[Opinion] Reward Points | Real Risk – The Income Tax Crackdown on Credit Card Misuse in India

Adv. Ashish Parashar – [2025] 180 taxmann.com 798 (Article)

Indian taxpayers are increasingly receiving income-tax notices where the real issue isn’t the credit card itself, but the misuse of cards to farm reward points/cashback – “manufactured spending”, rent gaming, card lending, etc. The Department is now able to see these patterns clearly in AIS/SFT and is treating many such transactions as unexplained income or expenditure.

In the recent write up the author have tried to analyse the nitty gritties on the new emerging issues.

1. Background – Why Credit Card Rewards are Suddenly a Tax Problem

Over the last few years:

• Banks and Fintechs have aggressively pushed high-reward cards, rent-payment apps, tax-payment via cards and wallet loads.
• Users, in turn, started “manufactured spending” – rotating money through cards and payment gateways purely to earn points/cashback, without any real underlying consumption.
• The Income-tax Department has scaled up data analytics and AIS/SFT-based profiling to flag high-value credit card spending inconsistent with reported income.

It is a norm that Banks and card issuers must now report high-value card payments as Specified Financial Transactions (SFT) – typically where annual payments on a card exceed Rs. 10 lakh, especially for non-cash payments, with lower limits for cash components. This data feeds directly into the AIS and the e-Campaign/Compliance Portal, where mismatch cases are pushed to taxpayers with online notices seeking explanation for high-value transactions.

2. The Typical “Misuse for Rewards” Fact Patterns That are Triggering Notices

2.1 Money Rotation/Manufactured Spending Pattern

• Taxpayer uses card to;
• Pay “rent” to a friend/relative via rent-payment apps (without any real tenancy), who then returns the money by bank transfer.
• Load wallets, pay to own/related entities, or route money via payment gateways.
• Net result – same money keeps circulating between bank and card, but:

1. 1. Card issuer treats it as spend and gives rewards.
   2. AIS/SFT shows huge card spends without corresponding income or lifestyle explanation.

Many rent-payment platforms historically did not insist on rent agreements, enabling “rent” to be paid to friends/family and refunded, effectively just to earn rewards.

How the Department reacts

Where such rotation is disproportionate to income or has no genuine underlying expense, officers are increasingly treating it as:

• Unexplained expenditure u/s 69C – where the source of funds used to pay card bills is not satisfactorily explained, or
• Unexplained money/investments u/ss 69/69A, depending on structure.

A widely-discussed recent example is issuance of a demand notice of about Rs. 1.12 crore u/s 156 issued to a Chennai-based taxpayer whose credit card usage of around Rs. 68.97 lakh via rotation and lending cards to friends was treated as unexplained expenditure u/s 69C because no returns were filed from AY 2021 onwards.

While this is anecdotal, it’s a good indicator of the Department’s current approach.

2.2 Lending Your Card to Friends/Family for Their Spends Pattern

• Cardholder allows friends/family to use their card (sometimes in exchange for sharing benefits).
• The cardholder receives reimbursements in cash/UPI/bank transfer, but:

1. 1. There is no proper trail, or
   2. The volume of spends is huge relative to the cardholder’s declared income.

In an Ahmedabad ITAT case, the Tribunal held that misuse of the assessee’s credit card by a friend could not automatically be treated as the assessee’s personal expenditure, emphasizing the need to examine who actually incurred the expense.

However, at the assessment stage, officers often either treat full card spend as assessee’s own expenditure, or Treat reimbursed amounts as unexplained credits, if the source of friends’ funds is unclear.

If the officer believes the cardholder is acting as a conduit or providing accommodation entries, the matter can escalate to an unexplained income addition u/ss 68/69/69C.

2.3 Aggressive Rent/HRA Gaming Plus Rewards Pattern

• Salaried individuals claim HRA exemption by showing rent paid, sometimes to parents or relatives.
• Simultaneously, they route “rent” via credit card rent-payment platforms to earn rewards.
• In some cases either there is no genuine landlord-tenant relationship or the landlord does not report corresponding rental income.

In this scenario, the Department can act in two ways:

1. Disallow HRA exemption where rent is not proved as actually incurred.
2. Treat part of the “rent” pattern as money rotation for rewards if amounts are reversed or refunded without economic substance (again invoking s.69C etc.).

Rent-payment for pure manufactured spending (no genuine rent) has already been highlighted by as problematic earlier by the Department – it’s essentially credit rotation just to extract reward points.

2.4 Paying Other People’s Business Expenses for Rewards Directors/Consultants Often

• Use their personal cards to pay vendors, travel and other business expenses of a company, then
• Seek reimbursement from the company, while keeping reward points.

From a pure income-tax perspective:

• Legitimate business expenses reimbursed against proper bills are not income in the hands of the cardholder.
• However, if reward points/cashback are substantial, particularly in a business context, they can be argued to be:

1. 1. Business income (s.28(iv)) if they arise from business-linked card usage, or
   2. A taxable perquisite where the company effectively allows personal enrichment.

It may be highlighted here that the reward points exceeding Rs. 50,000 p.a. (or where materially monetised) should be reported as income or at least disclosed, especially where derived from third-party spends.

2.5 High Spend Pattern Disproportionate to Declared Income

Even without overt “gaming”, the following profile is a classic trigger:

• ITR reflects income of say, Rs. 5–6 lakh p.a.
• Credit card spends of Rs. 10–15 lakh+ p.a. across travel, luxury, online shopping.

The Department uses data analytics to identify such lifestyle–income mismatches and issues:

• e-Campaign communications asking for explanation of high-value transactions, or
• Notices u/s 142(1)/148A where under-reporting is suspected.

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