ITR Filing 2024: Are you a frequent credit card user making high-value purchases on a regular basis? You might be unaware but your credit card transactions are under some level of tax scrutiny. Here in this article, we will discuss more about income tax on credit card transactions and how to avoid an income tax notice. But first we need to understand what type of financial transactions comes under the radar of tax authorities and how to keep a tab on your high-value deals.

What is high-value transaction in credit card?

High-value transactions refer to those financial dealings that breach a certain threshold set by regulatory authorities. The Income Tax Department closely monitors these transactions due to their susceptibility to exploitation for money laundering and terror funding. The Reserve Bank also stresses on the critical need for adherence to guidelines governing such transactions.

Also read: ITR Filing: How to pay income tax with credit card and earn reward points too!

What is the maximum amount you can spend with a credit card without attracting Income Tax scrutiny?

There are no specific rules for credit card spending, but banks are required to report high-value transactions to the Income Tax Department. Financial institutions are required to report any transaction above Rs 10 lakh using Form 61A. Additionally, the Income Tax Department requires individuals to report high-value credit card transactions in Form 26AS.

When should you use credit card?

Credit cards offer a compelling advantage to users while they go for large purchases. Credit cards help customers use the high spending limits which they don’t get in debit cards. A credit card should be used cautiously. However, credit cards can be invaluable in emergencies, such as paying a mobile phone bill that’s due before your next payday. We all at some point of time struggle with managing finances in the fag-end of the month and during those times credit cards come handy. Other than that we can prudently use credit cards for a medical emergency, wedding, education or other reasons. In the modern day financial ecosystem, there are a variety of options launched by banks, but credit cards have an edge over all other tools because they only help you access instant funds when you need it.

Credit cards have always been a popular financial instrument due to their ability to allow customers buy now and pay later. Applying for a credit card is also very easy and requires minimal documentation. If you meet a certain income requirement and have a decent credit score, you are eligible to apply for a credit card.

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Income tax implications of credit card transactions

An important aspect to consider is the income tax implications of credit card transactions. Remember, you should not exceed your spending limit, as the Income Tax Department is monitoring all credit card transactions. Your credit card details are linked to your PAN card, and all your expenses are electronically tracked by the government. As per I-T rules, high-value transactions must be reported during income tax return filing.

How does Income Tax Department become aware of high-value transactions?

As per the law, banks, companies, registrars, or post offices must report high-value transactions to the I-T Department using Form 61A, known as the ‘Statement of Financial Transaction’. The tax department then scrutinizes these transactions to ensure individuals have correctly reported credit card transactions and other financial activities in their income tax return (ITR).

Also read: Top 5 credit cards for online shopping in India | Check features, benefits and fees

How can you save yourself from an income tax notice?

As discussed in the article, there are several advantages one can exploit in a credit card but it is also important to be cautious with spending to avoid tax notices. The Income Tax Department’s notices are usually issued based on the data recorded in the tax system. To avoid such notices, taxpayers must ensure that their tax returns are filed on time and declared income in the ITR matches the information in Form 26AS.