Big alert for credit card users: If you are also making this mistake, you will be in serious trouble..

Nowadays, most people use credit cards for reward points, cashback, and offers. Used correctly, it's a beneficial tool, but if the card is used excessively or improperly, these benefits can turn into tax problems. The Income Tax Department is now keeping a close eye on credit card spending.

Some people use their credit cards to pay for their friends' or relatives' expenses to earn reward points and then get the money back from them. Sometimes, money is moved around through rent payments, wallet top-ups, or payment apps. On the surface, it looks like spending, but there's no actual expenditure. The tax department may consider such transactions as 'fictitious expenses'.

Spending exceeding income is a red flag.
If your income tax return shows limited income, but your credit card statements show expensive travel, shopping, or luxury expenses, it immediately triggers an alert in the system. The Income Tax Department identifies such cases through data analytics and may ask you to explain the source of your spending.

Giving your card to friends is also risky.
Many people give their credit cards to friends or family members to use and receive cash or UPI payments in return. If there is no clear record of this money and the spending doesn't match your income, tax authorities may consider the entire expenditure as your personal income or treat it as unexplained income.

Rent and HRA-related schemes can also backfire
Some salaried individuals pay rent using their credit cards to claim HRA exemption, especially to parents or relatives. If the landlord-tenant relationship is not clearly established or the landlord hasn't declared the rent on their tax return, the tax department may disallow the HRA exemption. Receiving money back in the name of rent also raises suspicion.

Mixing business expenses with personal cards is a mistake
If you use your personal credit card to pay for company or business expenses and then claim reimbursement, it's crucial to have proper bills and records for every expense. Especially if the reward points or cashback are substantial, the tax department may consider it as an additional benefit or income. When are reward points taxed?
Generally, reward points are not taxed as long as they are used only as discounts. However, if they are converted into cashback or cash, and their value exceeds a certain limit in a year, they may be considered income and taxed accordingly.

How to avoid an income tax notice?
The most important thing is that your credit card spending should be in line with your declared income. The source of every transaction should be clear and documented. Keep receipts, invoices, bank statements, and reimbursement records safe, and avoid using your card for others' expenses unnecessarily.

Using a credit card wisely offers benefits, but trying to game the system for rewards can lead to a tax notice. A little caution can save you from a lot of trouble.

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