Taxation of Cashback

The world of e-commerce is growing at a fast pace offering a plethora of offers like cashbacks, discounts, and rewards attracting people. As more people turn to online shopping, these incentives make it all the more attractive and economical. Amongst these, cashbacks, often provided via Payment wallets or credit cards provide significant financial benefits.  Let’s understand how cashbacks work, types of cashbacks, tax implications and much more. 

Sneak-Peek into the blog to learn the following aspects:

• What is a cashback
• Types of Cashback
• Tax on Cashback for Businesses
• Tax on Cashback for Individuals
• Conclusion 

What is a Cashback?

Cashback is a type of incentive wherein consumers are returned a portion of the amount spent on any purchase. It aids in reducing the overall cost of purchase, making it financially beneficial for a user.

Types of Cashback

Instant Cashback

Such Cashbacks are applicable to the same transaction only. For instance, suppose there is an offer, and you book a cab through an online app to ride from point A to point B. The normal fare may be Rs 400, but due to the offer of instant cashback of Rs 100, the amount payable at the end of the trip will be Rs 300.

Deferred Cashback/Cashback referral

Such Cashbacks are applicable to the next transaction done. For instance, If you book a cab through an online app and you refer your friend, you will receive a cashback referral if your friend also books a cab through the same app. Now, such cashback referral earned can be used when you next book your cab.

Tax on Cashback For Business

Basically, we can interpret Cashback as the discount given against any expense/purchase made. Since it reduces the cash outgo whether applicable to the same transaction or the next transactions. So, in the case of a person doing business, if he wants to claim these expenses in his books then the expense net of instant cashback should be claimed.

If, in the example of instant cashback quoted above, a person wants to claim the expense of a cab as a conveyance in books, then Rs 300 should be claimed. In the case of deferred cashback, the transaction to which such cashback is applied should be claimed net of the cashback. If you are not doing any business or you are not claiming these expenses anywhere, then there is no specific accounting treatment of the cashback.

Tax on Cashback For Individuals

For individuals, cashback received as part of a purchase (e.g., from credit cards, e-wallets, or online shopping platforms) of goods/services for personal use is treated as a gift u/s 56(2) of the Income Tax Act, 1961 and taxed at the applicable slab rates, if the sum of money without consideration exceeds Rs. 50,000 However, if the cashback received is less than Rs. 50,000, its an exempt income and should be reported in the ITR as an exempt income.