Do you pay tax on credit card cashback, referral bonus or old phone sale? Explained

Cashback earned through a credit card transaction, money earned by referring a friend to a fintech app, or proceeds from selling an old phone online may all put money or benefits in your hands. But the tax treatment of these receipts can differ depending on their nature and the circumstances.

While some benefits and sale of personal items may not be taxable, referral earnings may have different implications under income tax rules. Here’s how cashback, referral bonuses and old phone sales are treated, and when you may need to report them in your ITR.

Are credit card reward points or cashback taxable?

Under Indian tax rules, most credit card rewards such as cashback, reward points and air miles are generally viewed as discounts or a rebate linked to spending, rather than a separate income stream. As a result, they are typically not treated as taxable income, experts told Livemint.

There is no maximum limit beyond which tax authorities mandate credit card rewards or loyalty benefits be declared as taxable income under the Income Tax Act, according to Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited.

However, in cases where the benefit is not linked to underlying spend, is monetised by the individual or arises in a business or employment context, it may be taxable based on its character, Nishant Shanker, tax and FEMA expert at Navraj Global Advisors, added.

Both experts advised taxpayers that discount-linked consumption benefits do not require disclosure in the income tax return (ITR). It may only be needed if the rewards are substantial, monetised or linked to business spending.

How are referral bonuses from fintech apps taxed?

Let's say a fintech app gave you ₹1000 as a reward for referring a friend, in such cases it is different from cashback received on a purchase. The payment is made in return for an activity, rather than as a discount on something you bought. This distinction matters when determining its tax treatment.

For an individual who earns such rewards occasionally and is not running a referral activity as a business or profession, the income would generally be taxable under “Income from Other Sources”.

Section 56 of the Income-tax Act is the residuary provision covering income that does not fall under salary, house property, business or profession, or capital gains.

What about sale of a personal mobile?

Proceeds from the sale of some other personal belongings, such as furniture, car, scooter or even a dress, are exempt from tax.

This is because of a specific provision in the income tax laws that provides an exemption for gains made on the sale of ‘personal effects’ by an individual. The term refers to a movable property held by a taxpayer for their or a dependent family member's personal or day-to-day use.

Personal items that can be sold without attracting any tax liability include clothing and apparel, furniture, crockery or utensils, and daily use electronics such as mobile phones or laptops.

However, this definition of ‘personal effects’ do not include jewellery, archaeological collections, drawings, paintings, sculptures or any work of art, and income tax would be payable if the taxpayer makes any profit or gain from the sale of any of these six kinds of articles. Such items are subject to tax even if they were held for personal use.