make a purchase and the seller pays back a part of the price back. But, in essence, it is not all that different from a discount, but it benefits the seller more in the long term. A cashback simply means a part of your bill is returned to you, but this doesn’t always mean a cash discount. What you may get instead is store credit or points that get deposited in your account, which you can use only to buy things from the same retailer later.

From a seller’s view point, a cashback keeps the customers coming back. Say, you go shopping in a store and see that they have deep discounts on some items. You may go overboard shopping but this won’t necessarily mean you would go back to the shop again. On the other hand, if the cashier were to hand you a coupon as you got your purchases billed, which you could only redeem on a future purchase from the same shop, you are much more likely to go back to the store to make the most of the deal. This is a case of what behavioural economics terms sunk cost fallacy or the desire to make the most of something because you have already paid a part of the cost. This is how cashbacks work as well.

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“Credit cards and e-wallets offer cashbacks to promote the usage of their payment method. In this case, they fund the cashback on their own to encourage customer loyalty. When Paytm launched, there was no reason for people to start using it, but they incentivised it by offering Paytm cash every time you made a transaction. In doing so, some of us got used to the wallet and continue to use it even if there is no cashback on offer," said Swati Bhargava, co-founder of CashKaro, a cashback, coupons and price comparison website.

Dedicated cashback sites like CashKaro, Sitaphal and Coupon Duniya list offers for different sellers. To avail of them, you need to log on to the cashback site and choose the offer you like. The site will then redirect you to the seller website and you can carry out your purchase. “Cashback sites get paid by sellers for every sale that we drive to them. If you shop on any of our partner websites through your CashKaro account, we will receive the commission and pay you a cashback from that amount," said Bhargava.

Make the most of it

Gone are the days when coupons and vouchers came with a list of terms and conditions on the back that established that you couldn’t combine the offer with any other offers or discounts. Now, sellers and marketers are happy to let you have your cake and eat it too. “You can maximise your benefits by combining several offers and discounts. If you visit a merchant website like Amazon through a cashback website like CashKaro, you can get 1% to 5.5% cashback, depending on your purchase. You can also get a direct discount on the MRP from the seller. Based on personal experience, the average discount on an overall order is 10-15%. You can also get coupon codes and additional discounts for being a subscriber," said Gopal Gidwani, personal finance blogger, bachatkhata.com.

Also Read: Reliance Jio launches new plan, full cashback on recharges

But this doesn’t mean there are no caveats. Typically, cashback offers kick in only beyond a certain spending limit and the amount is usually capped. So while the banner on a popular e-commerce website might promise a 10% cashback, it could only apply to transactions of over 5,000. For big-ticket purchases, your cashback might work out to be a fraction of what is promised, because of this cap.

Also, pay attention to any fine print to avoid losing out on your cashback. “Sometimes sellers deny customers the cashback citing that they are not eligible due to terms and conditions as conveyed in fine prints. In order to play safe, consumers should read the offer carefully. Also, cashback offers should be trusted only from well-known brands," said Harsh Jaiswal, founder of Voxya, a consumer complaint redressal platform.

Another thing to keep in mind for large amounts as cashback is that cashbacks availed of during the purchase of goods or services for personal use may be treated as income from other sources, under Section 56 of the Income Tax Act. According to the Section, “If any sum is received without consideration in excess of 50,000 during the previous year, the whole amount shall be chargeable to tax." For instance, if you get, say, a 50% cashback on big-ticket items like televisions, the amounts may add up over the entire year.

Cover your bases

While the offers are always only a click away, the importance of doing your due diligence cannot be overstated. “The advantages of shopping online outweigh the disadvantages overall. Cashbacks are one such added advantage. There are so many cashback sites, and all of them claim to provide the best offers, but I wanted to find out for myself. I experimented with several websites and called customer service to find out more," said Parsana.

So what should you watch out for? “If an offer seems too good to be true, be cautious. If an unknown company is offering cashbacks, do your research before making the purchase. Watch out for websites with substandard design, grammatically unclear and incorrect product descriptions and bad reviews, as these are the biggest red flags that the website is fake," said C.S. Sudheer, founder and CEO of IamCheated.com, a site that registers and addresses consumer complaints for online fraud.

To look up customer reviews for a website, Google the name of the site, followed by the word “review". Also check the contact page of the website to ensure that you can reach them if you face any problems encashing your cashback or reward points. Keep in mind that these sites are not regulated, so you can’t claim compensation rights if you don’t get your cashback.

Parsana learnt this the hard way. “I experimented with a lot of cashback sites and with some of them, I never received the cashback amount at all or had to follow up constantly. Now I stick to the site that gives me the best customer service," he said.

Transacting through a fraudulent site can also end up compromising your bank and personal details. “Check the URL of the website. It should start with HTTPS. The S stands for ‘secure’ and payments made through such websites are safe. Be careful of mails offering attractive cashbacks. Clicking on unfamiliar links puts you at risk of malware and identity theft," said Sudheer.

Cashbacks can be a great way to save, but they shouldn’t be the reason you opt for a product or service. Keep in mind that sellers use offers like cashbacks to hook customers; so choose wisely and don’t prioritise offers over quality.

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