A line of short-term borrowing, credit cards are flexible borrowing instruments that come with the highest interest rates among most personal finance tools. The major benefit when using a credit card is that it helps build your credit score. Further, when it comes to utility, a credit card simplifies payments, assists with tracking expenses, and has benefits on offer from the lenders that could be highly valuable.
As part of the use of your credit card is the income tax requirement for statement of financial transaction (SFT), under Section 285BA of the Income Tax Act, that helps the tax department track transactions and curb evasion.
Avoid sharing credit card with friends, family
However, sharing your credit card with friends and family could lead to attention from the Income-Tax department. You may do so to accumulate a good credit score on a particular card or ensure lucrative offers and points for it. But, if your reported income is not sufficient to pay back your credit card debt, or your expenditures far exceed your income capacity, it may trigger a notice from the authorities.
Notably, an I-T notice is a formal communication from the tax department and can be sent for a number of reasons either before or after you file returns. It does not automatically mean a taxpayer is in default and could simply be sent for correction of mistake(s) in your documentation.
Are you at risk of getting an I-T notice?
Each tax year, your Form 26AS aka Annual Information Statement (AIS) is generated and can be accessed on the Income-Tax e-filing portal or approved bank’s websites. The document is a comprehensive display of a taxpayer’s financial statement for the year with information after SFTs, TDS, TCS, advance tax and other transactions.
When you file your returns, the department may take a look at your reported income against your transactions (expenditures, purchases, etc.) and in case of a single credit card used by multiple people, the outgo may look higher that the card holder is able to afford. This differential could raise a red flag for the I-T department.
For usual transactions (food, grocery, personal items) you will not have to report credit card transactions specifically in your returns. However, when it comes to business expenses, or use for official reasons, the expenditure, cost and any profit will have to be reported in your returns. Mismatch here could also lead to an I-T notice.
Even in case of multiple credit cards, PAN is linked to all your banks (and financial tools) and provides the I-T department with an overview of your financial activity, versus reported activity. Notably, banks and credit card companies are also required to report high value transactions through SFT. If probed, the department could also send an inquiry notice to gather information.
What steps can taxpayers take?
- Ensure you have full and proper records of your credit card transactions and bill payments.
- If money to repay your credit card bill came from friends and family who share the card, keep documentation to prove the source of funds.
- If the funding is from gifts, retirement funds, sale of property, gold or other items apart from your salary, keep the proper documentation and record ready.
- If the credit card is for business purpose, maintain proper books and accounts of the expenditure and source of funds.
- Check your AIS, TIS, and Form 26AS to see that information reflected in the documents is accurate.
If you are unable to justify your bill payments the money over your reported income will be treated as unreported income and taxed as such, along with penalty. Thus, it is advisable to file your returns as accurately as possible, maintain proper records and documentations and avoid unnecessary high-value transactions for deals.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.